One of the exciting aspects of being involved in Mergers and Acquisitions is that we are constantly learning. One of our most productive classrooms is the buyer visit. In those visits the buyer's motivations, priorities, concerns, and value drivers and value detractors are often revealed.
This was the case in one recent buyer visit with our client. Her Firm is representative of many early baby boomer led firms that "started the business in their garage" (actually it was started in her living room) 25 years ago and built a successful business with an excellent brand and customer loyalty. She is now looking to exit her business and reap the rewards from her hard work in the form of a generous buy out offer.
The potential buyer is a business owner that started a similar firm at about the same time, but has morphed into part business owner and part private equity investor. He brings a unique perspective of analyzing this acquisition wearing two hats - one as a strategic industry buyer and the second as a disciplined financial buyer. It was quite instructive to watch the dual motivations at play during the visit.
While wearing his industry buyer hat, he was quite excited about the synergies of the two companies, the growth potential, and the new vertical market that the combined firm could capture. While wearing his private equity investor hat, however, that excitement was dampened by the risk that our owner had created with her company. The owner and her top producer directly touch 70% of the company's revenues. They are the face of the company. They are the "brand". They are also in retirement mind set and have not groomed a capable successor internally.
Even though we have coached our clients with the "We will stay on for a period of time to transition our relationships and transfer the intellectual capital" speech, the buyer perceives huge risk. Quite frankly, I completely agree with his thinking. As this issue was explored, it became evident that this factor would negatively impact both the transaction value and the deal structure. Translation - a discounted purchase price and much of that price deferred in the form of a multi-year earn out payment.
The good news was the buyer's strategic side recognized the value of the new vertical market our client's company would allow him to enter in full stride. He also recognized, because our client was represented by an investment banker, that there will be other buyers competing for this prize. The buyer came up with a very creative approach. Because this new vertical market is so strategic to him and recognizing the lack of management depth in the target company, he had initiated discussions with two individuals that were high caliber executives from the new vertical.
The buyer laid out his plan to our clients and asked permission to introduce this potential acquisition to the two candidates as a simultaneous acquisition and hiring scenario. Our client is very concerned about confidentiality and pushed back. The buyer then countered with two purchase platforms - one with the new hire as successor and one without. The one with the new hire was far superior in terms of both total transaction value and in the percentage of that value that would be paid at closing versus paid as and earn out.
After some discussion with our client and a review of the financial implications, we agreed to the buyer's plan to introduce this opportunity to his two candidates with the execution by them of a confidentiality agreement.
This dramatic contrast in transaction value and terms really helped quantify and crystallize what we have intuitively known for many years. To use the words of Curley from The Three Stooges, "If you want to catch a mouse, you have to think like a mouse." Our translation is, "If you want to sell your company for maximum value, you have to think like a buyer."
The lack of an internal successor, the lack of management depth, the concentration of account relationships and intellectual capital into one or two key people that are likely to leave shortly after a transaction will result in at best, huge discounts in your company selling price and at worst, will make your company a non-viable acquisition target.
Contrast this current situation to a client that we represented a few years back and you will understand our advice. The previous owner client recognized that he was going to sell his company two years prior to the event. He started grooming an internal successor, giving up most of his own direct involvement. When he was satisfied that this transition was operating smoothly, he fired himself as president and promoted his protegee into that position. He allowed the company to operate successfully in this mode for one year and then engaged us to sell his company. The results were as planned - no worries about post transaction client or employee defections and no discounts on the business selling price.
Our advice to business sellers is to begin your business exit process well in advance of your exit. Give up your natural tendency to be involved in every aspect of your business. Relinquish control, delegate, develop your staff. Promote your successor into day-to-day responsibility. If you do not have a capable internal candidate, go out and hire one. Your added expense will be more than offset and rewarded with a much higher business selling price.
Author Resource:-
href="http://www.midmarkcap.com/SellerResources.cfm" target="_blank">Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.
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