The last few years have been banner years for M&A. More businesses are expected to be sold in the coming years than any previous period. The trend is global and across most sectors of the economy, even those which are not considered growth industries. This forecast comes on the heels of the biggest year ever for M&A transactions. The forecast is a little cloudy beyond 2021, so smart business owners are seriously considering whether it is time to sell – timing being everything.
If you are looking ahead with an eye toward selling next year, you will likely get a much higher multiple if you start preparing now. If you’re not thinking about selling because things are going well, you should be. An open window is always a good bet. Waiting too long to go through it, or having it slammed shut, almost guarantees a lower price. Selling on a downturn, or when you must sell, is not an exit strategy — it’s a fireside sale. Even if you are a young growth company on the move, doing a secondary sale for part of your company’s equity should be considered in up times.
The first thing to know as part of your exit strategy is that good businesses are not bought, they are sold. If you wait for a single buyer to come knocking, you’ll put yourself at an immediate disadvantage because there will be no competitive bidding process. Actively selling your business through professional M&A channels will typically ensure multiple bidders and a higher price.
A well-designed exit strategy can increase the value of your business by 50%. It will more than pay for the M&A fees.
Here are a few preparation tips:
1. Develop a definitive exit strategy and have it approved by your board. It can be stated as simply as this: “Our exit strategy is to sell the company (or x% of it) in x months for a target price of x.” Your executive team, board and key shareholders must be aligned with the strategy. No one else needs to know, nor probably should they know.
2. Clean up your corporate structure and cap table. Make sure your intellectual property is in good standing – tradenames, trademarks, patents, employment agreements, non-disclosure/non-compete agreements, etc.
3. Boost the top line without lowering the bottom line. Companies are sold on a multiple of revenue and especially on a multiple of EBITDA, so take care to protect the bottom line. Pull out all the stops to drive sales over the next 12-24 months. Create the proper incentives for your team, partners, and reseller channels, while watching expenses like a hawk.
4. Investigate the possibility of acquiring a company / team that will accelerate your revenue. The trick is to do it without paying a premium. Lots of companies (technologies and teams) can be acquired with equity or earn-outs. You don’t necessarily have to use cash to fuel growth.
5. Keep good books and get current on all tax and regulatory filings. Audited financials are best, but a Quality of Earnings (QoE) analysis by an independent CPA may also suffice, depending on the size of the deal and the preferences of the buyers. If any lawsuits are pending or threatened, try to get them cleared up before engaging with buyers.
6. Assemble all the due diligence documents a prospective buyer will ask for in a virtual data room. A good M&A pro can provide you with the list. Doing this exercise in advance will significantly reduce the time to close a transaction when you get the right buyer(s) to the table.
7. Retain a pro to write the teaser, the offering memorandum, the draft LOI, and to develop the list of target buyers. A good pro will also pre-qualify buyers and get more than one to the table. Doing this in-house is not a good idea. There is an art and a science to it, plus you don’t want the team distracted from the most important task at hand – building and managing the business. You can’t be third-party objective when you are first-party active. Get a good intermediary, preferably after Step 1 above.
Bottom Line: The best time to sell a business is in “up times” when acquirers have the money and the appetite. Anytime is a great time to sell a business if you are ready. Fortune favors the prepared. Give some thought to your exit strategy now.