Five Things To Consider When Selling Your Company
We get a lot of people talking to us about selling their company and for most, they have not thought it through carefully enough, and don’t know where they are in the marketplace. Sure, you can talk to a business broker, or you can talk to investment bankers who often have no idea where you are, or understand your strategic value in the market. I had one very well known investment banker blow me off about my company who couldn’t see the value prior to Qualcomm acquiring us. I asked for the meeting with the IB because I suspected there was interest and it wasn’t until they made an offer that they realized I was serious.
I learned a lot through the process of both buying and selling companies, much of which they don’t teach you in school. For one it’s never as tidy as the press tries to paint the story about acquisitions. They happen for more hidden reasons than the press knows. You also never hear about all the deals that fell apart while under NDA. I’m guessing the failure rate to closure is probably in the real neighborhood of ten to one. At least that’s how it feels from my experience. In other words, ten fall apart somewhere after initial inquiry for every that closes. It may be even higher, but I don’t think it’s a lower ratio. So how do you get it to closing, and do so with the least amount of risk? I’ve outlined five steps that can help, all based on my personal experience.
Five Things To Consider When Selling Your Company (The Shortlist):
Strategic Value Often Trumps EBITDA
You Must Build Your Story
Know Where Your Value Lies
Have Your Act Together
Deals Fall Apart
1 - Strategic Value Often Trumps EBITDA
About the only thing I think about when buying and selling a company is strategic value. I’m not buying a hardware store or gas station. Even then, I’d be looking for that unique thing that sets that business apart from all others. If it’s run-of-the-mill, it’s probably not interesting to me. I’m always thinking about building a great story and that begins with a strong strategy around the acquisition.
You can’t believe the number of companies that confuse a task or a goal with a strategy. Setting your revenue targets to be 10% above the prior year is not a strategy. It’s a goal. Often it’s reduced to nothing more than a task to hit the numbers. When I think strategy, I’m thinking market position, geographic or market dominance, product development and possibly acquisitions in route. I’m thinking about so many things, it would be hard to list them all here.
I don’t calculate a multiple of EBITDA and call it good. Some buyers do that if they are just buying capacity. I’ve had way too many business brokers pitch me and it’s the first thing out of their mouth. Many companies can force a strong EBITDA at the expense of everything else, such as equipment maintenance of continuing education, or even succession planning. Don’t fall for it. EBITDA is just one data point of many. You could be looking at a business that’s had great earnings for the last five years, but is on the very edge of losing that big customer that makes all the difference. Or, one that has plans to compete with you. EBITDA is just a point. That’s all! Dig around it for the real value.
2 - You Must Build Your Story
Ask yourself, why another company would buy you? What is it that makes your company special? Is it your market position? Is it your customer base? What? I pounded the crap out of presenting us as the very best Bluetooth software company in the world by intention. Someone scoffed at that statement. I immediately put up the slide of every top brand that used our software. It was a great argument. I then proceeded to explain how we built that deliberate strategy and how our product had a story behind it, and how we were seeing the future of our software.
They did make an offer to acquire us about six weeks after that meeting. Create and tell a great story, but don’t leave out where you’re going. Be vague about competitive details until you’re close to closing or you could end up competing against the very strategy you created. Build and tell a great story and this is where you can often boost value. Buyers don’t pay a premium for companies that have a vague future. Build a great roadmap and champion that cause.
3 - Know Where Your Value Lies
What’s valuable at your company and why is it valuable? This is where you have to do a lot of your own homework as the seller. One seller told me he thought his value was the senior team. There was nothing in place to keep them, and nothing in place to make sure they would go with any deal. They walk out and there would be no company. Especially if they wanted to compete. Many states now have laws that prevent employers from stopping employees from practicing their own craft. You can’t just prevent them from getting into your business unless you pay for that exclusivity for a duration. You can’t tell a carpenter he can’t work because he quit your job as a carpenter and so on. For this reason, you have to have agreements in place where your employees want to participate and go with the deal. I’m of the opinion that you be upfront with your intentions with a company and let them know if you’re considering a sale at some point and make it worth it for them to be a part of the deal. There is nothing like the surprise of a bunch of employees who all want something different when the deal comes together. There are many deals where there are headcount percent requirements and that threshold can be very high. Some are as high as 98%!
4 - Have Your Act Together
It’s hard to believe I have to write this one, but I do. Too many sellers don’t have their house in order and the deal falls apart early in the due diligence process because of sloppy contracts, bad employment agreements, sloppy financial records, open ended disputes and underlying problems with customers. We tried to buy one company and they completely misstated the value of the underlying assets. In fact, the value wasn’t even close! The seller never bothered to check the real condition of the remaining inventory, most of which was not obsolete and pure junk. The seller relied in internal managers to just spit out the numbers they had on the books.
There are plenty of great due diligence lists and a company about once a year should do a review of the company from top to bottom to make sure that everything is current and properly recorded. One company had hundreds of expired NDAs and continued to share company secrets as if the NDAs were in place. Others never did correct assignments of IP. Pull your senior team together and go through the due diligence list and fix the problems long before a buyer comes calling and then keep your house in order.
5 - Deals Fall Apart
Because deals fall apart, be sure to qualify the buyer ahead of time and keep the most sensitive information until the deal is ready to close. Some have a reputation of looking at “acquisitions” purely to gain intel. Others are acquisition machines and know what they are doing and have it down to a science. Know how your dealing with and do your due diligence on them. Also, prioritize the due diligence check list in the deal after the term sheet is signed, and have each point signed off as closed. One seller right now didn’t do that and the buyer keeps moving the goal posts. I predict it will fall apart.
There are lots of buyers who are looking for opportunity and will steal your company if they sense any weakness so how you disclose and in what order matters and and make sure they are legitimate regardless of potential terms. I buy companies on terms for a reason, but I’m willing to make it worthwhile for the seller at the same time. Look for a buyer who’s not out to take advantage of your situation as many do. Some buyers will sense that the seller is desperate and withdraw only to come back in at a much lower price. Kick them to the curb if you can because they will likely do it again and again. Also, be prepared for it to fall apart and make sure you have a great attorney through the entire process who’s managed large M&A deals before. Some companies require major firms to represent you in case there is a claim. Others don’t make it a big deal. It depends on the size of the transaction.
Be ready to be in damage control if the deal does fall apart. Don’t just leave it to chance that everything will be okay. Your employees will be rattled and some may leave so be sure you’re not creating a disaster if the deal falls through.