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Friday, October 31, 2008
Inside Finance Strategies
Thinking of selling your business? Plan now
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In the past month I’ve received calls from three successful entrepreneurs who all had the same objective — sell their business in a three- to five-year timeframe.
While the businesses themselves were very different, there were certain themes that ran through each conversation. Here are some of the questions that were raised and some ideas to think about.
“Do I need an appraisal?” When you’re ready to sell, some sort of appraisal (we usually do a more informal estimate of value) can be useful, primarily to be sure that your expectations as a seller are grounded in reality. There is no sense kicking off a sales process, with all the disruption and risk that entails, if you won’t take less than $10 million for a business that is more likely to fetch half that. If you are only halfway to your minimum price, you don’t need a costly valuation document to tell you that. Any experienced business valuator can give a pretty good idea if the gap is far too large with just a little bit of work.
“So valuation doesn’t matter at this point?” That’s only partially true. What is important is to figure out exactly what metrics your company will be valued on and determining what you can do over your planning horizon to move the needle. Generally speaking, profitable companies are valued on a multiple of EBITDA. But different multiples are applied to different segments and will vary based on growth and other dynamics. For example, companies with recurring, high-margin revenue streams are accorded a higher multiple than those with lower margins or more transactional businesses.
“Then I should be looking to change my business?” Well, maybe. Chasing a higher valuation multiple by getting into something that you don’t know much about and that comes with high risk is a bad idea, especially if your time frame is short. However, fine-tuning your business to improve its dynamics — as judged by a future acquirer — or growing your business in a direction that makes sense, regardless of a future sale, is a good idea.
“What else should I be thinking about?” Entrepreneurial businesses often have a couple of things in common: a disregard for some of the formalities of business and thin management teams. These same attributes, that allowed you to grow rapidly by being nimble and low-cost, can be real problems when it’s time to sell. If you haven’t already done so, get your financial house in order. Make sure your books are in great shape and get an accountant to at least review your statements —- an audit may not be necessary. Also, it’s time to deal with any major regulatory, compliance, environmental or legal issues you may have. If you don’t, they will all come out in due diligence, or even worse, in a post-deal lawsuit. A thin management team may present more or less of a problem depending on the buyer. For someone that is in your industry and looking to pick up products, sales and customers, a robust management team may just be another pain to deal with. For a financial buyer or a strategic buyer looking to get into your industry, and the latter especially will often pay more than a competitor, they need to believe that the company has a management infrastructure that can run and grow the business, and they are not just relying on you.
“When should I start?” Yesterday. Anyone who has been in business knows that every initiative takes time. The earlier you get going, the more time you have for the changes to take hold and to deal with a false start or two. Your ultimate acquirer is going to base their price on financial performance for a defined period, usually the last year, before the sale. A slight dip in earnings to pay for investments in the business two or three years before a sale can be explained away, but it will be hard to get paid for the results of those investments until they pay off in increased earnings.
David Wolf is a managing director of the Mercator Group LLC, an M&A advisory firm serving the lower middle market. He can be reached at dwolf@mgboston.com.
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