As a business owner, you may ask yourself, at some point – When’s the best time to sell my company? Unfortunately, the answer will always be, now, and not now. It all depends on your specific situation at the time and the process you use to market your company. Here are the most important considerations to help you make that determination.
In considering a sale, company owners first ask—Are there buyers for my company, and if so, what are they willing to pay?
Are there Buyers?
Generally, having buyers is not a problem. Operating companies are always considering boosting their growth through acquisitions, and private equity firms are always looking to put their cash to work by adding new companies to their portfolios. Today, there are over 229,000 companies with over 100 employees in the U.S., and many are potential acquirers at any point in time. Also, over 18,000 private equity investors currently hold well over a trillion dollars in investable cash. The reality is that there are plenty of buyers for every company situation, from high-growth superstars to companies struggling to stay alive and everything in between.
Most buyers specialize in specific situational profiles. Many focus only on specific industries, business models, size ranges, and locations. Some are looking for those that are highly profitable with great management teams, while plenty of others are looking for the very opposite.
Just be sure you get the help you need to find those potential buyers that see your specific situation as most desirable.
What Will They Pay?
Two factors will drive the answer to that question: 1) Your company’s current situation and 2) How you market your company.
1) Your Company’s Situation
As we consider key elements of your company’s situation, remember that the buyer is paying for your company’s past, but they’re really buying its future. That future can be the same as your plan and vision, but more likely, it’s the buyer’s vision for your company’s future after combining it with the capabilities and resources of their company.
Regardless, your company’s specific situation has a big influence on what a buyer will pay. The good news is that your company’s circumstances are always changing, and there is much you can do to make it more valuable and attractive to buyers, especially over time. Therefore, how you change your situation can greatly impact its attractiveness and the price buyers are willing to pay.
Business Model – However, one aspect of your company’s situation that is hard to change in the short term is your business model. Generally, buyers tend to focus on specific industries, customer markets served, offering types, production modes, and distribution and payment models. This means that only a subset of all potential buyers is likely to be interested in your company. It’s usually easier to spend more effort finding the right-fit buyer than it is to make any significant changes to your business model.
One strategic consideration for timing a potential sale is making an honest and informed assessment of your industry and your position in it. Is your industry a dynamic, high-growth industry with an exciting future, a dying industry with a limited potential for future growth, or somewhere in between? Could new, disruptive technologies like blockchain, cultured foods, electric and driverless vehicles, alternative energy, or additive manufacturing eclipse your future? If you don’t know, you need to figure that out before the rest of the market does, as developments like these can dramatically impact your sense of urgency, and ultimately, the price that buyers are willing to pay.
Profitability – The most well-known situational factor determining your company’s value is its profitability. Although most owners are optimizing for after tax income, buyers focus on the EBITDA multiple is the most commonly used normalized ratio for comparing the value and return on investment of companies with differences in capital structure, taxation, fixed assets, and types of operation.
There are many metrics and financial indicators that reflect your company’s financial condition in the eyes of buyers, including balance sheet indicators of efficient debt leverage, asset efficiency, and ratios such as debt-to-equity. However, for purposes of this article, the better your proven EBITDA performance and stronger your balance sheet, the more attractive your financial situation appears, and theoretically, the more a buyer will pay. But financial performance is not the only driver of value.
Operations – Financial metrics tend to relate to the past, while operations tend to reveal more about the future. Given your current financial condition, buyers and investors want to know how much they can increase their future financial return while hopefully lowering the risk of getting that return. Your company’s operational condition reflects how sustainable, predictable, and repeatable your profitability is and how a buyer might improve them to create an even greater return in the future.
At the highest level, how systematic are your operations? How much of your company’s secret sauce resides in the heads of key people, and how much has been embedded into processes, procedures, and controls? A buyer wants to understand to what degree you have created a business machine that systematically cranks out a profit and to what degree the company simply relies on a collection of good people to figure it out on a daily basis?
Management Team – Is the current management team responsible for the company’s financial and operational performance to date? Are they the team that can continue its performance? Are they capable of improving its performance? If the owner leaves, will management effectiveness and key customer relationships be compromised? These are important questions that buyers seek to answer. They know that new challenges will always arise in the future, and a strong management team will always find a way to successfully meet those challenges.
As the owner, your leadership goal should be to make yourself dispensable in day-to-day operations by transferring your special genius into the heads of your management team so it can continue effectively without you. Have you done that?
If your company has a lot of room for improvement in its operations or the depth of the management team, keep in mind that most buyers are not looking for perfect companies. Instead, most buyers are looking for companies that can benefit from the buyer’s own unique set of capabilities and resources. For example, if their operations are more sophisticated and efficient than yours, they will simply fold your operational processes into theirs. As a result, they would not be motivated to pay a premium if yours were improved. Similarly, if they have available management resources or expertise in your team’s areas of weakness, they will likely not pay any premium even if you strengthened your areas of weakness.
2) How You Market your Company
Your company’s current situation only establishes a general value expectation for your company. What a buyer actually pays for your company is dramatically affected by how it’s marketed. In our experience, sophisticated marketing can increase the EBITDA-based price from 50% to 100% of that general value.
The Lowest Price – Typically, the lowest price is represented in an unsolicited offer. The basis of this buying strategy is catching the business owner at a weak moment with the hope of getting a bargain by eliminating the hassle of a professional sale process. This strategy works when owners have little experience in the merger and acquisition world. They don’t realize they can get a much higher price for their company when an experienced investment bank conducts an effective marketing process.
The secondlowest price commonly results from owners selling the business themselves to known potential buyers. In this situation, for many of the reasons discussed below, the result is not much better than negotiating an unsolicited offer. Fortunately, this outcome is uncommon, as most owners realize that after decades of hard work building their business, it doesn’t make sense to compromise the sale effort of the biggest deal of their life. Besides, the increased sale price resulting from professional marketing is many times the additional cost.
The Highest Price – A company’s owner receives the highest price for his company when merger and acquisition professionals handle the marketing. When marketed properly:
- Simple, high-value financial and operational improvements can be identified and made very quickly before the marketing process begins;
- Professional marketing materials designed to appeal to the most attractive buyer profiles capture all of a company’s attractive elements;
- Merger and acquisition professionals approach a large pool of ideal buyers anonymously to maximize the company’s exposure while protecting confidentiality in the market;
- To the extent possible, those professionals protect the seller’s business operations from most of the effort and distraction of the demanding due diligence process;
- Professionals who understand the buyer’s strategy and tactics guide all of the negotiating, and they eliminate the buyer’s attempts to exploit the seller’s emotional involvement in the deal; and
- Most importantly, professionals design the sale process to promote competition and maximize the bidding dynamic. The expected return a buyer hopes for from your company’s synergistic combination with theirs, drives the maximum price that any buyer will pay. This total synergistic value is unique to each potential buyer. However, no buyer wants to pay any more than it has to. A professionally conducted competitive process is the most powerful driver to force a buyer to pay its maximum price. Often, a buyer will pay its maximum price, or more, just to block a competitor from receiving the benefit of acquiring your company.
The Final Question You Must Answer
Your company’s situation and timing may be perfect for selling. However, the last question you must answer is—Are you ready to sell—mentally and emotionally? Most company owners underestimate the emotional and psychological impact of selling their company. You became successful because you poured your heart and soul into the company, and it’s a part of who you are. As the owner, you’ve been the chief executive officer, leader, top-dog, decision maker, answer man, expert, and instructor. After the sale, who are you? Where do you go from here?
Knowing many owners, like myself, who retired early with the sale of a company, I can tell you that one can only play golf every day for so long, and it probably won’t be enough to satisfy you. Can you consult, teach, or volunteer your business wisdom, or can you start-up, invest in, or become a director of other companies?
All decisions you make have an element of “running from something you want less of” and “running to something you want more of.” Most often the best decisions have more “running to” than “running from”. As you decide whether to sell, be sure there’s enough “running to” something you want more of.
At Advocate Capital Advisors, we are a business owner’s true advocate. We are happy to help you assess your situation and think through your M&A strategy to ensure the best outcome.