CEO Advisor Newsletter April 2023
7 Critical Things to Know Before Selling Your Business
1. Don't Live in the Past
The previous success of a business (three or more years prior) is largely irrelevant at the time of sale, especially if it has been struggling in the last year. Buyers are interested in recent performance (Valuations are based on the last 12 months) and future sustainability and viability including your current forecast. Failing to grasp this concept will be very costly and waste a lot of time.
2. Buyers Won't Pay More for Potential
The valuation determined by buyers for the potential sale of your business will be based on the trailing twelve months (TTM) X an EBITDA multiple. I regularly speak to CEOs who believe they have a potential "Home run" and expect to command a top sale price based on perceived potential alone or a big Forecast. Buyers put minimal value on the future. If a business did $10 Million in sales last year, with $300,000 in EBITDA, the value will be minimized in the eyes of the vast majority of potential buyers, despite your lofty Forecast for $15 Million in Sales and $3 Million in EBITDA this coming year.
3. Buyers are Interested in Profits, Not Just Revenue
Another common misconception is that buyers are easily impressed with Revenue figures. This holds true with SaaS software companies, but only to a certain degree. Revenue always sounds good, but when it comes down to it the only number that matters in the great majority of M&A transactions is the Net Profit and EBITDA a business generates. Experienced business buyers want to see Net Profit and EBITDA, not just Revenue. Revenue of $10 Million or more will attract them as a potential buyer but EBITDA is primarily the factor for valuation.
4. Buyers Will Verify All Information in Due Diligence
Once an offer is finalized, the Due Diligence will verify a lot of seller information in a 30 - 40 day period. Due Diligence requires expertise, organization and preparation. You will not progress to the next step of the sales process - the legal agreements - until you pass the Due Diligence phase. And the key to Due Diligence is avoiding any renegotiations of the LOI or a pass by the buyer.
5. Be Both Expeditious and Patient
The sale of your business will be extremely time consuming and require a lot of experience and expertise. You want to keep the sale process on track and make progress on a daily and weekly basis. Otherwise, the sale process will drag on and an excessive amount of your time will be consumed and expenses will mount up quickly. At the same time, show poise, professionalism and patience as this buyer is your future employer. An M&A advisor is critical to lead the sale process due to the time and expertise required to consummate a transaction, and to be your "Bad Cop" during the sale process.
6. Be Honest, Flexible and Extremely Prudent
The truth will prevail and you need to build trust with the buyer. Experienced buyers understand that every business is going to have positives and negatives. There is no such thing as a perfect business so the best method is to be transparent and respond timely to the buyers requests. If you are honest and transparent from the start there is less risk of a deal going sour because the buyer uncovered something during Due Diligence that wasn't accurate or an instance where the truth was stretched. Honesty is the best policy in all business transactions and selling your business is no different. With that, you must be very prepared and prudent in how you present the information to get the results you desired. Again, an M&A advisor should manage and lead the sale process, as well as, communicate with the buyer on your behalf given the experience and expertise needed to navigate a sale to closing.
7. You Need an Experienced M&A Advisor to Ensure a Successful Sale
The goal is to consummate a sale at an optimal price and terms. This will require the experience, expertise and a tremendous amount of time invested by an M&A Advisor - from the preparation leading up to the sale, securing a buyer, conducting Due Diligence, advising the CEO through the entire process and keeping the sale on track all the way to the closing.
CEO Advisor, Inc., is an M&A advisory firm with over 70 years of M&A experience. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Making Your Company More Valuable and Attractive to Potential Buyers
- Do you remember 2008? How soon the markets forget. A dozen years ago you couldn't give away most real estate, and business valuations plummeted with very few buyers and minimal mergers and acquisitions (M&A) activity.
- Valuations have fully recovered and are extremely high again, and M&A activity is strong. Today, one of the limiting factors of deals getting done are over zealous CEOs and business owners that demand extremely high prices for companies that were not sellable less than a decade ago. But the market has shifted somewhat since September, 2021 and sellers need to be educated on these trends.
- Whether you decide to sell your company in today's market, or prefer to hold and grow your business further (and risk another drop in the market), there are certain key areas that you need to focus on to build value and make your business more attractive to current and future buyers. A strategy to make your business irresistible to prospective acquirers may generate the greatest return in your life time. After all, I tell our clients on a regular basis, you never know when the perfect buyer will knock on your door. And even if a buyer comes knocking, don't go down the path of a single buyer - this will not be a competitive sale process that will yield the best price and terms.
- Below are key factors that you must employ in your business to build value, make your company sellable and attractive to current and future buyers.
- Growth Rate
- The growth rate of your business is critical to the value of your business and the attractiveness of an acquirer. Small to mid-size businesses that grow at 10% or 15% per year are not attractive to buyers given the many other options they have to acquire faster growing businesses. If your growth rate is slow or stagnant, there are issues that you need to address in your business if you expect to exit at some point in the future. This key factor applies to all types of businesses all the time, and a business advisor such as CEO Advisor, Inc. will help you to accelerate your growth.
- Size Matters
- Buyers that are dedicating people and resources (their M&A team) to acquiring other companies tend to focus on larger companies. It takes just as much (actually more) time to acquire a small company than it does to acquire a mid-size or large company.
- Acquirers are looking for revenue and profits that will move the needle of their business. They want strong management, large markets served for future growth, and revenue that is substantial and predictable. Kick into growth mode to increase sales, profits, the value of your business, and to generate your golden opportunity to sell.
- Recurring Revenue
- If you are only as good as your last project, you are in trouble today. Acquirers see value in recurring, contracted revenue. Not just loyal customers that buy semi-regularly, but a strategy and business model with long-term, contracted customers that is forecastable and predictable. Not all customers need to be this sure bet, but you need to have a business that has staying power to attract buyers and have them pay you handsomely for the customers you have secured and for your many years of hard work.
- Gross Profit and Gross Margins
- Your Gross Profit Margin (GPM), or Sales less Cost of Goods Sold divided by Sales, is the number one factor that points to the profitability of providing your product or service (before overhead/expenses). Acquirers are attracted to businesses with high GPM as this will typically result in high Net Profit, Net Profit Margin and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
- Depending on your type of business (manufacturing vs. service vs. software have very different Gross Profit Margins), you need to have a GPM that is at or higher than other companies in your industry to optimize your value. If your Gross Margins are low, seek advice from a business advisor as you are leaving a lot of profits on the table, as well as, penalizing your business value substantially.
- Strong management is always a key factor in running and growing a sustainable business that is attractive to buyers. Interim management (business advisors, CPAs, attorneys, etc.) work well for smaller and mid-size companies until they reach a certain size where a full permanent management team can be hired. If you are the lone senior executive in your company or your management team is lacking a full realm of expertise, you need to gain additional expertise and experience from a seasoned business advisor to help you grow and build value in your business.
- CEO Advisor, Inc. has decades of experience and expertise in hands-on advising of small and mid-size businesses, including growth and strategy, building value, growth capital and buying/selling companies.
- Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.