Do you want to get a high business sale price when selling your company? Of course you do! Your business most likely represents the bulk of your life’s hard work, you deserve to get the most that you possibly can. We noted in a previous blog post that there are two broad answers to this question. The first answer concerns the business itself, and the second one concerns the sales process. The sales process focuses on the “when”, “who”, and “why” parts of selling a business, which I will address in this article. The sale process cannot transform an average business into a high multiple business. However, by following a few guidelines outlined below, it can result in a higher enterprise value at the closing date.
Takeaway: Attract a much higher business sale price for your private company by learning how the sales process impacts a company’s valuation.
They Say Timing is Everything
In real estate the mantra is Location, Location, Location. In selling a business or M&A it’s Timing, Timing, Timing! The timing of the sales process is perhaps the most important factor in the entire process. Not only is timing important in the context of the economy in general, but also with respect to the company’s performance and the owner’s objectives.
If you only take one nugget away from this article, take this away:
The ideal time to sell and achieve a high business sale price is when there is an consistent “year over year” upward trend in revenue and earnings, and there is an expectation of more to come.
** Unfortunately, this is when Most seller’s decide not to sell because it’s just to good to walk away from when business is going great.
The prospect of growth is very influential in attaining a strong business sale price multiple. However, while a valuation is determined by a company’s future prospects, buyers often use historical performance to assess future prospects. When I say “historical performance,” I mean at least two years of consistent growth. Many businesses grow in steps. A pattern of revenues at $10 million for several years, which then jumps to $20 million for one year, does not present a convincing growth trend. Another jump to $25 million the next year will go a long way to realizing a growth multiple (now we’re talking). Ultimately, convincing a buyer to pay a premium depends on how the growth was achieved, the quality of earnings and what the current prospects are.
The selling process is one that can take seven to ten months to complete if things go well. Therefore, inevitably you will run in the single most important question that a buyer wants answered while the sales process is ongoing…..
“Are you on track?”
or its very close cousin:
“Can we have a look at the latest financial month or quarter end?”
Under performing at this stage to what you originally told the buyer is definitely the worst case scenario. If you are four to six months into the process, you will have already received a number of expressions of interest and are likely working with a small group of seriously interested parties. An earnings number below expectations may open up the possibility for a value revision or structure change in a Letter of Intent. This may cause serious delays in the process, since an alternate buyer may need to be found. The moral of this story is….don’t miss.
Any Buyer is Good Right?
The second most important consideration in the sales process is who to sell to? Last year, I wrote a detailed article on how to identify the best buyer. I won’t go into the details here, but I will say state one key point. The most important step when identifying the right buyer is to ensure your M&A adviser runs through a complete, thorough, and diligent buyer selection process. The four phases of a business sale or divestiture are: plan, prepare, market, and complete. A critical factor in achieving a successful sale is to keep as many options open as long as possible. The seller has power when there are many choices. If there is only one interested party, then guess what, you have no leverage and chances are you either a) don’t sell your business, or b) end up selling it a multiple far below your expectations.
Why Am I selling Again?
The “why” of selling may not be a key driver in realizing the most value in a transaction, but it is a factor in the form of consideration received, and how long the process will take. Remember, if the business is dependent on the owner operator, he/she will not be able to leave the business upon its sale. If the owner operator has spent 20 years in the business, is nearing retirement, has made him/herself redundant, then he/she is in a position to structure the transaction to include as much cash as possible and a short transition period. However, if the reason to sell the business is to take advantage of an opportunity to accelerate growth, then partnering with a well capitalized financial sponsor or private equity group may be a better solution. This buyer may bring the investment and/or sales or distribution resources to the table that you need, but you should expect to spend more years with the business. Past experience has taught us that, If your only reason for selling is for money with hopes of getting a “pie in the sky” business sale price, then chances are you are not fully ready to sell.
Ultimately, the best time to sell and get the highest business sale price is when the owner is still interested in the business. This is when this interest will translate into a solid sales process, which will resonate with the buyer and is likely to drive the multiple higher. The best time to sell has passed when the owner is no longer interested in the business (i.e. if he/she is spending more time on other interests), or if the owner is compelled to sell for health reasons, or as a result of changing competitive/technology dynamics that are substantially reducing the economic prospects for the business. The sales process, from consideration to closing, can take many years. With future economic uncertainty as it is, it is best to start the planning from a position of strength.
By Cody Weaver July 24, 2017
Tinton Falls, NJ 07701
BAE Top-Producing Business Brokers
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