When a decision is finally made to sell life’s work, the market determines what that business is worth and what the future may become. Transitioning from business owner to business seller can be filled with intoxicating images of generational wealth. But is this feeling realistic? The decision to sell now tips the scales in your favor, but as the process evolves that balance slowly transfers towards the buyer. What was newfound delirium develops into anxiety and agitation with the owner on the hook for the seen and unforeseen risks.
Super Bowl Champion head coach, Bruce Arians famously quoted, “no risk it, no biscuit.” At some point, the question will be asked, “are you willing to do what others are afraid to do?” Businesses sell within a range for a given industry and values in these businesses are rooted in transaction comps. Let’s say you have a consumer services business (HVAC, Landscape, Restoration/Renovation, Plumbing/Electrical) and it’s turning $1MM EBITDA. The valuation ranges they may sell for are anywhere from 4 to 6 times EBITDA. The current market, industry trends, even world events will influence the prevailing range. As your sell side advisor, our job is to push the multiple as high as we can through multiple conversations with buyers.
“The deal a buyer doesn’t make preserves their job; a deal creates risk. Buyers will do whatever it takes to eliminate any risk within a deal.” – David Reed
Some owners ask us which is more important to impact – EBITDA or the multiple? There are two sides to the formula, and we don’t say any side is easier or more important to impact but sellers have more familiarity with the left side of the equation. They’re managing the day-in and day-out getting up out of bed every morning to push as much as possible. Anytime you’re improving the operating or financial characteristics of a business you’re increasing the other side of that equation. It may be a bit of an intangible and the best way sellers have success is when they are truly prepared for a sale at any time. Minimizing risk will position your opportunity above your peers who haven’t prepared.
“You’ll never go broke putting money in the bank.” PE funds must put money to work, but they won’t invest foolishly. How do business owners create risk in their business? Far too many owners attempt to write off way too much! The lower middle market is full of owners who run too many personal expenses through their business. Adjustments to EBITDA are made because we’re trying to present the most accurate picture of what the buyer will inherit from an equity perspective. From having your brother-in-law on payroll even when he doesn’t work a lick, the luxury cars, extravagant vacations to kids’ private education and real estate are just a few we often see. STOP IT! The principle is determining what the true EBITDA the buyer will inherit post-closing. It’s a bit of a complex process requiring guidance for the seller, and a conservative approach to the financial health of the enterprise is highly advised. Conversely, when your business is not presented with a conservative posture the buyer will dig and dig into your financials until they uncover truth.
“I’m looking for football players, not soccer players.” If you’re going to play your own game, then get on the field and not on the pitch. The business isn’t entirely dependent upon the owner day-in, day-out. The most successful transactions are when owners take 1-3 years (or whatever it takes) to establish leaders and delegate responsibilities away from themselves. Financially, the business is relatively clean, there’s not a mess. The customer concentration is broad and deep not tied to 1, 2 or 3 long-term customers. The owner is leading their business from a buyer’s perspective, strategically, financially and operationally. At JSP, we’re passionate about coming alongside clients guiding them to grow smart to sell smart. Would you bet $10 to make $100 if you knew you couldn’t fail?
“Get the job done…finish the fucking game.” Once you start your game, it’s up to you to finish it by presenting your opportunity as the top draft pick. When a house is put on the market, the landscape looks clean and fresh; the house is staged so potential home buyers can visualize their family living there. Everything presented is an invitation to potential buyers ‘ tell me more’ to tip the scale of a potential offer. It’s why we say the number one way to influence a buyer is ensuring you’re prepared. Are you going to be 100% prepared? It’s unlikely. For every 5% being unprepared, there’s tens to hundreds of thousands of dollars left on the table based on your revenue.
“Trust, Loyalty, Respect.” It’s in our DNA and hopefully you’re on the same page. Spoken or implied, every client asks, “How much are you going to charge me to get prepared?” Well, we’re not sure we want to work with you yet! We don’t beat around the bush, and many potential clients behave the same way before inviting us to help. Before we have any strategic conversations about next steps, we’re going to ensure there’s mutual trust and respect. That’s why we have a complimentary conversation to start. There’s enough free information for owners to make up their mind about a process. Are you willing to invest the time to get prepared or is it spending time you’re so worried about? If you’re worried, then you know your shits dirty; be honest with yourself. It can be fixed! There’s easily 12 months’ worth of work that can and should be performed on your own with your team.
“If you don’t try great shots, you won’t hit one.” – former NFL Head Coach, Bruce Arians
We always ask potential clients, “can you look at your business objectively and identify what changes must be made and how to prioritize them? Then why haven’t you?” It’s important to have an advisor support you through the preparation process. We ask the difficult questions whether you invite us to help or not. We have zero skin in the game today, BUT we made every mistake on our first two exits.
Ask yourself, “what can you do for your business tomorrow to help you sleep better tonight?” The answer will help you uncover action steps providing incremental improvement towards another turn or more on your multiple. We know you’re tired; the agita, the frustrations and the anxieties. You can do hard things when you take one step forward today.
“Be fearless, and let it fly.” The best way to let it rip is to validate a healthy financial picture. When and where it makes sense, we recommend to our clients a quality of earnings (QofE) report. While It’s not a small investment, a potential premium sale is on the horizon and is more than self-liquidating as you’ll earn several more turns on the multiple. At JSP, we have in-house certified valuation experts who evaluate the financial health of a business, and their expertise presents an adjusted EBITDA that’s used as the basis to then market the company.
Before you say, I’ll have my accountant or CPA do that…well, they can’t and shouldn’t unless they have significant expertise in selling businesses. We’re not going to discuss ethics in this post today. However, buyers will perceive you’re incentivizing your CPA and disregard your input. On the other hand, buyers will use 3rd party valuation experts who are incentivized to dig deep and find issues to justify reducing your number. It’s why having a solid M&A advisor like JScott Partners will more than pay for themselves to lead this part of the process.
A QofE is akin to homeowners securing a home inspection before listing their house for sale. A home inspection gives the homeowner the opportunity to proactively address issues prior to going to market. Would you rather pay for a home inspection and fix most things, or would you rather pay for a home inspection and reduce the purchase price for items a 3rd party is incentivized to find? In the end it’s your business, it’s your sale and your decision.
“Scratch where it itches.” Coach Arians was known for his quips and quotes in addition to winning everywhere he’s been. A deal will try to fail three times before it closes and buyers hope the seller will be worn down and accept an unfavorable deal. Our #1 job is to get you the highest price possible! We do our best to prevent any sideways behaviors from buyers and get ahead of any situation. Coach was always excellent at evaluating talent and creating a playbook, a scheme tailored to his players. When we are engaged with a new client and having discussions, we focus on identifying areas of risk. Multiples are oftentimes a function of the amount of risk appetite a buyer is describing through investing in your business.
Strategically speaking, there’s three ways to address risk in a business case:
1) reduce the risk as the business owner,
2) structure the deal to mitigate the risk, or
3) reduce the purchase price.
As your advisor, we’re going to recommend strategies and tactics you and your team can deploy to mitigate risks because it’s what you control. If your goal is a successful sale and exit, then we can provide a work around from a deal structure standpoint; at least there’s still a transaction in play. The most penal to a seller is to take a reduction in purchase price to reduce risk in your business. The value of your company is going to be significantly higher if you take the reigns and minimize your risks. Put a plan in place to secure a sale at the price you must have.
