You call in one of your plant managers and ask, “Do you have a plan for the plant re-stack?”
“Yes.” Comes back the manager’s reply.
“Can I see it?” you ask.
The manager retreats a bit and replies, “Well, it’s still in my head.”
Suddenly, you’re not happy. When you hear this, you conclude that there really is no usable plan at all.
Recently, when business owners were asked if they had a strategy around their exit, half said, “No,” and one-third said, “It’s still in my head.” In all, 83 percent of business owners have done no real strategic planning around their final transaction for the business. Most will never plan for the event. But those who do can reap huge rewards. Recently, a Milwaukee company sold at more than three times the industry norm.
As we enter what’s being called the fourth industrial revolution, change is going to keep speeding up. Smart business owners know there is little value in doing long-range strategic planning beyond having a broad idea of where you want to be in five years. However, there is one exception where long range planning really pays off. That’s the plan you build around building company valuation. This plan is different from your strategic growth plan where you’re focused on top-line growth and the margin. Rather, it’s the owner’s structure and positioning plan to maximize the value of the firm to potential investors.
How you conclude that plan will depend upon to whom you end up selling. Even if you end up selling to your children, having a long term strategy around maximizing valuation will hand them a more valuable firm.
If you’re going to transition your company to your kids, or to your partners, or to your employees, then your motivation is not to pull out the maximum value. If you sell the business to your children then you want a price that ensures their future success while providing a reasonable retirement for yourself.
If you sell to your partners, you face a difficult psychological problem. From your partners’ viewpoint, they already own the business and your exit means they are taking on more risk. To feel good about the transaction, they will want to pay you less than they think their comparable slice is worth. That way, when the deal is done, they will feel good about the transaction. They are not going to give you maximum value.
With an ESOP, the law requires an independent third-party appraisal. The appraiser is not trying to fix the highest price that can be justified. Rather, the appraiser is looking for fair market value. You’re not in control, and you’ll end up with an average valuation. But your good motivation for the ESOP is usually to provide for your employees.
Typically, you’ve already provided for your own retirement.
Venture capital, private equity, or other funded buyers will look at the money they pay for the business as the cost of future goods sold. They’re buying an asset that they must flip in a few years. That’s an expense, not an investment. They will be arguing for a bargain. You can still do very well here, but you’re in for a battle with very clever people. Recent surveys found that after the transaction 75 percent of former owners become dissatisfied with the results, mostly believing they received too little for their business.
There are several different motivations behind mergers and acquisitions that affect valuation. The worst for you is where the buyer views the transaction as a business rationalization, to reorganize and/or integrate. The absolute worst is when they are buying you to eliminate a competitor. For them, it’s not an investment, it’s a one-time expense.
Next, is an M&A transaction, in which the buyer sees either a horizontal or vertical play. The good news is the buyer will see this as an investment. Their interest in your company will be determined mostly by the price. They are looking for a return that depends on ordinary income flows, not something more strategic.
Better than other M&A transactions is the strategic asset buyer. Here the buyer has selected your company because you have something unique that the buyer needs. It could be intellectual property, technology, expertise, management structure, brand, market presence, or any of a number of other strategic plays.
The buyer who’ll pay you the most is the one who’s after your business because it presents multiple strategic assets. This is where understanding how the things you do impact value and how long-term planning places you on the radar of such a buyer. Typically, such a buyer is not going to be advertising that they’re in the market because this kind of acquisition is designed to create a competitive advantage and they don’t want any competitors or anyone in their value stream to know what they are up to.
The dirty little secret around selling your business is that you don’t find this best buyer, rather the best buyer finds you. The trick is to position yourself so that the best buyer will find you. How do you do that?
The answer to that question is one of the many valuation topics we will cover at the BizTimes Media M&A event on April 21 in Milwaukee. Join us for this valuable breakfast and morning session by registering here.
Bill Burnett is the director of export services for the Milwaukee 7. He can be reached at (414) 287-4118 or via email at bburnett@mke7.com.
