Many business owners have in the back of their minds a vague plan to sell their company when they are ready to retire. However, most have not taken even basic steps toward getting their companies ready for an eventual sale. Busy with the day-to-day operations and growing their companies, most owners leave succession planning by the wayside.
Consultant and author Mark Herndon, president of Parkwood Advisors LLC, an Addison, Texas-based mergers and acquisitions, investment banking and business services firm, has helped many company owners prepare themselves for an eventual sale. Herndon will be the keynote speaker at the Small Business Times “The Next Stage” M&A Forum on Thursday, March 27, at The Pfister Hotel in downtown Milwaukee (see accompanying story for details). Herndon recently spoke with SBT reporter Eric Decker about how business owners can prepare to sell their companies. The following are excerpts from that interview.
SBT: In your experience, how prepared are most business owners when they want to sell their companies?
Herndon: “The unfortunate reality is that the vast majority of them are not prepared. I saw a study recently by a major accounting firm and investment banking private equity trade association that said at least 90 percent of their clients initially present their interest in making a sale to them without any preparation with regard to capitalization, financial records, succession planning, nailing down some of the normal and really important preparation aspects. And I find that’s true in my experience.
“Owners have a vague notion of what it’s going to be like. And quite frankly, it’s such a different kind of skill set and such a different kind of requirement than most owner-operators and even many larger mid-market management teams are comfortable with, unless they’ve been through it a number of times. There will be a number of things they have not anticipated effectively early enough in the process in order to accomplish what they want within the time frame that they want.”
SBT: When you encounter a business owner like that, what is the first question you ask? Where do you begin?
Herndon: “I like the question, ‘What do you want to do?’ The first and foremost thing that I want to understand is where is the business owner, where is the management team coming from? Have they already concluded that it is the right time for a sale? Are they looking for various strategic options and not clear on what it is exactly? And at the end of the day, what do they see their goal being for lifestyles? Are they staying with the business? Do they want to go do something else?”
SBT: Who do business owners need to have on their team when they’re considering the “grow or go” decision?
Herndon: “The company’s management team needs to be involved in producing data and helping with analysis. If not the whole management team, certainly trusted individuals, board members (and) minority owners need to be contributing to this decision and need to be getting alignment with all of their various questions and concerns and etc.
“And then we get into the external advisors. I recommend a CPA, lawyer, wealth manager and tax specialist for the owners. Those decisions also tend to be overlooked until late in the process. We have all heard many stories where the tax considerations of a proposed transaction at the latest hour will scuttle the deal.
“And this is not self-serving, but is a statement of fact for this market, an investment banker or M&A intermediary does bring a lot of value, because it falls to that individual to really help provide the conclusion and consensus on the strategic decisions beyond some of the technical and expert counsel we’ll be getting from layers and accountants.”
SBT: How should business owners begin preparing their business for an eventual sale?
Herndon: “There are two phases of preparation that are very important. They’re very closely aligned, whether I’m growing or going, whether I’m buying for strategic reasons or selling for personal reasons or what have you. The first phase is what I call pre-due diligence. That’s where we put in the fix-ups and clean-ups. Are your books and records, your historical financials, accurate? If we take a business out that is not ready — anything that comes up as a red flag will affect the perspective buyer’s viewpoint of you as an owner and the management team and their respective professionalism and sophistication. It’s perception and the valuation.
“Number two is what I call intermediate value-building kind of things. And this goes back to culture, talent, the management team, systems and processes, the product and service portfolio, relationships and contracts with key customer accounts. That is where we really create value. Until we have those things optimized to the best of our ability, I think that the company will never get its true valuation. Business owners are wise to take six months to a year doing preparation for sale.”
SBT: What do business owners thinking about an eventual sale need to know about the different types of buyers they might end up selling to?
Herndon: “There’s probably three different types of buyers to look at. Financial buyers are actually quite active right now, in spite of what has gone on in the credit markets. Financial buyers are very interested in the early to middle market and family business segment these days. You could argue that they could be more interested in having the management team stay, because they are looking at your company as an investment. Another advantage is financial buyers are interested in structuring recapitalizations, and those are very attractive scenarios for managers and owners who want to stay involved with the business for a time to come.
“Strategic buyers would perhaps be another company, either that is a direct competitor now that wants to expand by scale or geography or adding to its matrix of products and services with something that you offer them. And the advantage there is if you’re looking for a true exit, that provides perhaps a better means for retirement or an exit of the business. They may be able to offer a little more for your business, but recognize that it’s probably going to be a little more disruptive to your current organization. There may also not be a chance with a strategic buyer to maintain an independent brand or identity. And that may be very important to some sellers.
“And the third kind is an internal transfer, to include management buyouts or ESOPs. This makes sense where there is a very strong existing management team but where the owner really is ready for an exit and is not comfortable with either a financial or strategic buyer and where there is a very strong culture of participation, quality, employee involvement and it is the owner’s intention to sustain that culture and that team as much as possible going forward.”
SBT: How do you help clients navigate which might be the right buyer for them?
Herndon: “That’s something that will take some time. Based on the analysis that we go through with the client, their objectives, the state of the company, the state of the industry, the competitor analysis, we will work together to identify a short list of qualified financial buyers, strategic buyers and some inputs on what would an internal transfer look like, and start a qualification process bringing back profiles of those qualified financial and strategic buyers and begin building a pro-con analysis on the most interesting candidates to the business.”
SBT: What is the best approach to marketing a business for sale?
Herndon: “My preference is a strategic laser-focused approach. It’s also more value-added to the buyer to say we have a proprietary deal that is ready to work and we believe you are a perfect fit for this opportunity. That doesn’t mean we are going to give an exclusive, but it means that we are not going to try to overshop the deal and get too many perspective bidders to the party.
“It doesn’t mean that we won’t list a business on some of the bulletin boards or some of the major marketing sites or do some e-mails. Certain businesses, at below $2 million or $3 million in sales, or some more common main street businesses — that may be the only way that we can quickly and efficiently identify perspective buyers.”
SBT: With the looming recession, an election at the end of the year and uncertainties about capital gains rates and other tax issues, should a business owner thinking about a sale begin the process this year, rather than waiting until 2009?
Herndon: “Absolutely, yes. And even if they decide that they’re not going to sell the business, I would say that you’re already in a position where they are in effect trying to change a tire on a moving truck. Problems with bookkeeping and records, problems with capitalization and governance documentation, problems with systems and process or talent or other major customer accounts aren’t going to get better if they’re ignored. It takes time to resolve any of those kinds of concerns.”
SBT: How can business owners use technology to their advantage when thinking about a potential sale?
Herndon: “The phrase I like to use is that the M&A world is flat. The Internet has revolutionized the world. Size is no longer the ultimate competitive advantage. There are so many more opportunities for family-owned businesses, for small and early to mid-market businesses to grow through all of these techniques, that many companies didn’t really think were considerations for companies of their size. All of that is available. Financing is available. Strategic opportunities are available.
“Here’s the flip side of that. A lot more is expected of smaller companies than ever before. We can’t forget all of these things like pre-due diligence and creating a robust performance culture and having a team in place. There are far more opportunities but far more is expected at this end of the market than ever before. We have to be ready, just like the big companies. We have to be strategic just like the big companies, if we’re going to get out to that growth plan that we believe we can do.”
Time to sell?
Consultant and author Mark Herndon recommends that business owners walk through the following seven-step assessment process when deciding whether they want to “grow or go.”
- The first step is the personal — what do you want to do? Where are you in your career? What are your family considerations currently and are there any pressing issues, urgencies or objectives? How is your health? How long do you see yourself staying in an owner and executive role, if at all?
- Look out to the big-picture economy. What’s the potential impact for capital gains taxes being changed? What is going to be happening in the credit markets, and will financing be available going forward?
- Assess your industry. What cycle or stage of growth is it in? What’s going on with consolidation or strategic expansion within the industry? And what are the analysts saying about the industry?
- Take stock of your company. What kind of management team have you built up and trained? What kind of systems and processes have you established to create sustainability, repeatability and quality beyond you being in the facility every day?
- Consider valuation and financials. What are your expectations? What is your business worth today? Do a potential review of financials, market comparables or databases with sales price multiples, EBITDA-to-sales price multiples. Consider seeking a third-party valuation.
- Assess the competitive market. Is there another company that needs a strategic partner?
- Account for any potential wild cards, such as risk, for growing or going.
