If you've owned a business for more than a couple decades, you've likely done serious heavy lifting to build your company. Stepping away just may not feel right at this time. But now is absolutely the time to pre-plan, align your leadership and be positioned for both growth and a full-value deal in the future. After all, if a phone call comes to you and the person on the other end presents a golden opportunity, you want it to go your way.
Today's investment environment has serious money on the sideline. Private equity companies are searching for great deals with lots of available “other people's money,” and interest rates are still at very compelling levels. Quality synergistic buyers have been retaining earnings and need to expand market share and put their capital to work. According to Tony Schneider, an investment banker with BKD Corporate Finance, "For several years, we've seen highly rewarding valuations on top-performing and well-positioned companies. Many owners have elected to take advantage of this robust market. Those who wait risk encountering depressed—and possibly unacceptable—valuations and elongated sale processes during the next downturn. Prospective buyers take shelter when they see clouds on the horizon."
With that in mind, here are three ways you could act now, even if you don't want to sell until later.
If your senior leadership is top quality (and paying attention), they recognize that your day for divesture will come. In fact, they may be wondering about your plans and have some insecurities. When the time comes to entertain a bluebird offer, or you make a decision to go to market, you're going to need them by your side. Due diligence by a potential buyer is both exhausting and difficult to disguise. Instead, be proactive. Set up long-term incentive programs that share an ever-expanding pie of value. Help your senior leadership feel not just included, but truly invested. That way, you can secure and incent them for everyone's success in the future.
It's pretty extraordinary to find a small to midsized business that practices formal strategic planning with action plans spelled out. Practicing advanced planning methods not only impresses a potential buyer, it also helps reduce your business risk, sets in motion continuous improvement and develops a high performance culture and leadership team. Private equity firms universally seek value businesses that generate cash flow and a track record of multiyear success. They also generally need key management in place. Strategic buyers also value management—but even more than that, they're looking for a synergistic acquisition with reduced risk.
What about that phone call? The one with the opportunity? If an acquirer is seriously interested, and you're ready to act with a letter of intent, the next step will be due diligence. That means a review of the past three to five years. If you haven't been archiving and documenting your business, don't have proof of management expertise (planning and execution) and haven’t attacked and mitigated risk, you’re setting yourself up for a hefty discount. The value of your company simply won't be as strong without that kind of documentation.
By aligning, optimizing and preparing, you’re acting now. Then, next year, maybe you can sell!
Contact David or your trusted BKD advisor if you have questions.