Thursday, August 25, 2016

Selling Your Business - Beware of the Tire Kicker

If you are approached by an unsolicited offer to buy your company, you might think this a good thing. If not handled properly, it could be a real drain on your company's performance. We are often contacted by a business owner after he has been approached by a buyer. He wants information from us on the merger and acquisition process, which we are happy to provide. He wants to wait, however, to engage our firm to sell his company  "until this situation with the buyer plays itself out."

The Single Buyer's Game Plan

This is the start of the death spiral. I don't want to sound overly dramatic, but this rarely has a happy ending. These supposed buyers will drain your time, resources, focus on running your business and, your company's performance. They want to buy your business as the only bidder and get a big discount. They will kick your tires, kick your tires, and kick your tires some more.

I recently read a great article from a UK Business Advisor, Clinton Lee, that takes a little different but equally cautionary view of this Tire Kicker.

Once You Pin Them Down

If they finally get to an offer after months of this resource drain,  it is woefully short of expectations, to the surprise or chagrin of the owner.  A second potential outcome is that when the offer does come, the owner doesn't know if it is a good or bad offer. Finally, once the buyer has tied up the owner with the LOI, he then proceeds to attack transaction value through every step of due diligence. He is the only suitor so there is nothing to stop bad behavior.

This is so costly to the business owner. Many owners repeat this process several times before they acknowledge the damage being done to their business. When they do eventually hire a merger and acquisition firm or a business broker, the company value has eroded substantially.

Even though we have watched this situation unfold from a distance many times, we have been frustrated by our lack of success in changing the owner's incurable optimism about this buyer.  Being the deal guys that we are, we needed to come up with a creative solution and a deal structure to move the business owner toward a better outcome. If we feel so strongly that this buyer will not be the actual buyer in the end, we should be willing to "carve out" that buyer in the form of a discounted success fee.

Put the Buyer into a Competitive Bid Situation

By George, that's it! If an owner has an identified buyer, we can incorporate a sliding scale discount on the success fee over time if this identified buyer becomes the actual buyer. If he becomes the actual buyer very quickly the discount is big. If the deal closes after five months of our M&A work, the discount has slid to zero because we have thrown him into the mix with several other qualified buyers and his offer will have been leveraged higher by 25% or more.

The benefits to the business owner with this approach are meaningful. First, if this is that rare occurrence of a legitimate buyer with a legitimate offer, the owner will not pay a big success fee for a small amount of work. Secondly, the owner can turn the burden of the process over to the M&A firm, freeing him up to successfully run his business during the process. Next, we end the endless, resource draining, tire kicking that erodes business value. Finally, by changing this from an auction of one to a truly competitive bidding situation involving the universe of qualified buyers, the owner will have no doubt that he got the best the market had to offer for his business.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Friday, August 12, 2016

Do You Know What Your Company is Worth?

Good insights from John Carvalho from Divestopedia

Do you know the value of your business? When I asked this question to business owners in attendance at a presentation I recently delivered, I was not surprised the majority weren’t 100 percent sure. Why should they care about value? No one ever asks for it. Banks, shareholders and government agencies never ask private business owners what their company is worth.
In reality, though, there are a lot of different stakeholders valuing your business every day, such as your employees, other banks, investors and customers. I would venture to guess that that alone should be a good enough reason to care about value.

What Buyers Look for in a Business

I recently found myself watching NBC’s "Shark Tank," where aspiring entrepreneurs pitch their business concepts and products to a panel of business moguls who have the cash and the know-how to make it happen. Hands down, the fastest way to get thrown out of the tank is to have an unrealistic valuation of your business.

So, think about it this way: If you had your eye on an acquisition, what would you look for? Putting yourself in a buyer's shoes is a great exercise to temper valuation expectations. I bet you would be looking for things like a diversified customer base, a systematic way of generating recurring revenue, barriers to entry from competitors and high margins, to name a few. So, be honest: Does your company have these characteristics?

Great Companies Drive Value

If building a company was a sport, the value of the company would be how we keep score. Jim Collins, author of "Good to Great," identified elite companies that have made the leap from good to great. Companies that make the leap were defined as meeting the following criteria:
  • 15-year cumulative stock returns at or below the general stock market
  • Followed by a transition point
  • Then cumulative returns of at least three times the market value over the next 15 years
What this suggests is that measuring corporate value is a key tool in tracking a company’s transition from good to great.

The Benefits of Regularly Updated Business Valuations

For me, the same question always come to mind: Why haven’t valuations become more commonly adopted as a strategic planning tool for private businesses? Every year, companies engage accounting firms to audit, review or compile their books. This requirement is driven by banks, tax authorities and others that require financial statements verified by an independent third party. I truly believe that an annual valuation would provide most business owners with more insight into their company than audited financial statements.

As I see it, the benefits of using periodic business valuations as a strategic planning tool are:
  • Business valuation provides business owners with a quantitative measure of the corporate value created through the execution of a strategic plan.
  • Frequent business valuations will give owners a better understanding of which financial levers they can pull to drive the value of their business.
  • Like in "Shark Tank," knowing the value of the business gives owners increased credibility with potential investors and lenders.

A Better Valuation Tool

Here are my thoughts on a better valuation model compared to traditional valuations currently offered by most advisors:

Traditional Valuation:
  • Based primarily on financial information;
  • Only provides a value of the business at one point in time;
  • Limited recommendations on how to increase value; and
  • Engagement is over once a value is determined.
A Better Valuation Model:
  • Digs deeper into key market and operational value drivers of the business;
  • Current valuation sets a benchmark and provides a comparison to where you want to be;
  • Provides a clear understanding of strengths and weaknesses in the business, plus recommendations on how to improve; and
  • Determining the value of the business is just the beginning. The engagement provides constant monitoring and measurement of value to help business owners achieve wealth creation goals.
So, my question to you, private business owner, is a crucial one: How can you know if you are moving toward greatness if you don’t know or frequently measure the worth of your business?

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist