Smith Holland M&A Resources  

Most companies are not structured for maximum sellability.

The common ailment amongst medium companies is the simple fact that they were not designed to sell. The owner originally envisioned a business to sell goods or services in order to sustain his or her lifestyle, with the dream of expanding into a successful venture. The steps and decisions taken to launch a business and maintain success frequently do not prepare the entity for the time it’s put on the market.

 

For example, an owner-operator may start a business where the profits are just enough to make ends meet at home. They are most definitely worried about the future of cash flows or how to optimize supply chains to increase margins -- or at least not yet. To help owners flip the mental switch towards the selling-mindset, a few case studies can be cross-examined as frameworks for a successful deal.

Inadequate Mindset Framing. Empty nest syndrome isn’t reserved for lonely mothers wiping tears from their face as their college kids drive off to freedom. Business owners see their business as their baby, and it is equally hard to hand over custody after raising and nurturing the organization for what can seem like a lifetime. While it's not always an easy decision to sell your business, the Smith Holland mergers and acquisitions advisors can help you secure the best value and guide you every step of the way. 

A common misconception among small to medium businesses is that the acquiring party will be cut from the same proverbial cloth. Maybe fellow Mom and Pop owners, maybe another family business bootstrapped with retirement savings. But the reality is that purchasers tend to know the selling waters better than the owner. The buyer has spent time researching and understands the competitive pricing of similar businesses in the market - whereas an owner may barely have enough time to handle payroll. A seller should be prepared to hit above his or her weight class, to go the extra mile during the transaction process to both promote confidence to the buyer and to protect the company valuation.

By enlisting an M&A advisor early in the process, a seller can take advantage of transitioning mindsets and preparing for a buttoned-up diligence process. Buyer sophistication increases with the size of a deal, and if a seller doesn’t have a 360-degree view of the playing ground, they are bound to get tagged by savvy purchasers. A seller’s goal is to maximize value and a buyer’s goal is to find ways to pay less than that value. If a seller has counters to every criticism a buyer can present, he or she has a firmer position on valuation and likely more bargaining power.

Reliance on Single Operator. Mom and Pop shops were the norm of the small business world. Family secrets, processes passed from one generation to the next, that’s how one gained a competitive advantage. However, such a concentration of company brainpower and strategy conversely presents a great risk to a buyer. Are the customers going to leave once the owner is gone -- who is also the head chef, and head marketer, and head of the front desk. Are the employees going to quit now that the owner who would allow them to be late every day is leaving? If a small to medium-sized organization is starting the selling process, it is productive for all parties involved to consider diversifying responsibilities or at least presenting a plan to mitigate these concerns from the purchasing party.

An all too familiar lesson can be gleaned from a past M&A deal. The company had maintained roughly $4M in EBITDA for 3 consecutive years. The owner was a senior gentleman who had the always-on-the-clock mentality that many entrepreneurs thrive on. He could have retired long ago, but it’s hard to say no to success, especially when it’s been built by one’s own hands. His instincts were still sharp, and he knew that flat sales would eventually lead to declining business, not what he wanted for his legacy. But he faced a tough milestone, letting go of the company puppet strings and allowing a subject matter expert to take over marketing. This was abated by a few initial screens of the business by prospective buyers, all of whom commented that the number one risk of the company was reliance on the owner-operator to stay onboard. Best case scenario, a risk-taking buyer could purchase the company and undergo an arduous process of peeling the current owner from every business operation and instilling managers in his place.

The reasonable personality of this owner allowed him to pivot his mindset towards deferring duties towards managers. It would free more of his own time to focus on his strong suits and give him peace of mind that the areas of opportunity were covered by specialists.

A more perfect outcome could only have come if this business owner identified the risk himself before selling. He could have then hired the marketing expert, increased sales and ultimately drove up the asking price. All was not lost, and the owner was still able to capitalize on the feedback during due diligence to de-risk the sale. A small to medium business owner ready to enter the marketplace should prepare his or herself to expand mental horizons, and think like an acquisition firm who wants to keep business running without a hiccup -- not have to spend months extracting company secrets from a single owner-operator. Imagine Willy Wonka trying to sell his candy company -- it would take a lifetime of transcription. No wonder his competitors thought it easier to navigate the moral and legal waters of stealing his trade secrets!

Money Issues. Due diligence has a knack for exposing financial weaknesses in smaller enterprises. Not only in documentation availability, but the scrutiny and data depth of all transactions is adequate to keep operations afloat, not for eagle eyes of a transaction. It is absolutely ok to hire accounting and financial professionals to prepare for a sale if it makes an owner feel more comfortable. Most of the time, an M&A team can work with company tax returns to consolidate in-house profit and loss and balance sheets from a company. Potential buyers will want to see at least three years of tax returns with details records for discretionary expenses -- or those that might not be needed by another owner if he or she were to take over.

Expertise matters.

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