From personal considerations to the economic climate, many factors go into the decision to sell a midsized company. Think of these issues as concentric circles, with you in the center and radiating outward to your company, your industry, and the market at large. Each will influence the timing of a sale, but it’s up to you to weigh them all before making a decision about your best course of action.
Of course, this is not a decision that should be made solo. Consulting a team of experts is one of the first and most important steps in selling your business. This group will help you take the proper action and answer essential questions you should ask yourself before you pull the trigger on a sale.
Assemble your team
While many timing issues are beyond your control, one thing is certain: The sooner you gather an expert team around yourself the better equipped you’ll be for any contingency. “For most business owners, this is a once in a lifetime event, so it’s critical to assemble a team of trusted, respected advisors with functional expertise to guide you through the process,” says Rob Tyndall, managing director, Mergers & Acquisitions at Regions Securities, LLC. This includes an accountant, attorney, wealth advisor, mergers and acquisitions (M&A) advisor, and certain members of your management team.
For the most part, this group should include people with whom you have long-term relationships, rather than a group cobbled together when an offer is already on the table. Trust and rapport are critical, especially as you turn to them for one of the most important decisions in your business life.
“The relationship starts months or years in advance of actually selling the company,” Tyndall points out. “The earlier a business has a discussion with an M&A advisor to understand what the process looks like and what he or she needs to be doing in the business to prepare for a sale process, the better it is for a business owner.” Hal Levinson, a senior partner with Charlotte, North Carolina-based law firm Moore & Van Allen who specializes in mergers and acquisitions, agrees. “There are a number of planning steps that can provide real value to the seller that might be missed if you don’t get your lawyer involved early enough,” he says.
Are you ready?
A privately owned company is more than just an investment. For most business owners, it represents a lifetime of work. You need to consider how selling your business will jibe with your career or retirement goals, as well as how much of your personal wealth is tied up in the business. You also need to ask yourself about how a sale will affect other stakeholders, such as family, partners, and employees. “It’s not only a business decision, but also an emotional decision for someone who has built a successful business,” Levinson notes.
That can require some soul-searching, so it might make sense to look to your wealth advisor to help you tease out your goals and link them to specific financial decisions. “We ask a lot of open-ended questions and get business owners talking about themselves, their family, key employees, and the dynamics involved,” says Jeffrey Winick, senior vice president and senior wealth strategist at Regions Private Wealth Management. “What do they see as the reasons for both the obstacles and successes of their business? What are their values? What’s important to them? How is their health?”
These considerations might appear imprecise, but failing to understand them well can lead to regret. “There may be all the reasons in the world to think it’s a great time to sell the company, but if you’re young and aggressive, you may choose to hold it and grow it,” Tyndall says. “Conversely, it could be a terrible time from a commercial standpoint to sell the company, but some personal issue may make it the right moment to have some sort of event.”
Once Winick has helped a client understand goals and priorities, he performs stochastic modeling of various scenarios to get a clearer picture of the financial ramifications of each option. “Modeling gives people the confidence that they can retire,” he says. “Sometimes you can show people that they have enough independent financial resources that they don’t have to worry about driving the hardest bargain just to get top dollar.”
Depending on what you need and when you need it will also affect the structure of any deal. An owner who needs immediate liquidity, for instance, may opt for a leveraged recapitalization or accept a minority equity investment from a private equity fund specializing in such transactions. These options can provide for a staged exit in which an owner can continue owning the company while reducing day-to-day responsibilities or grooming a successor. “That lets an owner have some liquidity while continuing to do what he or she loves, and potentially keep participating in the upside and growth of the business,” Tyndall notes.
Family, whether involved in the business or not, can present a thicket of complexity that’s best handled with open, honest communication. “The sky’s the limit on the issues that can come up with family businesses,” Winick says. “Having regular family meetings and keeping everybody in tune can prevent disappointment and misunderstanding.” A spouse, for example, may need to understand that retirement may have to wait a few years to capture the benefit of a cyclical industry upturn. Or an adult child involved in the business may require a transition period before assuming full responsibility.
Failing to plan ahead and getting the family involved can cause unnecessary strife down the line. Winick recalls one client whose father left equal interest in the family company to all of his seven children, despite the fact that only one was involved in running it. “Needless to say, it’s been nothing but disharmony for 30 or 40 years,” he notes. Business partners, too, can create complications with timing an exit, particularly if there are discrepancies in age, life goals, and talent. “If you have a realistic viewpoint of what you contribute and what your partners do, then you can think in terms of how to replace the loss of the relationships, talent, and strengths each of you brings to the table,” Winick points out.
Employees are another consideration. For an owner who doesn’t have heirs willing or able to take over the business, one option is to transfer ownership to employees through an Employee Stock Ownership Plan (ESOP), in which the owner’s shares are bought in tax-deductible dollars from company contributions or plan borrowings. The sale can be all at once or gradual. “If the answer to the question, ‘Could the employees run the company without you?’ is yes, this can be a great way to reward loyalty and keep the legacy you’ve built alive,” Winick says.Is your company ready?
Preparing to sell a business is all about maximizing its value, so the strategies you use to grow your company have a tremendous impact on the best time to sell. If, for instance, you invest heavily in growth, you will need to see some of that investment pay off to achieve a peak valuation. Conversely, you may conclude that further investment doesn’t fit into your long-term plans, so a sale may be more imminent. “Internally, it’s important to look at how prepared your company is for transition,” says Tyndall. “Does its capital structure maximize value? Will its strategy drive growth for the foreseeable future? Is its management structure capable of adapting to new realities?” These are questions that an M&A advisor as well as your accountant can help you answer.
Key to maximizing your company’s valuation is understanding what drives value in the first place. “Regardless of what a business owner may want the exit to look like, it’s important to be building, identifying, and developing value drivers,” Tyndall says. Specific drivers depend on the individual business and can include market share, customer relationships, scalability, unique products, or brand recognition. “Drivers offer some sort of competitive advantage in operations or products, whether it’s a better product or service or lower cost,” he explains. It’s “anything the company can do that’s special or different, something unique that can’t be copied, or something where there’s a barrier to entry.” These are the areas where investment will create the biggest bang for your buck.
Tyndall notes that the specific timing for selling a business depends on two internal factors: your company’s current performance and its midterm outlook. If both of these are strong, it may be a good time to act. But if either has issues that need addressing, Tyndall advises caution. And while a strong midterm outlook is desirable, every growth curve has a sweet spot that lets you capture value for yourself and for a potential buyer as well.
“If the company has very strong projected growth, meaning they could essentially grow to a significantly larger business and have a higher value at a later time, that could be a reason to defer the process,” he notes.
Prior to any transaction, both Tyndall and Levinson recommend reviewing your company and its balance sheet for anything that might delay selling your business or even reduce value. That means making sure your books are independently audited and your financials are in good shape. “In the months leading up to a potential exit, it’s important that your house is in order,” Tyndall says. On the legal front, an experienced M&A attorney will look for any obstacles in the business that could give buyers some concern or impact value. “Those kinds of things should be brought early to the attention of your team of advisors and your lawyer, so they can be addressed,” Levinson notes. “You don’t want the buyers to stumble upon material issues in the business.” Examples include an employment issue, intellectual property rights, and other potential hurdles. “You need to take steps to protect your intellectual property, and the buyer will have expected you to do that,” Levinson adds.
In addition, you will need to think about how you’ll deal with the inevitable disruption that due diligence and sales transaction can impose on an organization. Timing is crucial here, and you must decide who needs to know what, and when. Key employees should be incentivized to stay through the transition to ensure continuity and a full complement of talent after the sale. Similar care must be taken with customers and suppliers.
Is the market ready?
Finally, you should consider the state of your company’s industry as well as the market for M&A activity. If the industry is heading into a cyclical downturn, naturally that could be a time to think about deferring an exit process. But if it appears to be a permanent decline, you want to get out as quickly as you can. Winick cites the example of a mining company whose rights were expiring. The owners chose to wind down by selling the business to a competitor rather than making the heavy investment that would be required to keep the company independent.
The M&A market itself depends on a number of factors, such as the availability of financing, that are independent of your company and even the industry in general. “I look for things like product equity funds, private equity funds, and other companies making investments in the sector,” Tyndall notes. “Is there ongoing sector investment? Are there active strategic buyers in the industry? Where are the financial markets in terms of equity and debt capital availability? If there’s declining investment in the sector, declining buyer appetite, or uncertainty in the financial markets, then I may tend to hold off on a sale process.”
The bottom line is that timing a sale depends on numerous factors, so setting your priorities is an essential first step to knowing which opportunities are worth pursuing and which are best left on the table. “Selling a company is not something to be entered into lightly,” Tyndall cautions. “It’s sort of like the Olympics or the Super Bowl. You prepare and train for years for this one event, but if you come into the season and say ‘this is not our year,’ you should be prepared to wait until you’re ready. It’s something that takes time and work to prepare for a great outcome.”
