To Maximize Your Business Sale, Think Like a (Home) Buyer

You’ve built a rock-solid business. All the pieces are there—a great product, decent revenue, an extraordinary team—along with plenty of apparent demand in the market. A sale seems all but inevitable. So why isn’t anyone buying?

Because every step of an M&A transaction is designed for buyers to eliminate sellers or reprice the deal.  To truly understand why, you’ll need to think like the person on the other end of the transaction. You’ll need to channel your inner buyer.

I’m not suggesting you immerse yourself in M&A literature or moonlight at a private equity firm. Your inner buyer is probably better developed than you realize. In fact, if you’ve ever purchased a home, you have essentially the perspective and experience you need.

Business Deals and Real Estate Deals: Not That Different

Consider the characteristics that make a home desirable or not: its size, its current condition, its potential future value, where it’s situated, the value of similar properties, and so forth. Virtually every factor influencing a real estate investment shows up in an M&A transaction as well.

Buyers are looking for assets that meet or exceed an extensive list of criteria. Like savvy home buyers, they’re not willing to settle or simply say “yes” to the first option presented. They’ll take any opportunity to negotiate down the asking price. And when they have a bad feeling about a situation, they’ll walk away.

Stage 1: Browsing and Screening

Home buyers usually start their journeys by browsing and evaluating real estate listings on sites such as Trulia and Zillow. This high-level overview is where the vast majority of options get weeded out. If a home doesn’t align with the buyer’s overall requirements—if it doesn’t have enough bedrooms, for example, or is far out of the buyer’s price range—it doesn’t warrant consideration.

The same general process occurs in M&A, although there’s no Trulia equivalent for business deals. Instead, prospective buyers obtain basic information about a target—such as its profit margin, industry, customers, brand, and geographic footprint—by contacting the organization directly or through a “Teaser” developed by an investment bank or other intermediary. Although they can’t collect much data at this point, any early insights inform the decision to move forward but shape the buyer’s strategy and expectations. A seller who makes a lackluster impression, appears disorganized, or fails to communicate in a timely matter can anticipate tough negotiations ahead. That is, if they ever hear from the buyer again.

Stage 2: The Initial Walkthrough

Next come on-site visits and earnest conversations with sellers. In real estate, a buyer will tour a location to ascertain its condition and begin to plan any remodeling. In addition to the obvious issues and red flags (e.g. structural damage, poor workmanship, faulty wiring), curb appeal matters  : Is the asset well-maintained and looked after? How is the neighborhood?

Business buyers make similar appraisals—of their targets, of their targets’ positions in their industries or markets, of the curb appeal of the deal, and of the organizational leaders in charge. While parties involved in M&A transactions certainly do conduct walkthroughs, conversations with a seller are perhaps more important than the physical state of a given facility or office. A buyer wants to know that the company is well-structured, well-run, performing at high capacity, and rooted in a sound business strategy. Problems in the company’s foundation, so to speak, can end a transaction or significantly diminish the buyer’s idea of an acceptable price.

Stage 3: Thorough Investigation

After communicating about the deal and discussing it with their families (or close advisors and stakeholders), the parties decide on terms and price. Before agreeing to the purchase, however, the buyer typically engages in an exhaustive investigation. A soon-to-be homeowner will complete a home inspection, looking at the property from top to bottom. If problems are found they might even hire a structural engineer, pest control expert, or another specialist. From bad water heaters to outstanding liens, issues discovered at this point may destroy a seller’s goodwill and lead the buyer to rescind the offer.

Businesses have their own skeletons in closets. Liabilities that crop up during late-stage due diligence can and do torpedo practically-consummated deals. Perhaps it’s a misvalued asset, or a pending lawsuit, or the absence of a contract with a major customer, or the departure of a key employee, or a compliance gap, or a severe operational inefficiency. Whatever form it takes, whenever it emerges during the transaction, any source of risk can motivate a buyer to demand a lower price or withdraw altogether.

Ready to Sell? Talk to a Professional First.

As a business seller, you’re at a natural disadvantage. As soon as the transaction begins, the value of your company—and your asking price—can only go down. The secret to maximizing your return is to think like a buyer. That means anticipating and addressing every possible liability proactively, before your business goes to market.

Most sellers don’t do this. They underestimate the effort involved in M&A and assume their businesses are ready for sale. Can you blame them? Owners should believe in their businesses. They can’t be objective—they’re too close.

That’s why valuation and M&A advisory professionals exist. At Quantive, we’ve developed a system that eliminates guesswork for sellers. Our Market Readiness Indicator gives you comprehensive insight into how and when to bring your business to market.

To learn more about the Market Readiness Indicator and see how we can empower you in the single biggest deal of your lifetime, schedule a call with one of our M&A and Valuation experts.

Is the M&A Window Closing?

So here we are, halfway through 2019 and judging by the commentary from various talking heads, press releases, and my good friends in wealth management, it seems we really have no idea how strong the economy is. Maybe I’m just not a careful listener, but it sure seems like on one day the news is dire (tariffs! Iran! The jobs report!), and then the next day everything is fantastic (the stock market! GDP! The jobs report!) Within all of these mixed messages I think all of us have one nagging question – just how long can a good thing last?  

This leads me to probably the most frequent question I get from business owners and entrepreneurs that are thinking about selling.  The question is almost always a two part-er: how is the M&A market? And should I sell now or wait a bit to do X, Y, or Z? (And damn that last one is a doozy.  You can always wait for the next good thing to happen… but should you?).

Thanks to this constant stream of questions on this subject we’ve developed a playbook for sorting it out.  

 

Can You Afford to Sell Right Now?  

First off, this is hands down a generationally best sell side market.  If you want to sell a company and you can afford to, then by all means go to market.  How do you know if you can afford to sell right now? You need to answer two questions: what is the current value of my company?  And how much do I need? The former is best answered by a valuation – it’s a relatively modest investment to get clarity from an independent expert on how the market will price the asset you have built.  The second question should be answered by working with your financial planner. Getting granular on how your financial situation will look after the sale (using your current valuation as likely the largest input to that analysis) will help answer the question.  

Recapping: if what you have (i.e. the current value of your company) exceeds what you need (i.e. the capital that your financial plan requires in order to meet retirement goals), then by all means do-no-pass-go and go to market now.  

 

What Do I Gain by Waiting?  

For some folks the outcome of the first step will clear: you absolutely cannot afford to go to market. And clarity is great. But what seems to happen more often than not is a gray area. Perhaps the numbers are close but not quite there. That’s not a fun decision framework.

If you are in this category the real question is what do you gain by waiting? I’m constantly saying “the passage of time is not a strategy.” Waiting alone will not fix a value gap – we are already at the peak of the market. Values likely aren’t going to materially increase. Or put another way, there is at least an equal likelihood that values start to decrease.  

With this dynamic in mind, consider this: if you have an actual strategy to grow value and pursue that plan diligently, then waiting may make sense. On the other hand, if you are hoping that the market further matures and delivers a great value for your company… well I’d politely suggest that that isn’t the best strategy.    

 

What is the Probability of Success?

Let’s assume that you decide to pursue a value growth strategy to close your value gap. How confident are you that you can execute on plan?  

Similarly, entrepreneurs are constantly chasing the next big thing. We all do this – the next big project, the upcoming contract win, or maybe the new product launch. Healthy businesses always have a next new thing- it’s what feeds the beast and underpins growth. But that same cycle can feel like a hamster wheel with owners constantly chasing the next increment of success.   

In either case, it’s time to start handicapping the likelihood of successful execution. On our end, when we work with clients on value engineering assignments we do just that: by correlating actual impacts to enterprise value to both the probability of success and time to execution we can start to understand how value might change over time.  For instance, a given initiative might result in an additional $250k of income, require 18 months of time, and have a high likelihood of success. If the market currently would value that company at 5x, that initiative is worth $1.25M in enterprise value.  

 

What is the Probability that the Market Turns First?

Of course all this assumes that we have time to execute.  The market, being a nebulous collection of individual participants, doesn’t care about our plans whatsoever.  Take our example from above. What would happen if you executed on plan and in 18 months … but the market turns and now prices the company at a 4x? Well… it’s not going to feel good, that’s for sure. See below: 

 

In our example – that quarter million dollars of hard fought gains would yield exactly zero dollars in improved enterprise value in a market downturn. That’s not to say it’s not a worthy project – the company would still be delivering those earnings back to shareholders. But in terms of pursuing a sale you very well could be literally missing the market.  

 

Takeaways

We are always talking about how “timeline is everything.” If you have a short term horizon you can only impact so many things. Your decision to go to market now means you aren’t going to massively increase enterprise value suddenly. And that’s okay if the numbers work for you – it’s a great market! If you do decide you need to wait – be it for that next big win or to put in some hard work – that’s okay too. Just understand that you are on the clock and that a market downturn may erase the gains you’ve been holding out for. Finally, if you run the numbers and realize that you need to grow value beyond what can reasonably be expected in the short-term then it’s time to buckle in for the next 3-5 years and enjoy the ride.  

Need some help working on this decision matrix? Drop us a line.

May Deal Announcement

Quantive’s client Marlin Ventures was acquired by Consortium Management Group, Inc.

Marlin Ventures, a government contracts consulting firm, is renowned for its commitment to its clients’ success. Marlin Ventures provides a full range of business development and contract administration support “from capture to closeout”.

Terms of the transaction were not disclosed.

Matt Whitaker lead the transaction for Quantive.

March Deal Announcements

It’s been a big month!  Two deal announcements for closings over the past few weeks.  Big congratulations to Matt Whitaker who advised on both.

Deep Learning Analytics acquired by General Dynamics Mission Systems

Our client Deep Learning Analytics (DLA) was acquired by GDMS.  DLA has extensive expertise in artificial intelligence including data science, research, machine learning, predictive analytics and software engineering. The company specializes in deploying deep learning algorithms on small and power efficient appliances and mobile devices. The company provides understandable data-driven answers to pressing business and research questions in the fields of energy, defense, education, social policy, biology and e-commerce by drawing on better data, better machine learning, and better insights.

Terms of the transaction were not disclosed.

Matt Whitaker lead the transaction for Quantive.

CKA Acquired

Quantive’s client CKA, LLC has been acquired.  CKA is a federal contractor providing a range of IT services, to include cyber security, enterprise data center operations, and cloud computing.

Terms of the transaction were not disclosed.

Matt Whitaker lead the transaction for Quantive.

 

About Quantive

Quantive is a veteran owned and operated financial services firm. We help entrepreneurs in a range of matters related to corporate value: business valuation, value growth, and M&A advisory. We have over 15 years of experience in a wide range of industries with a focus on the lower middle market.

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