Selling your Business The Myth of Selling at the Top
By Jett Winter, CEO
Winter Advisors, Inc.
You just received word that a smaller competitor had just been purchased for 2 times their revenue or $50 million. You had been contacted by the buyer, but refused to discuss a buy-out since every transaction in the last 18 months had been on a higher multiple of revenue. “I’ll just wait another six months and they will pay 3 times revenue.” Little did you know, that this would be the last major acquisition in your market.
Selling a successful business will most likely be the single most important transaction in your life – filled with emotional swings that can easily cause a loss of perspective and a significant loss of value.
Learn to use trusted advisors and avoid the following eight myths:
All I need is one buyer – Remember one buyer is no buyer. M&A transactions are driven by the same market forces as other financial transactions and you will not know the true market value of your enterprise without at least two participants. Learn to use advisors to drive this auction process.
A large financial buyer is ideal – Buyers tend to fall into two categories: Financial and Strategic. A financial buyer wants to pay X and then sell for Y with the difference between Y and X being their profit or loss. So, the financial buyer is incented to make X a low as possible to increase their eventual returns: Buy Low, Sell High. A strategic buyer on the other hand, will execute a transaction to fill-out a product-line, increase distribution, increase its customer base, or even hit a certain revenue or profit thresholds. Given this, a strategic buyer will almost always be willing to place a higher value on a business. Once a strategic buyer does this, the financial buyer will have to match the valuation to play.
Valuation is the most important thing in an offer – Valuation is clearly secondary to the structure of a deal. The structure of a deal is what you will receive in value for the sale of your business: Public Stock, Private Common Stock, Private Preferred Stock, Seller Notes, Earn-outs, or Cash. A $100 million valuation using illiquid private stock is very different than $50 million in cash. Be careful of accepting large amounts of private stock or seller notes. Learn to use structure to get the deal you really want.
I’ll sell my business on an earn-out – Beware of the earn-out trap. Earn-outs generally provide value to a seller for business performance over a future period of time. Key earn-out metrics are usually revenue and/or profits. Earn-outs tend to be simple and clear at the beginning and pure mud as time passes. Why? As part of the new legal entity, new cost allocation and decision-making approaches change. You may be hit with expenses you didn’t imagine. Learn to take control of earn-outs and make them work in your favor.
I’ll sell and immediately retire – In most cases the acquiring company is also buying you and your top management team. Certain roles tend not to continue, but key roles in driving the business, product, and market are critical to the success of the business. So expect employment contracts to be part of the deal for key employees. Learn how to negotiate them to your benefit.
I don’t know what I would sell for – In a major transaction like the sale of a business, knowing your goal or target in terms of value and structure is critical in getting to the right deal. This target is also critical in building your business to certain levels to attain potential value and structure thresholds. Learn to build your business toward your valuation and structure goals.
Taxes don’t matter – Structuring a sale or merger transaction can be highly complex and it is possible to owe taxes for value received that is not liquid. Make sure to understand the tax ramifications before proceeding with any transaction.
Always sell at the top – Trying to wait and sell at the top of a market is the number one fallacy in selling a business. The reason is simple: we don’t know when a market has hit the top until it starts going down. Learn to have a value and structure target and build your business to meet these targets.
A seasoned firm like Winter Advisors can help guide a company through this important and challenging transaction event.