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 economy is rolling and merger and acquisition activity is hot. That’s leaving many business owners with a decision to make: Is it time to explore a sale?
Experts from the technology, banking and brokerage sectors discussed that during a workshop co-sponsored by Rick Brimacomb’s Club Entrepreneur and Upsize magazine at the Minneapolis Club in late May.
With the hot economy at play, business owners buried in the day-to-day storm of running a business might get caught off guard by the possibility of an unexpected acquisition offer.
When the opportunity arises, business owners should take them seriously. It doesn’t necessarily mean they have to sell all or part of their company, but it’s good to go through the process. And it’s also true that the challenges and risks associated with staying in control of a growing company can increase along with the entity’s size.
“Growth from zero to $1 million is generally easier to achieve and has less risk in it than $1 million to $2 million, $2 million to $5 million or certainly from $5 million to $50 million,” says Chris Jones, managing partner with Sunbelt Business Advisors. “When you get higher up the mountain, there is more risk. Maybe it still excites you, but maybe it doesn’t.”
“One of the best questions you can ask is ‘are you still excited when you get up in the morning to run your business,’” Jones adds. “Do you still have a clear vision of where you want to take it? Are you excited about taking it there and do you have the capabilities to get it there?”
While an acquisition offer can come out of the blue, experts say it’s good to have plans or at least preliminary thoughts on an exit strategy well in advance of actually having to make a decision.
Micah Thor, president of Tech Guru, has been a part of acquisitions. He’s discussed with his business partner whether his company was ready to sell. And he’s been involved thirdhand in due diligence discussions as clients have pondered an offer. The experiences have taught him to plan ahead.
“We have been approached multiple times for acquisitions and pursued some of those offers to a certain point,” he says. “The first time it ever happened was truly a huge compliment and an ego boost. It was this big number and we got visions in our head of a successful exit way earlier than we thought was going to happen.”
That deal fell apart early on, but the experience led Thor and his partner to discuss what their ultimate exit strategy might look like. The company set a goal for growth and decided once they reach that, they’ll re-evaluate. If it is time to consider selling at that point, they plan to take some time before taking an offer to make some strategic upgrades, Thor says, much like when one puts a house on the market.
Planning ahead can really pay dividends, agrees Melissa Johnston, senior vice president with Highland Bank. In 2011, she met with a specialty construction client who was looking to expand. They looked over his financial records, figured out what he needed right away, then started regularly keeping in touch.
Over the next few years, as the company grew, the client implemented EOS principles that allowed him to start putting the right management team and structure in place so he could start stepping away a bit. By 2016, the owner was ready to move on.
“He had a steep growth trajectory and could have benefited by staying in the business and potentially sold it for a lot more,” Johnston says. “But he didn’t want to.”
“Having those conversations early on and having a good banking partner who understands your business who can help anticipate your needs, especially when you are in a growth mode, is how banks can fit in the picture,” she says.
So, if you have decided you’re looking for an exit, what is a buyer going to want?
One thing business owners need to get better at is articulating their “differentiating value,” Jones says. “If you don’t have a differentiating value … you are a commodity. But if you have a DV, whether it’s your technology or the way you motivate employees, or your people, or your approach or how you monetize, shout that from the mountaintops. That will drive the value way up for your business.”
“Now more than ever sophisticated buyers are looking for that recurring revenue model, subscription-based revenue,” Johnston says. “They’re afraid of the project-based (profit and loss), so all income statements aren’t created equal. If you are a business owner trying to sell, think about what is your revenue comprised of. If it is recurring, and it is locked in, it’s more valuable than project-based revenue.”
Johnston adds that buyers have walked away from potential opportunities when they find 25 percent or more of a target’s revenues are attributed to two clients.
“That’s key,” she says. “If you can try to diversify your revenue before you list your business for sale it’s going to add another multiple. … It can definitely detract from value with high concentration.”
And, he adds, a business owner can sell with a limited customer base, but it’s often reflected in the terms of the sale.
“We sold one with a 95 percent concentration with one customer,” he says. “But our client had to take significant terms. Those terms were to be adjusted if the revenue from that client fell off.”
There are some technological enhancements that can add to the value of a business up for sale, Thor adds. But it’s likely too late in the process, if a business is in due diligence before making upgrades.
While buying a lot of new software applications probably won’t add to your return, because technology becomes outdated quickly, one thing that might make sense is upgrading old computers. Another might be switching to a cloud-based strategy that allows for getting rid of a bunch of servers, Thor says.
Intellectual property is another attractive point. “I would highlight the heck out of that,” Jones says. “There is a huge amount of value in that.”
If you do decide to entertain an offer, recognize that it’s a lengthy process. Six months to a year is normal for smaller companies as a snapshot, Jones says. Longer for larger or more complex businesses with fewer targeted buyers.
In the meantime, there are plenty of things business owners can do while they wait. Websites and social media issues are often overlooked these days.
Many websites themselves, he adds, are outdated and underwhelming. Also, people lose sales because potential buyers can’t find social media pages or they find unresolved complaints on those pages.
“It’s the first place a buyer is going to go “You may never get a chance to talk to them after the visit your website or your social media pages. … Look at your website honestly and see that it reflects what your company is.”
That’s a good practice anyway, adds Thor. Tech Guru has found that “most of our sales are done before we even talk to them,” he says. “They’ve scoured our website. They want to make sure we are not sociopaths and find out how much we cost.”
Businesses should spend some time well in advance of a sale cleaning up books, making sure the financials provide an accurate representation. And don’t, Johnston says, give all employees a raise 60 days before a closing. That delayed one sale, she says, because it forced the buyer to reforecast financials.
“The person who is doing the analysis, the bookkeeping, is just as important as the quality of the financials,” Jones says. “Make sure you have good people doing your financials.”
Business owners who plan to exit the business upon a sale also need to work on putting together a management team that will be able to carry on the company’s work once a deal is done.
“If you can’t be here without your phone blowing up, that’s going to hurt your multiple,” Jones says, adding that sellers generally recognize that the people they are acquiring are among the biggest asset. “The humans in the deal are going to cause interesting issues.”
Regardless of whether an owner decides to continue growing the company themselves or sell it, they should look at the process as a positive. Someone thought enough of the business to consider making an offer to buy it. And if it doesn’t result in a sale now, it can be a fantastic learning experience for down the line.
CONTACT THE EXPERTS
MELISSA JOHNSTON, senior vice president, Highland Bank: 952.858.4798; Me**************@***********ks.com; www.highlandbanks.com.
CHRIS JONES, managing partner, Sunbelt Business Advisors: 651.288.1624; cj****@************st.com;
www.sunbeltmidwest.com.
MICAH THOR,president, Tech Guru:
mi***@********it.com; www.techguruit.com.
