“Amidst all the hype and hoopla around this business, I wanted to emphasize the challenge—it is seductive but the failure rate is very high. And those who fail have no good place to go.”
― Mahendra Ramsinghani
I’ve been fortunate enough to have a company where I eventually saw three different offers for either the company or for my share.
Once we got beyond the initial stage of sniffing each other out from the first potential buyer, I knew I had to get my arguments put together. A critical piece of information I needed to know was just how much our company worth.
I’d taken enough classes in my MBA program that I knew how to create a valuation, and what other factors to incorporate since we were a privately owned, closely-held enterprise. I ran the first evaluation of what I thought that we should reasonably expect for our company.
However, I’d never run the sale of a company before. I wanted to bring in an experienced hand who had done a ton of sell-side M&A deals and who could patiently and forcefully argue our side’s position to our potential buyers without ruining the relationship between the principals of the potential buyers and our company.
We hired a good friend of mine from my business school to run the final valuation and the sell-side negotiations for us, and he was worth every penny of the fee we paid to him.
It turns out that my valuation was pretty close to what his team arrived at after their analysis. But, even though my analysis was correct, there is no way I would have wanted to try to run the sale on my own.
If you’re a business owner, though, who doesn’t have a deep network of experienced colleagues who ran private business sales as their day-to-day job, who do you turn to if you want to sell your company or you think you might get an offer on the table?
A lot of business owners will turn to their financial advisors. They help with the other aspects of financial life, and businesses make money, so it makes sense, right?
Not so fast.
I’ve sold a company. I’ve done the coursework for the CFP® certification. I’ve passed the CFP® exam.
I can tell you from personal experience that there’s very little overlap in the two skill sets.
What Do You Need to Know to Value and Sell Your Company?
The simplest answer to this question is what is the price that another party is willing to pay you for the keys to the business.
However, finding that answer is a much more complicated exercise.
The first thing that you need to know is what your own company’s financials and projections look like. You need to know revenues, free cash flow, EBITDA, and profit margin, amongst other financial metrics. You also need to have realistic projections for what the next three to five years will bring in terms of growth and increased profits.
You may also need to know industry growth trends, assumed discount rates, and terminal points in order to generate a discounted cash flow valuation.
What were the latest purchases in your industry based off of? EBITDA? NOPAT? Revenue multiples?
Furthermore, you need to know the structure of the deals. Were there earnouts? Were there adjustments based on closely held enterprises versus publicly traded companies? Did buyers buy companies that potentially added growth markets, or were the purchases solely for the recurring revenue that the targets provided? What were the conditions that caused purchases at multiples above the averages, and do you fit those? Alternatively, what were the conditions that caused purchases below the multiples, and do you fit those? What’s the football field spread for the different valuation metrics and which one applies the most to you?
Since many purchases involve earnouts and equity transactions, you also need to know about the business model and the valuation of the buying company. Are they trading an appreciating asset or a depreciating asset for your business? What discounts apply for all cash deals? If there’s a significant earnout component, you need to understand the buyer’s business model, how you’ll fit in, and how the buyout will increase your chances of reaching the earnout. You also need to know how the earnout component compares to comparable deals in your industry.
If you’re going to be working for a while with your acquirer and the negotiations have the potential to be contentious, you probably don’t want to be the one doing most of the speaking at the table. In fact, you probably don’t want to be at the negotiating table, as you can then use your advisor as a scapegoat for the harshest parts of the negotiations and maintain a good working relationship with your acquirer once the deal is done. You also need to know what, historically, purchasers have valued and what they’re willing to trade away in negotiations. You need to be familiar with past deal structures, including liquidity terms, non-competes, and typical lengths of time for acquired owners to stay with the new companies and their roles.
It’s possible that some financial advisors have played the role of sell-side advisors in small business acquisitions and can guide you through what you need to think about when selling your company. Most financial advisors should be able to help you think through whether what you would receive for your company would help you meet your financial goals as well as evaluating the tax implications of a sale, no matter how the sale is structured.
However, if you want to maximize the value of your company when you’re selling it, you might want to look beyond your financial advisor for help. Your financial advisor may or may not know people in his or her network who could help.
If you’re a small business owner who hopes to cash out of his business one day, you’re better off making sure that your financial planner also has experience in exits, or else, once the day comes (if it does) when you are poised to sell, you may leave a lot of money on the table.