You might be thinking about retiring or pursuing other interests, or you might be young with lots of gas left in the tank. Regardless, it can take years to prepare a business for sale. So, if you are a business owner and want the process to be smooth and the fruits to be sweet, it’s time to start thinking like a buyer and managing your business for a sale.
Review Your Strategic Alternatives
You can start by talking with an investment banker about strategic alternatives. This will require an understanding of the shareholders’ goals and priorities, concentrating on both qualitative and quantitative factors. Do the shareholders want to protect the employees, community and other stakeholders and not sell to a buyer likely to relocate the business? If the shareholders own the real estate, is it important to sell it with the business? A thorough review will include some or all of the following:
- A valuation, including estimates of enterprise and equity value. This requires complete financial statements; projections for sales, cash flows and capital expenditures, and other information.
- An analysis of the business and its prospects, focusing on its strengths, weaknesses, opportunities and threats. This includes consideration of corporate structure and resources, industry structure, legal and technological factors.
- A presentation of alternatives. Some of the most common include a recapitalization, sale and management buyout.
Think Like A Buyer
Buyers can be grouped into two main camps: financial and strategic. Simply put, financial buyers bring capital and expertise to target companies; help them grow sales, profits and barriers; and realize returns when they are sold a few years later. Strategic buyers acquire related companies for a variety of reasons, including gaining access to new markets, customers or products; filling existing capacity; and cutting costs. Financial or strategic, buyers look for many of the same qualities in an acquisition target: management, growth, earnings and sustainable competitive advantage.
- Management. Some owners of privately held companies find it hard to hand over the reins to their managers. Others might find it easy, but lack a team with the experience and skills to step up. Either way, it takes time to groom or recruit the right people. A strong management team will help buyers get more comfortable if the owner plans to leave. It will also increase the owners’ alternatives, as financial buyers are investing first and foremost in management.
- Growth. There is no hard, fast rule, but companies should at least grow at a rate equal to the rate of inflation or their primary industry’s growth. Robust growth signals that your business is strong in terms of products and services, competition or competitive advantage, pricing power, sales and marketing, and customer loyalty or satisfaction. Moreover, growth is a key input in any valuation.
- Earnings. Again, no hard, fast rule, but 10-percent earnings before interest, taxes, depreciation and amortization is a popular hurdle, especially for financial buyers. Like growth, healthy earnings are a sign of strength and a key input in any valuation.
- Sustainable Competitive Advantage. According to Michael Porter, Harvard Business School’s authority on competitive strategy and international competitiveness, the three methods for creating a sustainable, competitive advantage are through-cost leadership, differentiation or focus.
Managing For A Sale
In many cases, the initial valuation or alternatives don’t meet the shareholders’ expectations. This gap can be caused by the difference between perception and reality, or simply the space separating the company’s current state and its future potential. Over time, management can address weaknesses and threats and lead the company to a place that fits the composite buyer’s criteria. At the same time, managers should be ready to provide detailed information when the time comes. Buyers like to examine audited or reviewed financial statements; projections; and sales and profits by market, customer and product.