For the past 20 years you have built your business. Your company has become part of your identity. Even when you are not at work, you are working, thinking, planning. You never stop. If you sell you are leaving behind much more than a job. In this article we will discuss some signs that might indicate that it is time to exit your business.
1.Late in your working life you are faced with a major capital requirement in order for your company to maintain its competitive position.
2.A large competitor is taking market share away from you at an accelerating pace.
3.Your legacy systems, production capabilities, or competitive advantage has been ?leap frogged? by a smaller, nimble, entrepreneurial firm.
4.A major company in a related industry just acquired a direct competitor.
5.Your fire to compete at your top level is not burning as brightly as it once did.
6.Your kids are not interested or are not capable of running the business.
7.You have had a health scare and have decided to smell the flowers.
8.You have lost a major client of a key employee.
9.The market is hot and you decide to take some chips off the table for asset diversification.
10.You exit in an orderly fashion and from a position of strength as you intended.
Lets look at these in a little more detail.
Major Capital Investment Required - You are supposed to be diversifying your assets, not concentrating them even further. Think about a simple payback analysis. Does that extend beyond your retirement date? You want to be able to defend that investment with the energy and intensity you devoted when you were originally growing your business. Maybe it is time to bring in an equity partner with smart money, an industry buyer with the management depth, infrastructure, or distribution network to protect that investment. You might consider selling not with a three year employment contract. Let the new owner defend the required capital investment.
A Large Competitor is Taking Market Share Away from You - Believe me, the news is not going to get better. As an investor you would probably sell the stock in a company you owned if Microsoft or GE decided to assume a presence in that market. Business owners often struggle with objectivity when a similar event takes place in their own company's industry.
Your Legacy Systems have been ?Leap Frogged? by a Nimble Entrepreneurial Firm - This happens all the time and can cause an erosion of your customer base. Your inertia will sustain you for a while, but eventually you will begin to experience customer defections. You can either rewrite, acquire or sell. If you decide to sell, do so before losing too many clients.
A giant company in a related industry just acquired one of your major competitors. Watch out, they did not make this acquisition to maintain status quo. They want to grow their market share. They will be coming after your clients. The good news is that as a defensive measure, one or more of their competitors will be compelled to make a similar acquisition. It is best to be aggressively ahead of the curve and get acquired while the market is hot and prices are being bid upwards.
Your interest and competitive fire is eroding. Let's face it, if you are not growing, you most likely are contracting. Your competition was tough when you were on your game. Your family's net worth is under attack if you are no longer fully committed.
Your original plan was to turn your business over to your children. They may not be interested or capable of competing at this level. Perhaps the greatest legacy you can leave to your kids is to convert your company into a diversified portfolio of financial assets that are far less risky than turning the company over to inexperienced managers.
You have a health scare and all of a sudden you start thinking of all the sacrifices you made and all the things you want to do before it is too late. Your list of goals is immediately changed from financial in nature to family, friends, travel, experiences, philanthropy, etc. You might want to listen to your heart this time.
You have lost a major client or a key employee. That can be a real blow to a business. The owner, by nature, is optimistic and believes that the lost business will soon be replaced and does not ratchet down the expense level to match this new sales level. If he does cut, inevitably, it is not fast enough and not deep enough. Maybe it is time to seek a buyer that could replace that business before your company's value is severely impaired as your profits erode.
The market is hot and you decide to take some chips off the table for diversification. You may be thinking of retiring in four years, but a consolidation is occurring in your industry and valuations are up 20%. Sell at the top and sign a four year employment or consulting contract. The odds are that if you exit on your original schedule, valuations will have settled back down to the norm.
You ring the bell and exit on your own terms, from a position of strength, exactly like you planned. You are well aware of the competitive forces in the market and the relative strength or weakness in valuation multiples. You have prepared your business to be attractive to a strategic buyer. Everything is going your way. You hire a good M&A advisory firm to present you confidentially to the most likely buyers. Several recognize your value and show interest. You are able to get a little competitive bidding going. Your transaction value rises and your terms improve. You pull the trigger and complete the sale. Mission Accomplished.
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When dealing with only one buyer, he is right. When there are multiple suitors, competitive market forces are allowed to function properly and true business value is established. I am often asked by a business owner what he should do when he is approached by an unsolicited offer. As a general rule, these buyers are only interested if they can get a bargain and limit the process to themselves as the only buyer.
First question I would ask the potential seller is, do you know the value of your business? If he says yes, my next question would be, how do you know? Have you had a recent valuation? Are you familiar with other comparable transactions? Are there rule of thumb valuation multiples for your business? Are you aware of any strategic value components your company may possess? Are you familiar with a discounted cash flow and terminal value approach to valuation?
If he feels comfortable with the value of his business, would this value be adequate for his financial future? What if a buyer was willing to meet his value criteria, but the seller were asked to take some as an earn out or some as a seller note? What offer would induce this owner to change his exit plans, assuming he was not already for sale?
In most cases, the buyer is very aware of the market and the owner is not nearly as well informed. The buyer most likely has made similar overtures to three to six other companies and is attempting to bring one bargain to closing. Because he has multiple opportunities, he has the leverage.
When talking to business owners who have gone through this unfortunate dance with a single buyer, several patterns repeat themselves. The first is that the seller is unable to pin the buyer down on the price and terms even after several months of buyer tire kicking. They are vague and evasive. They reschedule and delay meetings. They drag the process out. They introduce a partner deep into the process who starts hacking away at the terms and the deal shrinks. They discover minor issues in due diligence and act like there should be deal term and price adjustments. The seller gets deal fatigue.
The single buyer is emotionally detached from this process and thinks it is just part of his deal making skill. He is doing the same thing with multiple business owners simultaneously who have a much different emotional connection to the product of their life's work. The buyer is behaving badly and the owner really has no leverage to make the buyer behave. Most of the time the owner will simply blow up the deal after wasting months of time and a great deal of emotional strain. Sometimes he just caves in and sells out at the newly adjusted lower price. What a terrible outcome.
How should the business owner handle this? First answer is my company is not for sale. That usually scares the bottom feeders off because you are establishing a point of strength that you do not need to sell. Of course the buyer will say that everything is for sale. The next step would be to get mutual non disclosures executed and if you are sharing financials, you have the right to request his financials to make sure he has the financial ability to afford you. If it is a public company, you can check the public records for financials.
You really do not want to let the potential buyer do much more looking until he has submitted a qualified letter of intent. That basically says that if we do our due diligence and find out that everything you have told us checks out and we do not find any material surprises, we are willing to pay this much and on these terms for your company. Why would you let another company tear yours apart without knowing that their offer is acceptable to you once they do?
These are good steps, but I still have not solved your problem, leverage. You only have one buyer and you really have no pricing or negotiating leverage. For that you need multiple buyers. A business owner who has to run his business, which is already more than a full time job, normally can only process one buyer at a time. Therefore no leverage, no pricing power, no competition, no good result.
For that you need multiple buyers. To accomplish that you need a merger and acquisition advisor or business broker or investment banker, depending on the size and complexity of the potential transaction. When we are contacted by an owner that has one of these buyers in pursuit, we simply throw that buyer in to the process. When it becomes evident that this is going to become a competitive buying process, they head for easier territory pretty quickly. In our many years of doing this and in the twenty five year history of my prior firm, in only one case did the original unsolicited buyer end up being the winner. And that final price was 35% greater than his original offer.
The unsolicited offer is originally attractive to the business owner because he believes that he will net much more from the transaction if he can avoid paying the investment banking fees. The practical reality is that being sort of, kind of for sale will depreciate your company's value. Either tell these buyers to go away completely or tell them you will have your investment banker contact them. This one buyer middle ground is not a good place for you or your company.
