Business owners looking to sell their companies today will face a far different marketplace than they may have heard or read about in recent years.
Interest rates are climbing. Bank financing is tougher to come by. Businesses themselves are not performing as well as they had in recent years. And buyers, both private equity groups and strategic buyers, are able to look at more deals now, increasing the market of companies now trying to find buyers.
However, despite the obstacles, some businesses will have no choice but to start the sale process – perhaps because their business is over-leveraged by bank debt, is under-performing because of market conditions or the owners are facing an illness or divorce.
Company owners who need to sell out in today’s marketplace need to begin with some simple, but important, questions, said Jim Gettel, managing director with Schenck M&A Solutions, a division of Schenck Business Solutions.
“Will the business come back?” he said. “Can it support the products that it did before? And what is the break-even at this point? Can you cut to the point where it looks to be (a viable) business?”
Back to basics
If a sale needs to occur within a three- to six-month time frame, there are a few things that can help maximize the value of a business for its sale and increase the chances that it is sold.
“You need to make some tough decisions on how to conserve and focus on cash flow,” said Lou Banach, managing director at Schenck M&A Solutions. “Often, part of that is bringing a turnaround person in, so that you’re not in a liquidation scenario. You want to buy time.”
Stan Johnson, president of Anderson/Roethle Inc., a Milwaukee-based mergers and acquisitions advisor firm, agreed.
“Do we have employees we don’t need? Do we have family members that are drawing salaries that are too hard (on the balance sheet)?” Johnson said. “Frequently when we’re selling a company for a client, what we do is look at the historical income statements. We can ask what they would be if the position wasn’t a family member, and then re-cast the financials and perhaps they’re not as bad as they look.”
Sometimes other adjustments to a business’ operations or reporting methods need to be made.
“I’ve been in factories where you almost need a flow chart to determine how things move because it looks like one of those old Keystone Cop commercials,” Johnson said. “And when you clean those things up, those companies can go from losing money to making money. Sometimes we have to tell people to clean those things up for a few quarters before they go to market.”
However, cutting services and people should be done carefully, so as not to damage the long-term viability of the company.
“It’s tempting to cut marketing, R&D and other areas which may free up cash flow,” said Steven Glaser, an attorney with Quarles & Brady LLP who works on the firm’s mergers and acquisitions team. “But any buyer worth their salt will look at the way things have happened to see that all of a sudden, in the year before the sale, those things were reduced. And that could raise a question of whether they will accept the cash flow numbers or due diligence.”
Targeting acquirers
Finding the right buyer for a company is likely to give the best outcome, in terms of price paid for the company, Glaser said.
“It may be a strategic buyer, or it may be a private equity firm with several platform companies, and (your company) can be an add-on to one of their platform companies,” Glaser said.
However, companies also need to spend a significant amount of time cleaning up their operations, books and balance sheets before they approach any potential buyers.
“All of the private equity groups are getting more (proposals) than they’ve ever gotten,” said Jeffrey Vogelsang, managing partner with Promontory Point Partners, which has operations in Milwaukee and the Chicago area. “If you have a poorly prepared presentation, no one is going to look at it.”
If a personal matter is driving the decision to sell the business today – whether it is health-related, a divorce, or some other matter – communicating that in a clear manner to potential buyers could help ensure a successful sale, said Paul Stewart, managing director with PS Capital Partners LLC, a Milwaukee private equity firm.
“For owners of businesses that need to sell now because of personal reasons, being able to show what is driving that decision in a way that is verifiable to buyers allows the buyer to get comfortable,” he said.
Deal structure
Business owners who need to sell their companies in today’s marketplace, but are still willing and able to help run them in the future, have several options on how to structure the sale of their companies that could increase profits in the future.
One option is to sell the business, but include earn-outs or other financial incentives that pay out in future years, Stewart said.
“You may need to take a combination of cash and a note at closing. What it comes down to is you need to be comfortable with your buying group. Ideally, it would include some members of your management team, an equity player in town who you are comfortable with who will support your management team, and a local or regional bank. Together with your seller paper, with an earn-out, they can put a package together that over time may pay out even more what you would have gotten in a high market with straight cash multiples,” Stewart said.
“I’d be looking for a buyer that will keep me on with a significant operator role with an equity stake,” Vogelsang said.
Buying time
If their business is over-leveraged with bank debt, owners may consider hiring a business turnaround expert.
“You still need to look at a variety of issues to at least get you out of a distraction (situation),” Gettel said. “You could hire a turnaround guy to help give you time. If you’re having a problem with the bank, they can ask ‘What can you do with that relationship?'”
If a business is facing difficulty repaying its lenders, the ownership team needs to gather its trusted advisors to formulate a plan before approaching its bank, Banach said.
“You need to get together your team – your attorney, CPA, M&A advisors or turnaround pros, and once you get a plan, then you go to the bank,” he said. “Too often, business owners panic and rush to the bank, and then the bank asks, ‘What’s your plan?’ You’ve got to provide the leadership. You will know the issues sooner than the bank.”
Renegotiating bank debt could help buy a business owner 12 to 18 months of additional time, which could allow the economy and the business to turn around, Banach and Gettel said. And if the business rebounds, it increases the chances of finding the right buyer who will pay the highest price for the business.
“The way to control this is through time,” Banach said.
