Denice R. Preston
Why do 46% to 82% of lower middle-market sell-side deals fail to close when there is $936 billion in uninvested capital? It is usually because companies aren’t ready for the buyers to examine them, and owners may be too optimistic or greedy.
Businesses can do more to take control of their destiny. The key to success is to (1) prepare and work on an exit transaction and (2) use “intelligent lust” to close the best deal.
The following is a brief introduction to the topic
Why do between 46% and 80% lower middle market transactions fail to close when $936 Billion private equity capital is slipping down the market? It is usually because companies aren’t ready for the buyers to examine them, and owners may be too optimistic or greedy.
In my 30-plus years of experience as a president, CFO, and principal investor, as well as an investment banker, consultant, and operating turnaround specialist, I have improved the performance of 10 businesses and completed 27 M&A and investment transactions worth $1.3 billion. In this article, based on my experience, I discuss common reasons why deals fail and what owners can do to achieve a better result.
I argue that business owners have much more power to take control of their destiny. I believe that my advice for how to sell a business is to (1) Take the time to prepare for the exit transaction and (2) use “intelligent desire” to get the best deal. An interim CEO will help you improve company performance, prepare the sale, determine your range of valuation, and identify and analyze buyers that you may not have thought about.
Selling a business: Mastering the owner’s expectations and conflicts
You deserve to be rewarded for all the years you spent building your business. Of course, this is what motivates you to sell your business. The large number of failed deals shows that the difference between the price and the seller’s expectations is a major problem that sellers don’t anticipate. This article offers a practical approach to fixing the imbalance that many sellers face when their expectations are far greater than what a buyer is willing to pay.
Owners who are able to close deals have overcome their doubts. Don’t waffle-decide. Early commitment to a plan and making it work is key. This article explains how an owner or company can improve their chances of closing a transaction at a higher value. The owner’s willingness to do so from the beginning of the process confirms their determination and also increases the preparedness of the company. A survey by the International Business Brokers Association of 264 brokers in 36 states found that less than half follow a pre-planned sale procedure for companies worth up to $50,000,000.
Compare that to the five most common reasons given by buyers for not closing a deal, and note that four of them are within the seller’s power.
Selling a business: Boosting Company Performance
It may seem obvious. You’d be surprised at how few companies take the time to do the simple fixes or to build a plan to show the value of an acquisition to the investor/buyer.
How to boost company performance
You can optimize your company’s performance by taking the following actions:
Analyze your business. You can find ideas by analyzing the data. These analyses may reveal options such as renegotiating contracts that are problematic, targeting customers with higher values, or culling product lines.
Quick fixes. Selective pricing increases are a powerful but often overlooked way to improve revenues and profitability. Other quick fixes are usually expense-oriented. For example, sub-leasing real estate that is not being used, refinancing costly equipment leases, and plugging profit leaks. As an example, I was a consultant and investor for a snack food company that had not bid on its second-largest component of COGS material in several years. By bidding to four suppliers, including the incumbent, the cost of the item dropped by 24%. COGS decreased by 7%.
Longer-term, bigger fixes. They may take up to a year before they produce any earnings, but the benefits can be significant. When I helped a company that was experiencing production bottlenecks by adding low-cost equipment to pinch points, it eliminated 25% of direct hours of labor in an industry where direct labor represents 45% of the total revenue. This not only improved profitability but also increased scheduling flexibility and reduced lead times.
Growth Plan. A buyer or investor will need to make an argument for your company’s value after investment. Your business knowledge will allow you to present the value of your company in a manner that appeals to even the most skeptical members of the committee. You can do this by backing up projections and assumptions using customer acquisition data, market trends, and other supporting information. Your audience includes operating people, accountants, marketers, and MBAs. Your roadmap for the future will help your company to be at the top of their list.
An interim CEO will help you implement these initiatives for growth and profit improvement. Below, I explain why increasing profitability increases your company’s value. The value of your company will increase by a multiplier of the earnings improvement. Your growth plan will extend and expand these improvements. A higher EBITDA can also increase the value of your company. If a company has a $2 million EBITDA, it is worth $10,000,000. The same company could have a $5 million EBITDA and be worth $50+ million.
The EBITDA Multiple
The value of your business increases by a factor of ten for every dollar that you add to the profits of your company. This is because buyers and advisors evaluate an acquisition based on its earnings. The chart below shows that most companies valued less than $75,000,000 are valued based on multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization) ranging between 3.0x and 9.0x. EBITDA Multiple will depend on the industry, growth prospects, and scale of your company. This article will discuss the valuation calculations.
Expanding EBITDA Multiple
If you are able to increase your earnings in order to scale up your business, then your payments will be multiplied. This is because, on average, larger companies command higher salaries than smaller ones (in the same sector, with the same growth rates, etc.). This is because (1) more capital is available for larger transactions–private equity funds, in particular, are constrained by minimum deal size limitations–because large corporations with high stock prices and excellent access to capital markets can afford larger deals and also need them to be large enough to make material contributions to the acquirers; and (2) companies with more than $3 – $5 million in EBITDA are generally operated by deeper management teams that can run the business after the owner pockets transaction proceeds and leaves. This article explains how a company can increase the scale and multiple of its business by either increasing its profitability or through acquisition.
