CONSIDERING SELLING YOUR COMPANY – PART B
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Welcome to this second part of “Considering Selling Your Company.” In the first blog, we determined that there are several factors to consider in order to maximize your sale. If you haven’t read or listened to my first post on selling your company, I encourage you to start here.
In that blog post, the first five lessons we discussed were:
- Understand your organization’s potential
- Prioritize what you want to get out of the sale
- Understand the tax ramifications
- Consider Charities
- Hire Professionals
In this second part, we will look at an additional six key lessons to consider when selling your company.
6. SYNERGIES
As I mentioned in the first part of this blog series, hiring professionals increased our opportunities and opened us to the idea of synergies. It was shocking how many synergies we were able to identify and were highly valuable in helping us achieve a higher sales price than we initially thought. The synergies 100% belong to the buyer, but if you’re smart enough, you can get paid for a piece of their synergies as well.
As a buyer, you want to keep all the possible synergies that can come from an acquisition as quiet as possible so you can benefit 100% from them. As a seller, you will never get paid for 100% of the synergies – as one of the main incentives for the buyer is the additional value because of synergies.
However, you want to be smart enough to know the synergies, value them, and capture them in your Offering Memorandum. We wanted to show the buyer we were prudent and knew the synergies and the benefits to the buyer.
Synergies come in different areas that could include savings on expenses, an increased revenue stream, improved operating performance, and more. Most companies will typically sell on a multiple of earnings. The goal is to sell on a multiple of earnings at the highest multiple possible. Ideally, you don’t want to sell on a multiple of trailing earnings but on forecasted earnings, if possible. Your package and marketing materials need to create as much excitement as possible.
Knowing those synergies and confidently showing future revenues allowed us to sell the company for double what I thought it was worth. My revenue of the sale broke down to 25 percent from improved forecasting, 45 percent from identifying all the synergies, and 40 percent from achieving a high multiple of earnings.
7. SPEND TIME IN THE BUYER’S SHOES
This is a period you want to spend a lot of time in the buyers’ shoes. The better you can figure out the buyer—what makes them tick or what motivates them—the better it will be for you in the long run.
Buyers generally know the benefits of acquiring your company and the positive impact the acquisition will have on the combined business. This could include identifying customers or having knowledge or insight into the industry.
Try and identify these potential areas and the different ways the buyer will influence your business in a positive way. Think through all the ways your business is going to grow the buyer’s business as well. This added effort showed the buyer we had thought through all the details, and as a result, we illustrated why we were a good business to acquire. It also communicated our value and, therefore, encouraged them to make their best offer.
Your goal is to try to remain ahead of everyone else. If you can, seek to know more than the buyer, and your efforts will be rewarded.
8. EARNOUTS
One of the things that we did to help get our price as high as possible was we structured the sale to include an earn-out. An earn-out is a contingent payment the buyer only receives when specific performance targets are met. It is usually much easier on a buyer for several reasons.
As the seller, it demonstrates you believe the numbers you’re forecasting, and you believe they are attainable. As the buyer, it also feels like a win because they only pay if you meet preset targets. Additionally, it gets them more excited about your company because they want to acquire an organization that has real growth.
When I sold my business, we included a three-year earn-out into the structure of the deal which included a payout every year if certain benchmarks were attained. This was a great strategy for us. We ended up getting paid 72% of the earn-out, which was above even my expectations. The earn-out made it a home run for all of us.
Don’t be afraid of earn-outs, especially if you believe you can deliver on your forecasts. By layering in the earn-out, we were able to stretch the price, and they were practically speaking, paying based on performance.
9. CONSIDER HOW YOU EXIT
Deciding whether you stay and work in the company or exiting after the sale requires time and thoughtful strategy. If you’re planning to exit, it’s best to commit to being there for a period of time to assist with the transition. If you plan to stay at the company and have certain roles and responsibilities, begin to move towards those areas even before the sale is completed. Either way, plan it out as early as possible so you can frame it well within the marketing package.
Remember to consider your team as part of the profit sharing. I’ve always had a win/win philosophy, so I wanted everyone in the company to share in the sale proceeds.
When I sold my company, I decided to share the sale proceeds and worked on a formula. At the time, we had 70 employees, and I met with each one. It was an amazing blessing to share the proceeds with the team who helped build the company. I heard stories from team members who were able to put their children through college or put a down payment on a home. It was incredible to know my company’s success was their success too.
10. STOCK PRICE
Make sure you know how much impact the acquisition will have on the value and/or stock price of the buyer’s company. We predicted that when the buyer announced the acquisition, their stock would go from $12 to $18 per share. On closing, it went from $12 to $18.50 in 24 hours. The acquisition will most likely add value to the buyer. Knowing the increase in value to the company will go a long way in your negotiations.
Understanding what their value is, bringing your bottom line into their bottom line, knowing what their multiple is compared to yours, and the value add you are bringing helps you further understand the opportunity, the buyers’ motivation, and how far you can push on price.
11. CASH VERSUS STOCK
There are plusses and minuses to a cash deal, and you should sit down with a professional and discuss your options before selling your company.
Personally, I knew I did not want to take stock in another company. I’ve worked for myself since I was 17 years old and did not want to be at the mercy of somebody else’s stock price. My preference was cash.
My partners, on the other hand, wanted stock as they believed in what we put in our marketing package and thought the buyer’s stock would go up dramatically (they were right). Even though I thought the stock price was going up, I was happy with the price we negotiated. I did not want to be at risk with a company I was no longer in control of.
Ninety days after our sale, the commercial mortgage securitization business tanked and severely impacted the buyer’s business. As a result of this severe drop, we watched their stock price drop from $18 per share down to just $6 per share. Even though I had no idea the market was going to change so drastically, it highlighted the reason I did not want to take stock.
ACTION STEPS
If you are in business and plan to sell your company (even if it’s in the distant future), begin to have these conversations today. There are three groups of people who would be beneficial to talk to.
A. Anyone who has sold a company – no matter what industry they are in. If you know anyone who has sold their business, talk with them and learn from their experience. Find as many people as you can – source them from friends, relatives, and colleagues. Multiple conversations are useful.
B. Someone who has sold within your industry. Try to find someone within your industry who sold their company. Seek to understand their process, professionals they used, and lessons learned. Gather as much information as you can from people who have sold their companies.
C. Professionals. Identify the experts within your industry who are routinely involved in selling companies. Find out what would make you more attractive to a buyer. Share with them where you currently are as an organization and where you are headed. Define what changes and adjustments you need to make now for the future. Identify the professionals you would hire if the opportunity presented itself. Continuously work on improving your organization.
Fortunately, I chose an industry and built a company that was ideal to sell. But there were also policies and systems I had put in place that benefited us and made us attractive to a buyer. Had I thought of selling years before, I would have made decisions with this filter in mind.
If you are thinking about selling your organization, begin to run it through this filter and make choices that will best position you for a sale when you are ready. When you come to the moment, know what you’re selling, articulate clearly what makes you unique, and clearly explain what the opportunity is for the buyer.
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