Sell Your Business for an Outrageous Price
An Insider's Guide to Getting More Than You Ever Thought Possible
Author: Kevin M. Short
Pub Date: September 2014
Print Edition: $21.95
Print ISBN: 9780814434710
Page Count: 240
e-Book ISBN: 9780814434727
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Reducing Seller Risk and Increasing Sale Proceeds
By and large, business owners are a schizophrenic group. When starting their companies, they put everything they own on the line. Typically, they pour into their companies every dime of their personal funds, pledge their family homes, and borrow from family members and banks, fully confident in their ability to pay off those loans. Even though they risk financial destruction (and often divorce) in doing so, they readily accept overwhelming odds as part of the package.
When it comes to selling their companies, however, owners have little stomach for risk. Having devoted heart, soul, and nearly every waking moment to nurturing their companies, few are confident about or eager to cash in their chips and walk away.
OBSTACLES TO SELLING A BUSINESS:
REAL AND IMAGINED
In my career as an investment banker, I meet successful business owners every day who are, at some level, thinking about how they will jump off the locomotives that their businesses have become. But they hesitate--some for good reason: Their companies are simply unprepared for sale. Typically, "unprepared" means that without the owner's involvement, the company's continued profitability is uncertain at best. These owners have failed to install the systems and management teams that enable a successor owner to operate the company successfully.
So let's set aside the group of owners who justifiably hesitate to sell because they have not done the planning necessary to create saleable companies, and let's instead focus on another group.
In this group, we find owners who have saleable companies but believe that they cannot sell their companies today (or anytime soon) because the economy is too uncertain, buyers have fled the marketplace, and/or the buyers who remain are bottom-feeders willing to pay only bargain-basement prices.
Let's, for the moment, assume that all three of these boogeymen--the uncertain economy, the Ghosts of Buyers Past, and bottom-feeders--are real and are crouched and ready to pounce on owners naive enough to put their companies on the market. How then do we account for the sales that do happen--even in a tough economy? Further, how do we explain the fact that some companies are not only selling at healthy prices but selling at what I call Outrageous Prices?
I define an Outrageous Price as one that is at least two times the EBITDA multiple of an average company in its industry. While less common than during the heyday of the M&A market, even today there are real buyers paying Outrageous Prices for ordinary companies. Why and how does that happen? These questions fascinate me, and I share in this book some of the answers I've discovered.
Please don't misunderstand me: I applaud owners of saleable companies who are hesitant to enter the marketplace, to a point. I agree that owners do well to think twice about selling their companies, but not because of the current state of the economy or the presence of bottom-feeders. Bottom-feeders are all-season creatures, and the economy has always been and will always be cyclical.
I believe owners should think carefully before putting their companies on the market because without careful preparation a hefty percentage of companies put on the market will never sell. According to an Ernst & Young press release, "M&A conversion rates are at their lowest point for a decade. For transactions announced in the last nine months, only 60% by volume and 42% by value went on to complete in the same period" ("Global announced M&A deals rise in Q4 2012, but conversation rates continue to decline," London, 20 December 2012, www.ey.com/GL/en/Newsroom/News-releases/
It is worth noting that the average deal value in the report (during the fourth quarter of 2012) was $231 million. The presence of very large transactions in the marketplace overstates the success rate for smaller companies. Bigger deals enjoy better odds of closing because there are usually several buyers vying to make the purchase and, often, the deals are worked out before the company ever goes on the market. In fact, there is an assumption that the big deals will close.
That's not the assumption in smaller deals. While transactions of any size can fail to close for a number of reasons (many of which are discussed in Chapter 3), here are several of the primary reasons deals in the midmarket fail:
Sellers expect too high a price.
If significant change in the selling company occurs, rarely is it able to quickly regain its balance.
Buyers in this marketplace are harder to find.
Family dynamics (common in this segment of the market) can work against a successful closing.
Large sellers have an army of analysts (and usually minute-to-minute stock prices) to set sale prices, so they rarely go into a transaction with unrealistic saleprice expectations. On the other hand, owners of midmarket companies must rely on a competent and experienced investment banker to align their expectations of value with that of the marketplace.
In addition, mid- and lower-middle-market companies are more vulnerable to significant internal changes than are large companies. In a midmarket company, the death of a CEO is a certain deathblow to a sale transaction. In contrast, large companies have succession plans in place and a stable of talent that reassure buyers who react with a yawn or a simple adjustment to the payment of the purchase price.
As implied earlier, large companies generally enter the marketplace with several buyers waiting at the negotiating table or eager to pull up a chair. Not so for mid- and lower-middle-market companies. Chapter 5 of this book is devoted entirely to how to locate, interest, and eventually sell midmarket companies to qualified buyers.
Finally, there are a number of family-owned businesses in the middle market. Without planning, family dynamics can torpedo a deal before we even have a chance to pull up the gangway. Even with careful planning, delicate relationships in family-owned businesses must be handled with extreme care if a deal is to close.
When one considers that the conversion rate for middle-market and lower-middle-market deals likely falls well short of 60 percent, the reluctance of owners in these marketplaces to sell makes sense. Sellers have a great deal to lose if they put their companies on the market and fail to close the deal. Losses can include any of the following:
Customers, employees, and vendors
Fees paid to advisers
The cost of the owner's inattention to running the company
The owner's personal disillusionment
In my mind, this list is far scarier--and more deadly--than the boogeymen that keep most potential sellers awake at night.
Loss of Customers, Employees, and/or Vendors
In an effort to gauge saleability and price, some owners decide to tell "just a few people" that the company is for sale or attempt to negotiate with an interested buyer without representation. In the first case, owners have no control over who learns about the contemplated sale. Employees, customers, vendors, and bankers all nurture and are connected to various grapevines, and all will likely react less than favorably to rumors of a sale.
Let's assume that employees, vendors, lenders, and customers don't abandon your ship when they hear your company is for sale. At a minimum, this juicy information will make them pause to locate the nearest exits. Competitors will do everything they can to exploit the uncertainty rumor of a sale creates to lead your customers and employees to their own greener pastures.
To owners who are tempted to go it alone or doubt the damage competitors can inflict, I relate the story of one owner (let's call him Fred) who called me after having been approached by a competitor about a possible sale. Fred had allowed the competitor (now acting as a potential buyer) to meet with his employees and customers. Within days of these meetings, the competitor/buyer began to hire Fred's best employees and steal his best customers. When Fred confronted his "buyer," it coolly informed Fred that it was no longer interested in pursuing the transaction. Too late, Fred realized that this competitor had never had a genuine interest in pursuing a purchase.
Loss of Adviser Fees
More cautious owners spend thousands of dollars to hire investment bankers to take their companies to market. Some bring in their attorneys to perform presale due diligence, and most ask their accountants to straighten out and audit their financial records. During the several months that it may take an investment banker to discover there's no suitable buyer interested in purchasing the company, the owner has paid that investment banker a hefty up-front fee and monthly retainers. That's as good a reason as any to pause before leaping into the market.
Cost of the Owner's Lack of Focus
Harder to calculate, but no less damaging, is the price companies pay as their owners spend more time (and energy) thinking about and working on a sale than they do on maintaining the company's profitability. The Proactive Sale Strategy takes about eighteen months to execute, and the time frame for a well-structured, well-planned sale (from the date the owner hires an investment banker to closing) is between eight and twelve months. If those time frames are longer than you expected, consider that the sale process for owners who enter it armed only with the hope that the right buyer will appear can last years, assuming the transaction closes at all.
It is not uncommon for owners to retain investment bankers after they have either attempted--unsuccessfully--to negotiate a transaction themselves or used an inexperienced adviser. Remember Fred's story? After the last phone
call with his competitor, both Fred and his remaining employees were completely demoralized. Fred's loss of faith in the sale process convinced him that he was stuck in his company forever. This loss of faith and subsequent belief that one can never sell makes it especially difficult for owners to rebuild their management teams and regain momentum.
An owner's loss of faith in the sale process is similar to the loss of faith in the justice system that an innocent person might experience after having been convicted due to incompetent legal advice. In either case, the wronged parties must regroup and use exactly the system they now distrust to regain what they are due (their freedom or a reasonable purchase price).
In the face of these real risks--and the perpetual presence of bottom-
feeders and a cyclically uncertain economy--what can owners who want or need to sell within the next year do to not only close the deal, but close it at the best possible price? I'm so glad you asked.
I've spent the last twenty-plus years of my career immersed in bringing together sellers and buyers. During the market's heyday, the high tide raised all (or nearly all) boats, yet two nearly identical companies might sell for two radically different multiples. In the heat of battle, I could do no more than resolve to think about this observation at a future date. I've taken that time over the past several years.
In the cool objectivity of hindsight, I've reviewed the deals in which buyers paid at least twice the EBITDA multiple of an average company in its industry. I tested the possibility that a company that sold for twice the multiple of similar companies did so because the company was inherently outrageous: It had discovered a cure for cancer or the eat-all-you-want diet pill. That proved untrue. Most of these "outrageous" companies were quite ordinary, and, generally, their owners did not realize that what they were doing differently could be very valuable to certain buyers.
I then looked at the buyers who paid these Outrageous Prices; maybe they were outrageously naive. Since most of them are and were major corporations with legions of expert negotiators working on their behalf, that hypothesis did not hold water.
Then what was it?
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