Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
The mergers and acquisitions market has been hot for a while now, meaning buyers are in a potentially prime situation to get what they want and need in order to sell their business.
A panel of experts convened at the Minneapolis Club in November to discuss M&A in an event co-sponsored by Upsize and Rick Brimacomb’s Club Entrepreneur.
It’s often said that failing to prepare is akin to preparing to fail. That’s true in the mergers and acquisitions space, according to panelists who say business owners should always be thinking about what their transition might look like, even if they have no intention of a near-term sale. When they get a sense their timeline is within three to five years, that planning should become an even bigger focus.
“Maybe the metric for our business is a multiple of EBITDA or it’s a customer diversification or reach,” he says. “Maybe we need to diversify our revenue stream a bit to drive a bit more value.”
Schornack adds that if the metric is subscriptions, the company should break out those revenues on financial statements and make them trackable and reportable.
“Even if you have no aspirations of ever selling your business, at some point it’s going to transition,” he says. “Why not spend some time thinking about it and planning for it.”
There typically is plenty that can be done to get ready for a sale, some of which, left unaddressed, will reduce the return in a sale, says Maxwell Bremer, an attorney at Gray Plant Mooty. For example, dealing with customer concentration issues or locking up key suppliers or customers to contracts all help.
“There is a whole bunch of stuff you can clean up today to get ready to sell your business that will generate value for you as you go through the process that if you don’t do, you miss out on,” he says.
One thing that will help ensure these factors are addressed properly is putting the right team in place. Business owners typically have accountants, lawyers and bankers in place. But panelists repeatedly suggested that when it comes to selling, they need to add to that team with experts well versed in transitions. And they should do so early in the process.
“It doesn’t mean you have to let go of an adviser you’ve worked with forever,” she says. “But you definitely want to have good advice from someone who knows and understands transition.”
And start early, she agrees. The longer the team is in place, the more knowledge and trust is built. If an offer catches a business owner by surprise, “you already have those relationships established,” Keyes says.
The additional expertise will probably include an investment banker who can properly assess the landscape to find multiple potential buyers. Latzke says his company and many other investment banking firms will meet with business owners several times free of charge to build relationships.
“I can’t identify buyers,” Bremer says. “Investment bankers can identify not just strategic buyers, but private equity buyers and sometimes other strategics who aren’t really in your space but who are looking to get in. By virtue of that you create a competitive marketplace that often results in a much more attractive price than you ever thought possible.”
Bremer says a seller might wait a bit on bringing its mergers and acquisitions attorneys to the table, but should engage a trust and estates lawyer early to ensure maximum value from estate and gift plans. Don’t wait too long on the M&A folks either, he adds, as negotiating and signing letters of intent without consulting an attorney could be detrimental.
“We can add so much more value on the front end helping you think through how to structure the transaction in the most tax efficient way,” Bremer says.
Long-time partners have a role too. Schornack says as potential deals approach, a company might want to spend a bit more with its accountants to do a reviewed or audited statement to reassurance buyers of the accuracy of the financials.
“Your buyer will pay you less if they are not confident what you are presenting is accurate,” Schornack says. “And they will come in after the fact and start auditing the information, if they don’t do that ahead of time in their due diligence period. … If you focus on the details and you organize it correctly the closing will go smoothly, the transition will go more smoothly and you’ll probably maximize the value of your company.”
The goal of preparing early and building the right team is ensuring a competitive bid process. A big buyer pool is important in negotiating the highest price, Latzke says.
“If you have one buyer, that’s a lot different than having more than one buyer,” he says. “Whatever you are trying to sell — if you are trying to sell your motorcycle — if you have more than one buyer the price is going to be higher than if you have one buyer.”
It’s also important because it speeds the process and keeps the seller in control. Many times, Latzke says he’s seen potential buyers drag out a potential deal for months when there was no competition at the table. Ultimately, he adds, those deals often fall through.
“If you have multiple buyers you as the seller get to set the timeline,” he says. “You control the meetings and when things happen and when you get offers. If you have one buyer, they control the timeline. … It’s not just price, it’s price, momentum, timing and all the other terms of the purchase agreement. All are impacted by the competitive situation.”
So, what drives the value it will take to create a company several suitors will get in line to buy? Latzke and Keyes suggested that business owners with an interest in selling immediately get a company valuation and perform a SWOT (strengths, weaknesses, opportunities, threats) analysis to determine where they might have opportunities to strengthen their position.
“Every private business is going to transition,” he says. “It may be to family, it may be to management, it may be an ESOP, it may be a sale, but every private business is going to transition.”
Strong revenues, particularly if they are subscription or recurring, will generally drive a higher multiple in a sale, as will growth rate, stable profits, a strong customer list and the potential to grow in the market, Latzke says. A diverse customer base and the retention of key employees also help, Keyes adds.
Furthermore, Schornack says, a buyer is going to be most interested in what they can do with the company in the future. Well organized books that call attention to the right data will help make that case, he adds.
There also are significant intangible factors, Keyes says, that drive value, such as culture and brand. “All of those things take time,” she adds. “That’s the piece that is generally the most time consuming, is getting the business ready.
Despite all the advice available to business owners, many still neglect to plan for their transition. Many business owners get buried in their work or they aren’t ready, both financially to maintain their existing lifestyle without the business or for the length and tedious nature of the sale process.
“They’re mired in the day to day with the business and they need to have outside people say ‘hey, let’s get going,’” Keyes says.
But a failure to plan, she adds, can have dire consequences, not just for the owner, but for family members, clients, employees, vendors and, potentially, entire communities.
“You’re really going to end up exiting, transitioning on someone else’s terms,” she says. “That’s a huge risk. … The ripple effect of the impact it makes when a business doesn’t transition well is very large.”
Maxwell Bremer is an attorney at Gray Plant Mooty: 612.632.3056; Ma************@****aw.com;
www.gpmlaw.com.
Julie Keyes owns KeyeStrategies: 763.350.5563;
ju***@************es.com; www.keyestrategies.com.
David Latzke is managing director and partner at Cherry Tree & Associates: 952.253.6032; dl*****@********ee.com; www.cherrytree.com.
Andy Schornack is CEO at Flagship Bank: 952.944.6050; as********@***********ks.com;
www.flagshipbanks.com.
