Think about your favorite sport: anything from bowling to skydiving. The adage Preparation, Position and Execution applies. When you think about selling your business, let this advice guide you. Ignore it and you may well find yourself selling for less than maximum price—the equivalent of parachute failure.
Preparation: Selling a business is a marathon, not a sprint. Without conscientious training, finishing the race in a "personal best" time is not possible. When selling your company, your preparation should start well in advance of the sale process. What condition is your company in today? What weaknesses must you address before stepping up to the starting line?
Consider the case of the owner of a plumbing parts company. For years, he had understated his inventory to minimize his profits, thus reducing his tax liability. For years his accountant used these numbers to prepare the company's tax returns.
When this owner realized that neither his employees nor his son was interested in taking over the business, he investigated selling to a third party. During his first meeting with a M&A advisor, the advisor asked how he supported annual sales of $25 million with an inventory of $250,000. The owner admitted how he had cleverly "saved hundreds of thousands in taxes" over the years by understating his inventory.
This owner faced a difficult choice: correct the inventory numbers so that his EBITDA (earnings before interest, taxes, depreciation and amortization) would support the $10 million sale price and face the possibility that the IRS would charge him with tax fraud or let the numbers stand, avoid jail time, but find that no buyer will buy a company with unsupportable numbers.
Position: Do you know which industries are hot in today's M&A marketplace? Are you familiar with the prevailing multiples for companies in your industry? Do you know how your company compares to its competitors? Have you retained a credible transaction intermediary who knows how to reach active buyers and persuade them that they cannot afford to miss the opportunity of acquiring your company? Positioning your company in a crowded marketplace is the second key to your successful sale.
Execution: Professional buyers are formidable adversaries. They have executed numerous transactions and know how to chip away at both a seller's confidence in the price and the terms.
I remember meeting an owner of a chain of popular barbecue restaurants. Her EBITDA was $5 million when an intermediary representing a well-known hospitality group expressed interest in buying her out and asked to see her financials. Two weeks after their first meeting, the buyer sent her an Expression of Interest offering four times EBITDA (an attractive multiple in the restaurant business). This owner entered into negotiations without paying much attention to the last phrase in the buyer's offer, "Four times EBITDA as defined by GAAP (Generally Accepted Accounting Principles)."
What this owner didn't know, but the buyer did, was that her company's EBITDA was not $5 million, but $2,500,000. After closing, the buyer successfully argued the point and, in the end, the seller received the promised 4 x multiple-- on $2,500,000.
Whether the M&A marketplace is hot or cool, it is not a place for rookies. If you prepare well, understand your position and retain a seasoned coach before you enter the sale process, you can greatly improve your chance at maximizing your sale price. And that, after all, is the name of the M&A game.
Kevin M. Short
Managing Partner & CEO