The Acquisition Exit Strategy - Making It Work

As a business owner, you know the importance not only of keeping your business going and growing, but also of knowing what to do when you decide you are done.  Of the many exit plans you may be considering (such as transferring ownership to relatives or friends, liquidation, or simply running down the clock), a common exit strategy which can both maintain the success of the business and generate the maximum profit for yourself is finding another business or investment group to acquire and perpetuate your business: the Acquisition Exit Strategy.
 
Here are some things to keep in mind, to help make this strategy a success for you:
 

• Choose the Right Acquirer For Your Business

Finding an acquirer with the right strategic fit and alignment with your business will increase the acquirer’s chances for success in keeping your business thriving after the transfer of the business is completed.
 

• Make Your Business Attractive to an Acquirer

Pinpointing and emphasizing the aspects of your business that offer the greatest potential for profit and growth will go a long way toward attracting potential acquirers.  If a bidding war ensures, the possibility of a higher acquisition price can increase exponentially.
 

• Avoid the Temptation of Targeting a Specific Acquirer

If you have a specific business or group in mind to which you would most like to sell your business, tailoring your attractiveness to the business/group may make your business less attractive to others.  There is also no guarantee that your preferred acquirer is genuinely interested in buying your business in the first place.
 

• Pay Attention to the Business Culture of the Acquirer

Your business brings with an associated cultural operating inclination (fast and loose, straight shooters, cautious, aggressive, conservative or liberal minded etc.).  If the business culture of a potential acquirer is at odds with yours, there is a greater likelihood of the culture clash getting in the way of – and potentially preventing – the success of the business going forward.  An acquirer with a culture more closely aligned with yours will have a greater chance of succeeding after the transfer of the business.
 

• Carefully Evaluate the Terms of the Agreement

If you’ve landed an acquirer and are set to make the deal, go over the terms of the agreement and make sure they won’t cause you grief after the transaction is completed.  For example, a non-compete clause might make things difficult for you if your plan is to start a new business along similar lines as the one you sold.
 
If proper care is taken in the process of executing the steps of a well thought out acquisition exit strategy, the result can be profit and success greatly exceeding alternative strategies.  Of course, we here at CPI are more than happy to help you with this.
 

Sources:

https://www.entrepreneur.com/article/78512
http://articles.bplans.com/types-of-exit-strategies/

Selling A Business When It’s In Trouble

Not all businesses succeed.  For every success story, there are many more stories of failures, and the failure can happen for almost any reason.  There are also stories of businesses that found success, only to encounter difficulties later on.  Businesses like these may find themselves in a position where they would rather sell than stand by while the ship sinks.

Can distressed businesses be sold?  Is there a market for distressed businesses?  Provided the business is viable and can remain a going concern through the sale process, the answer is yes – as long as the business owner is willing to either accept the fact that the value the business based on its current condition may not be as high as they’d like it to be, or alternatively, is willing to take the necessary steps to improve the business and thus increase its sale value.

Accurately pricing a distressed business is the domain of an experienced professional business broker, one that knows how to use the tools and techniques at their disposal to identify both the weak and strong points of the business in order to arrive at a valuation that closely conforms to market conditions and expectations.

If the business owner is open to the idea, a professional business broker will also be in the best position to suggest steps the business can take to minimize its weak points and shore up its good points, which can go a long way towards increasing the value of the business to prospective buyers.

While the manager or owner/managers of a troubled company may be in the position of decision-maker in the sale, this is not always the case.  The business broker will need to become acquainted with all parties involved in the business in order to determine which party is the real decision-maker in the sale process.  The business broker will then ensure they are the primary party involved in the sale process.

If the business is on the cusp of bankruptcy, a sale usually proceeds faster, cheaper and more privately – although there is less protection for the parties concerned.  If the business has already fallen into bankruptcy, the sale will proceed more slowly, be more expensive, and it will also be public – but there are benefits in the form of greater protection for the concerned parties, an automatic stay, and there is a forum for addressing related issues.

Above all else, the main hurdles to overcome in the sale process of a distressed business are twofold.  One is to make clear headed decisions and not let emotions get the best of the parties involved.  The other is dealing with time constraints, which can further exacerbate feelings of panic.  A good business broker will be able to keep these challenges in mind throughout the process, properly dividing up the steps each party needs to take based on their role in the process and effectively managing the activities of each party as needed.

With a steady hand, attention to detail, hard work and a clear-headed approach, a good business broker can meet the challenges of selling a distressed business, and the business can be sold for a value which is satisfactory to all parties involved.

Sources:

http://www.krbrokers.com/site/wp-content/themes/krbrokers/articles/sellingyourbusiness/Selling%20a%20Troubled%20Business.pdf

http://ml-sf.com/publications/docs/TPL0804-Litteneker_McNutt.pdf

Managing Expectations of Seller Valuation

I love the following quote by Warren Buffett as it sums up my feelings on business value in a nutshell:

Price is what you pay, value is what you get.

One of the biggest struggles with selling in the middle to lower middle market is business valuation expectations. Sellers almost always feel their business is worth far more than what the market will bear. Here are some reasons why this has been the case:

• The owner is valuing assets and not cash-flows. In most cases, a buyer is only willing to buy the business based on the cash the company is kicking out month-over-month and quarter-over-quarter. The true value–especially in today’s businesses–is not typically in the hard assets, but said assets are able to produce in a cash-on-cash return for investors.
• One of the biggest problems with valuations is the "Facebook" effect. Just because Facebook paid a multiple outside the range of anything reasonable in the real world, doesn’t mean your company is also worth 100X Revenues or $40/user. In fact, unless the business has some form of intellectual property combined with the ability to scale in a network-based format, forget about it. You’re a traditional business.
• Valuation multiples don’t increase if your bottom-line increases, rather if the company becomes more sell-able. Ie: the company is set up for large scaling, progressive technology, expansion strategies in place etc.  Sure, the business will be worth more if you put more cash flow to the bottom line, it doesn’t mean your multiple moves from 4x to 6x.
• The owner/operator is reverse-engineering a valuation based on wants/needs, not on fair market value. There are many instances when selling a business is not the right move at all. If you’re <50 years old, the business is kicking-off cash and you’re looking to retire, but realize you’ll need a 7X or more multiple to get there, forget it. Keep operating the company for a few more years.

There could be a host of other reasons, but these are the most common incident to the clients with whom we’ve recently worked. There are certainly ways to help boost the valuation multiple of the business of up to 40%  above the FMV (that’s what our process helps to do), but the exception to the fair value should not be considered the rule. It is tough for sellers and buyers to walk in one another’s shoes. Unfortunately for the seller, the buyer is also usually right about what the value of the business truly is. Because buyers typically acquire businesses many times and sellers only sell maybe once or twice, it usually means the buyer is much more sophisticated and knows more about what the market will bear in terms of price. Hence, as an advisor, it’s always frustrating when sellers fail to listen to both retained advisory and acquiring firms when they tell them their business isn’t worth 12x EBITDA.

A Note on Earnouts

Some owners are diabolically opposed to earnouts as part of the deal structure. Earnouts can increase the risk of not getting paid what is expected and can ultimately be a source of frustration, but in some instances they work really well. In the case when an owner has an unrealistic valuation expectation on the business an earnout may be just the thing to keep expectations in check and provide the right incentives to maintain, manage and grow the business post-acquisition. Earnouts of up to 30% of the total deal value are often applied in situations where the seller wants more and is confident the coming 12, 18 to 24 months will see a boost in the bottom-line.

When it comes time for owners to prepare to sell, the company will certainly sell much faster if management has keen and realistic expectations on what the company is worth. From our experience, the larger the deal gets, the less this particular problem becomes an issue. That’s a topic for another day.

The above was written in part by Nate Nead in M&A Advisory and updated by Devon Fleming.