This sounds like a bold claim, but over our 17 year history
in Mergers and Acquisitions we have seen huge swings in value for business
sellers that embraced these value enhancing approaches.
Never - Engage with a single buyer who approaches you with
an unsolicited offer. This buyer is trying to buy your company at a bargain
price. You are either for sale with the full universe of strategic buyers
competing for your company, or you are not for sale. This is the number one
error business sellers make.
Turn as much of your revenue as possible into contractually
recurring revenue. This is exactly why most major software companies are moving
away from a one-time licensing fee to a software as a service (SaaS) offering.
The time and materials IT service model is disappearing and being replaced with
a managed services offering. Contractually recurring revenue tremendously
reduces the risk for a business buyer and they will pay up for it both in purchase
price and the percentage of cash at closing versus earnouts and deferred
contingent payments.
Create and leverage intellectual capital. Just ask a song
writer or an author. Disney is a master at creating compelling movie characters
and then using them on everything from lunch boxes and underwear to action
figures and amusement park rides. For intellectual capital including software,
inventions, approved drugs, the labor plus materials metrics of a typical
manufacturer do not apply and the gross margins can approach 100%.
Become a voice of authority in your industry. Be the go-to
resource for reporters to comment on industry developments. Blog, write
articles, and speak at industry events. Many M&A deals that result in huge
premiums for the selling company are the result of also acquiring the company's
talent. Take Wal-Mart's acquisition of
Jet. How much of that premium price was a result of the visionary CEO Marc Lore
and his potential impact on the giant acquiring company. Acquisitions by
Google, Facebook, Microsoft and many others feature this premium price for
companies with coveted talent.
Understand and document how a large acquiring company could create "strategic value" as the new owner of your company. Capture that in a growth plan document and be ready to articulate that in discussions with potential buyers.
Own your financial statements. When a buyer asks a question
on aspects of your financial statements, it is not your accountant's job. It is
your job to understand where every dollar comes from and where every dollar
goes. The message is that you are in control. If you are wishy washy in this
area, the buyer loses confidence in all other facets of your business and will
apply their own discount on the entire transaction value.
Diversify your customer base. If you have a major portion of
your company's revenues concentrated in a hand full of customers, count on the
buyer applying a punishing discount to transaction value and the amount of
transaction value you receive at closing. The implied message is that after you
leave, your customers will no longer be loyal to the old company. They will
hedge their bets with your transaction value.
Do not attempt to sell your company yourself. Here are just
a few reasons. You already have more than a full time job. Selling a business
is a full time job. Normally a business seller will sell only one business in a
lifetime. Experienced buyers have acquired dozens of companies. Their
experience will move money from your pockets to their pockets at every stage of
the sale process. You will have a very difficult time creating a true soft
auction competitive bidding process and will default to processing each buyer
in a serial fashion. You lose all competitive leverage. By selling your own
business, you alert the world that you are for sale. Your employees, clients,
suppliers, and bankers get nervous while your competitors get predatory.
Hire a good M&A advisor, preferably with experience in
your industry or market niche to represent you. They will speak the language,
so important in establishing credibility with the buyers. They will have a
fully developed database with the appropriate M&A contacts at the target
buying companies. They will articulate your story to the best buyers. They will
balance the experience scales in negotiating price, terms and conditions of
your transaction and perhaps more importantly, will defend that value through
term sheets, due diligence, contractual negotiations and closing. Finally, they
will artfully stimulate the animal spirits of a competitive market to maximize
your selling price and terms.
The sad part about business owners who elect to sell their
business themselves, is that the only one who knows about the huge haircut they
took was the single buyer who is celebrating their bargain purchase.
For more detailed information on all aspects of Business
Sales, please visit our website at www.midmarkcap.com/mmc and subscribe to our
Exit Strategist Newsletter.
