The failure rate of deals where small businesses are looking to sell or raise external investment is higher than needs be. Processes typically fall over due to the potential purchaser (trade or financial) losing interest, which stalls the entire process. Given that the macro-economy is conducive to M&A activity right now, the main reason for high failure rates is the passé approach many small business owners take to this process.
Entrepreneurs are generally underprepared when it comes to considering a sale of their business, or capital raise. This wastes time, money (through on-the-clock advisory fees), and causes untold disruption to the business. The problem is compounded by the fact that deal processes can be complex and emotional times for founders, especially those who are experiencing them for the first time.
Focusing on key areas in your business before you appoint advisors will not only save you time and money, but also vastly improve the chances of your transaction concluding. The areas small businesses should improve help develop day-to-day performance in addition to improving the longer-term outlook. This advice is relevant irrespective of whether you are looking for a full exit (i.e. to trade) or a partial exit (i.e. to private equity via a buy-out).
Infuse Operational Excellence
Consistency in your financials with commentary explaining performance over a reasonable historic time period is essential in convincing a potential suitor that they should even consider your business. The numbers have to demonstrate a well-managed business that is routinely building value for shareholders.
Decisions you may make today will impact the level of interest you get in your business later. For example, growing turnover at the expense of profitability will unravel over time as a market multiple on a lower profit number equals a lower business valuation. Ideally you need to balance being able to grow both the top line and bottom line in parallel.
It’s not revolutionary to suggest that focusing on building a strong team is a prerequisite to business success. For a business considering any liquidity event, this becomes essential as it demonstrates how well the business has been managed. For exit to private equity via a management buy-out (MBO), or for capital raising purposes, investors will drill deep to assure themselves that the team is backable.
Identify And Monitor Potential Suitors
Only the ‘right’ buyer or investor will spend time on you, and so a big priority becomes identifying who the ‘right’ purchaser is. Whether you are looking to sell your business or raise investment for it, there are some common characteristics that will help you pinpoint the right partner.
Generally they need to be operating in the same niche as you. However their functionality could well be different. They could be in a different vertical for example, but see value from operating in your part of the value chain. For a trade buyer the ideal suitor may well be a competitor. For a financial buyer, it is important to identify who have done deals in your space before, or who has a team specialising in your sector.
Size matters and a potential purchaser needs to be of sufficient size to be able to finance the deal. Coupled with this is an intent that they would actually do a deal. There are some companies that are very acquisitive and inorganic growth is part and parcel of their growth strategy. However, for others, growing by acquisition is not the preferred way forward. In this instance, you would have to be something quite special for them if they are to make a move.
Similarly with investors, not all investors are out in the market and investing. Check to see if they have recently raised a fund that allows them to invest and if they have been active in the market. Just because they are having meetings with prospects it does not mean they have money to spend.
Once you have identified who you want to attract, you need to spend time and energy getting on their radar. The objective is for them to make contact with you once they see the positive things you are doing in your sector. This gets the ball rolling on any potential deal.
Work On Your Positioning
Preparing your brand, profile and reputation is a crucial part of having a successful process, especially once you’ve identified who you want to attract. This can have a potentially large impact on valuations and is a real opportunity to command a premium if executed well. However, properly crafting your story and allowing it to permeate your industry takes time and is not something that can be done in months.
Think clearly about what your brand represents and what makes your business unique. Is it the demographic you serve, or the quality of your offering? Securing industry awards and getting profiled by industry media is a good way to demonstrate a positive presence.
Understand The Process To Prevent Stalled Exits
Entrepreneurs who have a familiarity with the deal process have a better chance of getting a deal done and can be more appealing to potential suitors. After all, no one wants a deal falling over at the last minute because the vendor did not fully understand what his deal meant for him.
Consequently, it is imperative small business owners educate themselves or get help to understand how these processes are run and do the necessary groundwork so they understand things better and do not have unrealistic expectations.
Valuations are always a key point of discussion in any process. In my experience, founders typically have an inflated view of the valuation of their company. This may have come from valuations rumoured for competitors. Understanding what drives value up as well as down is important so you can address these areas in your business way before any process is initiated. Further, keeping abreast of transaction activity in your sector is important not only to identify valuation multiples being paid, but also to identify why those multiples were paid.
The due diligence process can be very frustrating and can lead to things cropping up that ultimately scupper any deal. Having your house in order in advance of any transaction not only gives you time to deal with issues that may arise, but also saves valuable time when the deal is on. Many transactions fall over during this phase, which can largely be avoided through adequate preparation and action plans implemented early on.
As a small business you should be having conversations with corporate financiers and brokers every so often to understand how they can help. Every advisor has a different style and area of specialism and so it is good to understand upfront what you think would work well for your circumstance. Often the right decision is personality driven. You should not consider doing a deal without an advisor in any case as it is time-consuming, and you will find it difficult to remain objective during the emotional rollercoaster.
There are steps that small business owners need to take to make their company more attractive to buyers and investors. The relevance steps can prevent stalled exits. Contrary to popular practice, these steps need to be executed well ahead of any anticipated process. In fact, many of these processes should be adopted within the usual business practice and can help the business perform better in the short-term as well.
Seeking the right advice and spending time upfront to identify your end game will help you improve the odds tremendously and allow you to achieve your exit.
What are your thoughts? What do you find most confusing when it comes to thinking about selling your business? What do you specifically need help with? Leave a comment or email me to let me know.