CEO Advisor Newsletter August 2019
10 Questions to Ask Prior to Selling Your Company
CEO Advisor, Inc. provides business consulting, growth capital and mergers and acquisitions advisory services to small and mid-size company CEOs, presidents and business owners. A major benefit to our clients is that Mark Hartsell, MBA, President, works with each client first hand on a daily basis. Other M&A advisory firms will solicit your business and then assign a junior associate to handle the great majority of the sale process - an extremely risky roll of the dice.
Mark has 38 years of business experience with decades of mergers and acquisitions experience. He is certified in Mergers & Acquisitions from the Wharton Business School, University of Pennsylvania, achieved a Master's Degree in Business from Loyola University and has a hands-on approach to guiding entrepreneurs through every aspect of the sale.
Here is your opportunity to ask Mark these and other valuable questions regarding your most valuable asset - your business. Contact Mark Hartsell at (949) 629-2520 or email MHartsell@CEOAdvisor.com.
10 Critical Questions to Ask
Exit Strategy - Do I have an exit strategy? Do I need an exit strategy? What is an exit strategy? Well, this is actually 3 questions but all point to one important issue - You never know when your life or health may take a hard turn or a great potential buyer with a fat check is going to knock on your door, so Yes, ever company needs an exit strategy. Simply stated, an exit strategy is a plan and process suited to you and your business to optimize the value of your business and to facilitate a sale at the proper time.
Readiness - Is my business ready to be sold? The answer is typically a resounding, No. Preparing your business for sale can take up to a few months; optimizing the value of your business can take years. At a minimum, you want to always be prepared to sell (when that proverbial buyer comes knocking on your door or you proactively make the decision to sell for various reasons) and this is where an M&A advisor such as CEO Advisor, Inc. is extremely valuable.
Timing - Is this the right time for me to sell my business? There are many considerations here, but I like to look at it slightly differently. I ask CEOs and business owners, when is it too late to sell your business or a time when the value would be greatly diminished? Meaning, what things could happen that would make it very difficult and burdensome for you to sell your business? Things such as, A) if a deep recession hit and now you had to wait 7 more years to sell to retrieve a good value or to find a legitimate buyer; or B) if my illness were to return, how much risk would occur to my business surviving or how much burden would it be on my family and employees; or C) if stiff competition surfaced or a disruptive and far less expensive technology, product or service directly encroached on my business how would I recover or reinvent my business and how long would that take? And how much money would it take?
Market Timing - Is the market right to sell my business? Today, valuations are extremely high, with record low interest rates that enable buyers to borrow cheap money and pay higher prices. The economic recovery is now 10 years old with the average economic cycle ending at 7.9 years in the past 75 years. With high valuations and a low interest rate environment, it has never been a better time to realize the best value for your business. And this window of opportunity will not last indefinitely; in fact it is shrinking by the month.
Time Commitment - How much of my time will be involved in selling my business and how long will it take to sell my business? Selling your business is a commitment and will take a substantial amount of time over six to nine months or longer. With the right team of experienced advisors, your time involved will be weekly, but far more manageable, predictable and minimized with a far greater opportunity of success. To minimize your time and optimize your value, efficiency and likelihood of securing a buyer, you will need to engage a team of advisors early on to zero in on a buyer and complete a transaction.
Team of Advisors - What is the team of advisors I will need to take me through the sale process and how do they benefit me? It is absolutely critical that you continue to manage and grow your business, keep it on track and not have any downfall in your revenues or profits if you expect to find a buyer and optimize the sale price. Your advisory team will consist of an M&A Advisor, Corporate/Transaction Attorney and Tax Advisor.
To enable you to do this, CEO Advisor, Inc. acts as your business and M&A Advisor to:
A) Strategize, research and create a list of 50 - 200 prospective buyers
B) Create the needed materials in preparation of the sale, such as an Executive Summary, 3-Year Forecast, PowerPoint Presentation specifically for buyers, make sure your financials and tax returns are in order and current, generate reporting and KPIs/metrics and many other preparation steps
C) Contact the 50 - 200 prospective buyers multiple times by phone and email to arrange conference calls and meetings to secure a bonafide offer in the form of a Letter of Intent (LOI)
D) Negotiate and finalize the Letter of Intent
E) Prepare for, gather and coordinate the extensive amount of Due Diligence information the buyer will require to validate your valuation and proceed with the sale
F) Coordinate with your CPA/Tax Advisor to ensure your tax situation is optimized
G) Coordinate the legal documents with your corporate/transaction attorney and assist you in negotiating the many business issues that arise from these documents
H) Negotiate your future compensation for after the sale
I) Prepare for the closing of the transaction and coordinate all aspects of the sale to completion.
In summary, you will need an M&A Advisor, Corporate/Transaction Attorney and CPA/Tax Advisor with your M&A Advisor driving the process from start to finish. Remember, there are over 1,000 variables that must occur properly to close a sale, and just 1 misstep to kill the deal.
Valuation - How will buyers value my business? Most businesses are acquired based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The multiple varies based on your type of company, growth rate, your gross profit margins, your profitability, the size of your market, the strength and depth of your management team, and many other factors. In some cases, in the absence of profits, but in the presence of extremely high growth rate, margins and size of the market, businesses may be valued on a multiple of revenue, as well as, other factors.
Cash at Closing - Will I receive 100% of the sale price in cash at closing? Unlike selling real estate where comparable properties are common place and basically 100% of the property can be inspected, tested and validated, a business has many variables that are fluid and cannot be validated, and comparable deals are very hard to come by. Realistically for small to mid-size private companies, buyers will pay you 60% to 80% in cash at closing, occasionally ask you to hold 10% in stock to keep you fully vested and committed to the business, and the balance in the form of an Earn Out requiring you to meet milestones and your forecasted revenue and profits prior to paying out the balance of the sale price in cash one to three years after the closing. An all cash deal is possible, but you need to be realistic when selling your business.
Continued Service - Will I need to stay on with the buyer after the sale? Every situation is different, but 98%+ of the time, the buyer is fully expecting you to not only stay on, but help them to further grow the business. Taking your cash and heading for the beach is not realistic and this is one more reason to devise an exit strategy while you are still willing and able to work for at least 2 years after you close the sale of your business.
Alternatives to Outright Sale - What are the alternatives to an outright sale of my business? I speak with many CEOs and business owners and many feel that they can simply sell their business to the employees. Others want to find a person to run their business for them so the owner can move on and do other things, while pulling cash out of the business each month. These alternatives are rarely feasible in realistic terms.
The best alternative to outright selling your company is to team up with a Private Equity firm by selling a minority or majority stake and taking money off the table, while still having substantial upside in the ultimate sale of the balance of the business (the second bite of the apple.) The Private Equity firm will provide capital for you, growth capital for the business, highly experienced management help and an opportunity to ultimately sell the business at an optimal sale price in the future.
Contact CEO Advisor, Inc. to see if this is a fit for you and your business as we have many relationships with Private Equity firms focused on small and mid-size companies and I work with my clients on this alternative regularly.
Selling your business is a very complex and time consuming undertaking requiring tremendous experience and expertise. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
Improving Business Performance
It's easy to focus only on the day-to-day running of your business, especially in the early stages. But once your business is an established company, it is critical to focus on longer-term strategic planning. You need to set Business Goals, Sales Goals, Gross Margin targets, build your management team, identify new opportunities and better understand what drives performance.
Assessing your business performance and conducting strategic business planning will be useful especially if:
- Your business is unable to gain traction in key target markets or moving in a direction different from what you had planned.
- You are unsure if you are keeping up with changes in the marketplace or making the most of marketing opportunities.
- You are uncertain about how well the business is performing, especially versus your industry or direct competitors.
- You are not using or able to understand your financial statements.
- Your Business Plan and Forecast are out of date.
- The business may be becoming unwieldy or unresponsive to market demands and Gross Margins and Net Profits are slipping.
- You are unsure how to grow your company to the next level.
- Considering selling the company.
- Seeking Growth Capital.
- Growth is below 20% per year.
- Focus On Core Strengths
Critical to your business performance is understanding where you actually excel - your core competencies and strengths, the products and services you offer, the level of success of your sales team and marketing efforts. You need to focus on the goals that drive success - what needs improvement, better reporting, what differentiates your products and services, how to capitalize from a sales perspective, how to launch new or complementary products or services to increase sales, profits and the value of your business.
It's vital to address these key questions about your products and services:
- How effectively are you matching your products and services to your customer's needs?
- Which products and services have strong Gross Margins? Which aren't performing as planned? Which are not profitable at all?
- Pinpoint which products and services offer both a high percentage of sales and high Gross Margins.
- What critical issues do you have with sales, pricing, sales coverage, marketing and growth?
- Build Value
As you build sales and profits, you want to ensure that you are also building value in your business.
This includes highly important factors such as:
- Strong Growth Rate
- Strong Gross Profit Margin
- Recurring Revenue Model
- Intellectual Property
- A Strong Sales Team that meets or exceeds sales goals consistently
- New Product/Service Development
- Strong Marketing Plan and execution