Over the last 15 years we have advised more than 100 direct marketing companies and many of those assignments have involved helping a seller prepare his/her business for sale or due diligence on behalf of a buyer. From that experience here are ten things I think sellers need to ponder when it comes time to sell all or a portion of your equity.
- Know the market.
Selling your business is like selling your house, you will get more in a hot market and that has nothing to do with your house or your business. In the last twenty years we have seen sale prices, usually expressed as a multiple of EBITDA, move from a low of 5-6X to a high of 10-12X for solid businesses. The key driver of this, in my opinion, is the availability of money in the market combined with low interest rates. Both exist now and, not surprisingly, we see market prices now at an all time high. It’s not unusual in today’s market to see multiple bids that exceed asking price guidance. What does that mean to you? I would say that if you a contemplating a liquidity event in the next 10 years you might consider it now. The market is extremely favorable for sellers.
- Know your market.
I am always surprised to see owners who don’t really have a good handle on the market that they compete in. PE buyers (usually Harvard MBA “quants”) thrive on the numbers – market size/growth, market share, competitor sizes/growth rates, market SWOT, your key competitive advantage, etc. Be able to lay all that out in simple, understandable format (10 slides tops!) and confidently discuss it. Many sellers say “those numbers don’t exist in my market” and if they don’t the PE buyers are still looking for your best estimate based on your many years in the market.
- Articulate your vision.
Many sellers take pride in where they have been and that’s great. All buyers want to know the history of the business and understand the foundation. More importantly, they want to hear your vision of where you want to take the business now. A common seller mistake is to present options when buyers really want a clear and committed vision with contingency plans. Often the premium price goes to the seller who can articulate and convince on his vision.
- Support with facts and accomplishments.
Talk, as we know, is cheap. Past performance, good and bad, needs to be explained. Was it a result of a good strategy and flawless execution or were you the beneficiary of a market windfall? Can past success be repeated? Can past failures be prevented from re-occurring? Confidence builds when the seller can clearly articulates what caused past successes and failures and relates that to the future plan.
- Don’t oversell.
Good businesses stand out and sell themselves and while your commitment and passion is admirable do not let yourself transcend into hyperbole and exaggeration. Remain humble by crediting your team (the buyer is buying them too!) with accomplishments and taking responsibility for “misses”.
- Understand they are investing in you.
Often sellers “leave themselves open” for whatever the buyer may want. That’s ambiguous. Understand if you are the founder or long time leader of the business that the PE groups wants to invest in your continued leadership. In fact, the purchase price will likely be more if you continue on and/or at very least phase out over a reasonable period of time (if you are retiring).
Also, your best price will come if you demonstrate your continued commitment by retaining a significant percentage of the equity, like 20%+.
- Define your future role.
Be clear about what you want and how you see the future. If something other than that should materialize in the future you probably won’t be happy anyway so think clearly about what you want and be able to articulate it.
- Don’t be greedy.
Your best price will come when you retain a portion of the equity and keep “skin in the game”. An upfront purchase price that is too high may just put too much pressure on future performance. Consider that with the additional resources and management of the buyer that your “second bite at the apple” might end up being larger than your first. Consider, for example, how enterprise value might increase with one or more “fold in acquisitions” that the buyer helps execute.
- Don’t manipulate the numbers.
Seems obvious but you’d be surprised how many sellers want to take moves to pump up their P&L. Don’t do it. Now is not the time to cut new customer acquisition spending or to favorably change the amortization of pre-paid marketing expenses. Adjustments for owner expenses will also be reviewed with a fine toothcomb. If the smart financial analysts of the buyers don’t find such changes people like me (who are hired for due diligence) will and when found, it will reflect poorly. We advise putting all those commonly manipulated expenses up-front to demonstrate your commitment to openness and fairness. Remember too, if you remain with the company in any capacity such maneuvers often will come back to bite you.
- Remain confident but humble.
In our opinion, nothing builds trust and sells better than competence and confidence mixed with humility and graciousness. Think about your opportunity to make a good impression. Remember, your buyer is asking “Can I work with this person?” and you want the answer to be a resounding “Yes!”. Top management teams receive top value for their businesses and continued commitments.
If a liquidity event is in your future, please call us. We’d be happy to assess your situation and offer counsel on how to obtain the optimal outcome which is much more than just the top price.Terence Jukes is president of B2B Direct Marketing Intelligence LLC, a strategic B2B direct marketing consultancy based in Fort Lauderdale, Fla., that services B2B catalog company clients in the U.S., Canada, France, the U.K. and Germany. You can reach him at tjukes @ b2bdmi.com or (954) 383-5221
Comments or questions are welcome.