I thought my head was going to explode.
My client said to me “I want you to use me as an example of what happens when you don’t prepare.”
I’m constantly amazed by Entrepreneurs and Business Owners who can see opportunity and execute to build a business. My number one piece of advice for them always comes down to one thing: don’t neglect the knitting.
I know, I know, you don’t like numbers. Accounting is boring. Accruals - Bah! Generally accepted accounting principles? Yawn.
All that stuff isn’t why you’re so good at what you do. It isn’t why you got into business. What makes your company an obviously great investment is the secret sauce you’ve developed, right?
Trust me. You are going to pay the price one way or the other. If you build with a buyer’s eye, you’ll sell at a sellers’ high. I just made that up. And no you can’t use it, because it’s Copyright © 2017 Harbinger Partners, LLC.
There's nothing worse than a Backseat Driver. Or the Monday Morning Quarterback. Business owners are constantly offered advice from 'trusted' advisors who don't have a stake in the Owner's best interest as much as a stake in keeping the money train rolling.
When it comes to an exit who can tell a business owner how to prepare? Lawyers can certainly be counted on to minimize risk in a transaction. Accountants can certainly be counted on to prepare statements to GAAP and if they're tax specialists to minimize taxes. Many groups purport to help business owners with councils, coaching, and expensive consulting.
But when you stop and think about it, who knows more about value in the market place than those who are actually doing deals? It stands to reason then that if you're a business owner thinking about an exit in 1-5 years, you should be speaking with a business advisor, a dealmaker, a merger & acquisition specialist now.
We here at Harbinger Partners use a best-in-class, proven value building system combined with a customized online coaching module to guide business owners to real, sustainable value improvement. Not theories. Not business school bologna. Outcome based, real-world-actionable, measurable and programmatic.
And when Lawyers and Accountants offer that, please let me know.
There are many places that a good Intermediary can add value (just check out this article: http://www.axial.net/forum/2-ways-investment-bankers-add-value-ma/ ) but one of the things that Intermediaries should be especially careful with is a Business Owner's time.
That leads me to what I call the "Casual Buyer". The Casual Buyer comes from all walks of life. Former private equity folks that didn't get the promotion they were looking for and decided to go out on their own. Wealthy individuals who made their money selling other businesses or just have some family money to 'play with, and unfunded sponsors to name a few.
The interesting thing is, these buyers can all be legitmate and good buyers. As a Business Owner, you need to be aware that not all buyers from the same 'categories' are the same. Even when they have cash. A good Intermediary will weed these folks out and not waste the Business Owner's time.
Not too long ago I was working on a deal where the buyer spent the majority of our first phone call telling me why the deal wasn't for them. If they invested the same amount of cash in their core operation they would make 8x return in 5 years. The business for sale was 'too far away'. They didn't have any direct experience in the field. They were asking about what kind of structure the business owner would take and the value he would take and were disappointed to hear the business had grown.
To me, buyers like this, who often view themselves as 'value' buyers are looking at a deal precisely because the 8x return they espouse to have is not actually available to them - otherwise they'd invest there. Ironically these 'value' buyers actually don't see the value that the Business Owner has built - which is why I call them "Casual Buyers". I do not let these Casual Buyers get anywhere near the Business Owners I represent.
Originally published on Axial Forum: http://www.axial.net/forum/get-top-valuation-business/
Originally published on Axial Forum: http://www.axial.net/forum/5-types-financial-buyers-intermediaries-dread/
I learn so much from people that have built their own businesses. It’s amazing to see talented, driven individuals who took the risk to go out on their own be successful. Here on LinkedIn and other business and social content sites, we tend to see a lot about the VC or high profile backed start-ups in mobile, cloud, and technology segments – but there is a whole other set of businesses where the risk is no less, and the entrepreneurs are just as spectacular.
These business owners have often carved out tremendously defensible markets with repeat customers, sticky revenue, and eye-popping cash-flow that will never see the headlines. They are content to make money while existing just beneath the radar of social media. And they are the type of people that I’m fortunate to work for every day. How lucky am I?
If you’re a business owner like this, and thinking it could be time to sell, I’d recommend you have a look at a recent Forbes article, “22 Mistakes Made By Sellers in Mergers and Acquisitions”. It’s right on the money. I’d also recommend if you’ve never sold a business before, that you read the book written by my colleague Ney Grant called “How to Sell Your Mid-size Business”.
But before you can even get to the nitty-gritty of the ‘HOW’ it’s all done and the mistakes to avoid, I have four highly important considerations for you to reflect on. They start with the ‘WHY’. My job as an advisor is to make sure you have thought through the ‘WHY’ and follow up possibilities in an organized way, so that you don’t stumble into the many challenges that are inherent to getting a deal done.
Why are you selling? I get calls from business owners all the time that can faithfully be plotted along the two axes of Experience and Readiness. To keep it simple, let’s say Experience can be broken into two categories: have you bought or sold a business before. That’s easy. Readiness on the other hand is a bit more complicated. Like Experience, there are also two components to Readiness, again to keep it simple: Business and Personal. Now, if the business is not ready, it’s not ready. That is generally not too hard to see. A good advisor and or accountant can help you get on track. But Owner Readiness? That’s what really needs to be explored. Why does an owner want to sell their business is amongst the first questions I ask.
The 'why' usually falls into one or more of five categories: retirement (including passing the business to a family member), fatigue/disinterest, health/family/financial pressures, new/other business interests, and recapitalization for growth/Chips-off-the-table. The last two of these categories have an immediate next step for an owner or a path to ‘do something’. The first three do not: retirement, just selling because you’re ‘done’, and or having health/financial pressures don’t necessarily or naturally lead to clarity on what’s next and importantly if selling is even the right thing. Clarity on the ‘why’ and understanding the end in mind are the lynchpins to getting a deal done, and done right. Once this has been sufficiently explored and answered, then you can contemplate what’s next.
Are the other pillars of your life sturdy? It’s hard enough to run a business. It’s even harder to run a business and sell it. If there are other active life-changing events involving family, relationships, health and or other matters these will inevitably be emotional and mental drains that can lead to less than optimal deal outcomes. Put another way, you need to be able to continue to run the business and grow it like you are going to keep it, and be ready for the stress that comes with marketing a business for sale. That leads me to another area that a good advisor will help the business owner consider.
Are you ready for the work and the relentless scrutiny? Selling a business can be a very emotional and personal thing for many business owners. The risks often have been long borne and there is pride in the entity that has resulted, as well there should be. Diligence will be difficult, even with excellent advisors. Entrepreneurs typically have not had to prepare answers for any of the decisions they’ve made either in how they’ve run the business, organized the work, found customers, marketed, and accounted for all of it. Buyers bring hard hitting and insightful analysis and questions – and business owners need to understand it is part of the process. It’s not meant to be taken personally. Plus, it takes time, is a lot of work, and can be frustrating. As an owner, this is where you need to have the clarity of the outcome from the “why” to focus on.
Can you work for someone else again? Finally, for those entrepreneurs that are re-capitalizing and keeping minority ownership in the business, the real question is this: are you ready to work for someone else again? As a business owner you’ve been the go-to for all decisions – and now there will be some changes in delegation of authority. Can you envision yourself building this business with the new majority owners? What were the reasons you started the business in the first place? What are the outcomes you are looking for in the next stage? An owner needs to come to grips with this before deciding to sell to make sure the advisor focuses on the right type buyers.
Selling and buying can be emotional things, no matter how cold and calculated a buyer and seller can look on the surface. There can be ego, bad word choice, misunderstandings, over-reaching, petulance, pettiness – as well as teamwork, vision, potential, good chemistry, and sometimes even real humility and compassion.
Considering a sale? Get educated. Find an advisor that cares about you, understands you, and will help you work through your options. Because you’ve built an amazing business and you deserve to get to the outcome of the “why” that you want. And you already know that you don't need to be on the cover of Forbes to be successful.
David Walsh is a founder and Managing Partner of Harbinger Partners and a general all-around can’t-sit-still kind of guy. He advises business owners in the small to mid-market, consults with investors, hedge funds, and private equity on industry trends as well as sales optimization and business development for private businesses.
You’ve worked hard building your business. No one knows the things you’ve done to make it go. The early mornings, late nights, and employee problems: the waking up at 3:00 a.m. wondering if it would all fall apart. While others may have been starry eyed dreaming about entrepreneurship, YOU lived it! On the glorious edge of ruin -- until you built a reputation, customer base, and millions in cash-flow.
But now that your business has been growing steadily over the last several years you’ve decided it’s time to take some chips off the table, get some growth capital or maybe even to sell 100% of the business and move on to something new. You’ve learned through your experience that you can’t predict the highs and lows, so you know that your best opportunity to maximize value is when the business is healthy and growing.
You read a book or two about how to market or sell your business, talked to your financial advisor and lawyer, and you came to the conclusion that you couldn’t market the business yourself. There’s too much there you’re just not comfortable with and you've been approached to sell before. You’ve learned over the years that you get what you pay for. You know you need a professional.
So you picked a firm and a dealmaker you’re comfortable with: one that really understood you, your business, and how to market broadly to create price competition in the sales process. They’ve taken your financials, your story, created an informational memo, marketed you to prospective buyers/investors, presented you with a plethora of options -- and finally, FINALLY you’ve chosen the one buyer you’d like to move to close with.
Okay, now. Here’s what you’ve been waiting for. After all that work, here is How to Skunk the Deal.
Let the emotions rule.
Humor aside, because, who would really want to do these things, the number one thing that skunks a deal by far is declining performance. When a value has been set, and performance does not match projections, the deal is going to be re-traded or dropped. All capital is seeking a balance of risk with ‘knowable’ returns versus cost of equity and or debt. The minute the trends change negatively is the minute your buyers develop the ‘far away’ look in their eyes. And yeah, the checkbook gets that far away look going too.
You will hear dealmakers say ‘Time kills all deals’. It’s very true. But the root causes behind adding time into deals are emotional attachment, financial/business integrity, and the deadliest of all, declining performance.
Please don't skunk your deal. After all, you've worked too hard to not get to a close.
David Walsh is a founder and Managing Partner of Harbinger Partners and a general all-around can’t-sit-still kind of guy. He advises business owners, private equity groups, and random strangers. He also attempts to advise his kids. So there’s that.
If you are a business owner contemplating a recapitalization or sale of your company, there is just a whole lot to think about. The first thing on every Entrepreneur’s mind is “How much is my company worth?” Value is a strange thing because really, like beauty, value is in the eye of the beholder. Different buyers find value in different aspects of a business. That’s why in order to unlock maximum value and create competition amongst buyers, you need to market broadly and gets lots of ‘beholders’.
To get ‘beholders,’ in the first place, you start with the marketing. A typical marketing plan to sell a business includes a document that is called a ‘book’ or ‘confidential information memo’ that describes the state of the owner’s business in great detail. It often includes narrative, financials, pictures, and charts. There are all sorts of methods, styles, and content that different firms use to produce these books.
The one thing that a great number of these descriptive offering memorandums all have in common is a phrase that goes something along the lines of this:
“Owner has not used professional, dedicated sales and marketing resources.”
The paragraph where this statement shows up will then go on in greater detail to essentially implicate, and I loosely paraphrase here:
“Can you imagine how much revenue growth you could get if you, the buyer, just went out and hired a couple of sales folks?!”
Savvy buyers, though, aren’t having any of this without some investigation. Their thinking is simple. Fundamentally, it is this: if it was so easy, why wouldn’t the owner have already done it? After all, the entrepreneur who built the company certainly knows the most about the operation and its potential? So why hasn’t the owner already put their cash flow to work to get more cash flow?
It’s a good question.
If you’re an owner thinking about selling your business, you need to review how you acquire and keep customers. If there are improvements you could make, I strongly suggest you consider making them now, well in advance of hardcore sale preparation.
Start by asking yourself a few basic questions like:
By getting a deep understanding of these points and who in your organization is doing the work to acquire and retain customers, you can get a sense of the expense required to really dedicate resources towards customer acquisition, retention, revenue growth, and, most importantly, if the potential numbers will reflect favorably in enterprise value.
When you have the basic framework of how things work today, you can create a simple model to understand what the economic value will be, how to set compensation goals, and how to measure their effectiveness. The enterprise value of one sales person at $40,000 total target compensation annually can be figured like this:
(Base Salary + Commission + Overhead) * EBITDA multiple
Where EBITDA multiple is the expected value multiple of the company.
For this example, if an owner hired a sales person who earned $20,000 base and $20,000 in commission with a 15% overhead, at a total cost of $46,000, and the EBITDA multiple of the company is an estimated 4 times or 4X, the overall enterprise value or cost of hiring a sales person is $184,000. In order for this to be a good investment, the owner needs to model current and projected revenue, gross margin, operating expenses, and EBITDA and have a return greater than this level.
For this example, to keep things simple, let’s assume that every dollar this owner’s new sales person generates in revenue translates to 15% of EBITDA.
For a business owner to break even on their investment, their new sales person must generate at least $306,667 in topline revenue, at equivalent gross margins to the average of the business.
There are many other things to consider, including ramp up time, training, management, systems, compensation plans, etc. But growth in revenue and earnings drives not only interest in an owner’s business but overall value. The more an owner can demonstrate how it’s working rather than how it MIGHT work, and the stronger the EBITDA, the higher the EBITDA multiple will climb.
To give you a sense of the difference a carefully planned sales strategy could make in to your exit, consider if an owner discovered, in the example we’re working with, that they could impact EBITDA positively by a net $50K on an annual basis by hiring a sales person. That resulting difference in value with $3M of EBITDA at a multiple of 4X might move that company to a $3.05M EBITDA at a multiple of 4.1X or a difference of $488K.
That’s a lot of lettuce.
Now of course, it’s more complicated than just that. But the point is to explore your options and invest wisely to demonstrate that the scalability and return is there. What I see time and time again is that small- to mid-size companies often ignore this until it’s too late. Hiring professional sales & marketing people can help an owner to:
There is no doubt that understanding the numbers takes work. Reach out to your accountant, exit planner or advisor for help if you need it. And on the sales/selling side, it is work to understand, hire, train, and manage the resources. On the flip side, there is greater access than ever to outsourced services that can help a business owner develop a sales team and the necessary review points and resulting cadence requirements to get the right outcomes.
Why am I asking you to focus here? Because you’ve spent years building this business and you deserve the highest value when you sell. Building a competent sales resource or team will likely bring tremendous returns in terms of buyer interest. Think more ‘beholders’ which creates that price competition to drive value.
Then your advisor can put this statement in your confidential information memo:
“Owner HAS professional, dedicated sales and marketing resources that drive year over year revenue and profitability growth”
David Walsh is a founder and Managing Partner of Harbinger Partners and a general all-around can’t-sit-still kind of guy. He thoroughly enjoys helping business owners maximize the value of their companies.