Exiting your business is a lot like selling a very good used car (or the home you’ve lived in for 25 years). A lot can look good on the outside, but a lot can go wrong if the buyer takes a good look at the inside. That’s why you want to start early, get a skilled mechanic to check it out, and address those hidden flaws that can torpedo a sale, sometimes at the 11th hour. Here are a few examples we’ve helped with over the last few years:
- Asset valuation didn’t hold up under scrutiny – this most often happens with inventory, frequently the most valuable asset in terms of size and timeline for cash conversion. We had a recent deal go south because the company managed its inventory valuation to minimize taxes, then changed its approach to prepare for going to market, but the transition created distrust that ultimately scared away the most promising buyer. The message is clear here – plan ahead and remember that tax bills are virtually always smaller than sales prices.
- Facility consolidation was in the buyer’s plan, but the transition cost was perceived as too high. Often the case with a small business that a larger company wants to acquire, perhaps for their customer list, their technology, their advanced equipment or staff capability, or to make use of the buyer’s excess capacity. The customer list can be moved, but the rest come with challenges that don’t pay off if the seller’s bottom line isn’t rich enough to support the move. We had to focus our efforts on nearby prospects, thus limiting the range of possibilities.
- The always present disagreement over price vs. value – the seller wants X, they buyer wants to pay less. Only rarely is this not an issue, whether the buyer is a strategic buyer or a financial one. In a current deal we are exploring the possibility of closing that gap by use of an earn-out variation that isn’t based strictly on bottom line – and all the variations in calculating that – but on sales volume that is predictable and reliable, as in a multi-year fixed price contract with key customers. This could be an opportunity for a win-win instead of a walk away.
- Absence of a management team once the sellers leave – a tough challenge if the sellers carried a lot of the middle management responsibilities personally to keep costs down, but now want to walk away free with cash in the bank. We got our client to start thinking early about the positions they would need to fill come exit time, in this case 4-5 years earlier. The plan was good but the sellers liked the profits they brought home and didn’t act on the plan. The result was the need to stay with their company after the sale to enable time to develop a replacement management team or to train the buyer’s team in the hidden nuances of the business. Departure delayed.
Our prediction a few years ago that this decade would see a lot of privately owned companies put up for sale is certainly coming to pass, and happily there is still a fair amount of money looking for the good ones. The trick is for the good ones to look like good ones from the beginning, rather than having to prove it during due diligence, and that requires preparation – a plan that is well crafted and then carried out. And that doesn’t happen in a few months, it happens when the owners start early and in earnest. We’ve said that means 4-5 years if the company needs some fixing, as nearly all do. Does yours? Are you ready to begin?
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