business valuation

3 Expert Secrets for Getting the Biggest Bang for Your Buck When Selling a Business (Part 3 in our series on Business Valuation)

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This is the third part in our series on business valuation. In Part 1, we give you the rundown on public vs. private valuations. Part 2 discusses 5 key factors influencing valuation. This time we are bringing you an expert’s take on common misperceptions, how to get the biggest bang for your buck when it comes to selling a business, and who is likely to be involved in the deal.  

To punctuate our fall blog series on business valuation, we interviewed a friend of Audacia Strategies, Dan Doran, Principal at financial services firm Quantive. As an experienced M&A professional focusing on small and mid-sized privately held companies, Dan has seen it all—or at least, A LOT. He and his team support both buyers and sellers uniquely positioning him to be the voice of reason when it comes to transformative business deals. Check out our full interview here.

If your plans involve selling your business—even if retirement is several years in the future—you need to carefully consider the insights Dan offers here. So let’s look at Dan’s top business valuation strategies for sellers.

1. Think early and often about how to influence your business’s valuation.

In basic terms, business valuation is a snapshot of the health of a business at any given time. We already examined in greater detail how analysts and buyers determine what a business is worth. But value can be boiled down to three things:

  • Earnings
  • Growth
  • Risk

To influence valuation, Dan works together with owners to get them thinking early on about these three aspects of their business. One challenge he often runs into is that business owners tend to think about the worth of their companies only when they are ready to go to market or when an offer comes their way. But, says Dan, “this is actually backwards.”

If you want to get the best price, it’s important to understand how you can best position yourself in the market. And if you aren’t satisfied with your current position, you need time to make improvements before you’re ready to find a buyer.

In addition, there are a lot of reasons why someone may want to know the value of a business, besides being in a position to sell. “There are number of litigation reasons, for example,” says Dan. A business owner might be going through divorce or someone might have died making the value a probate matter. Then, there’s the transaction stuff: buying or selling a company, buy-ins and buy-outs, capital needs, etc. “For all these reasons, it’s important to get to an understanding of where the market will likely price an asset (i.e., the business) at a given point in time.”

2. Mind the difference between valuation and price.

It’s also important to remember that there’s a difference between valuation and price. In the simplest terms, valuation is an analysis, while price can be negotiated. So, what this means for you is if you use an expert like Dan he will build a valuation model to predict where the market would likely price your business.

Of course, any valuation is only as good as the facts and knowledge available. “There’s no such thing as perfect information,” says Dan. In every transactional deal, there will be an asymmetry of knowledge, meaning that buyers and sellers will have different perceptions of what a company is worth. The most timely example of this is Elon Musk’s tension with short sellers a few months back.

Here’s Dan’s take on Tesla:

“This was really a battle of information,” says Dan. “There’s an asymmetry of knowledge and investors in public markets are constantly trying to gain more knowledge to predict where they think price will go. So, Elon is in possession of more facts than these investors and his position has been that the stock is going to grow, whereas short sellers are looking for it to decline. It’s been a battle of information to try to manipulate that stock price.”

But perhaps the biggest lesson learned in watching Elon Musk trying to value (or price?—it’s a bit hard to label) Tesla at $420 per share is that bringing a neutral party to the table during negotiations can help. Regardless of whether Elon was fairly valuing his company, he had no buyers in the end. A good M&A process will have some competition and likely involve negotiations around not only price, but also the terms of the deal.

3. Get the biggest bang for your buck when influencing business valuation.

We’ve discussed in a previous post, how competitive the M&A market is and how important it is for business owners looking to sell their businesses to stand out from the crowd. Our conversation with Dan reinforced this point. With fewer businesses being passed down to the children of business owners, 80% of business owners need to liquidate their businesses to fund their retirements, which means this is a seller’s market.

But where does Dan suggest putting your resources to see the biggest ROI? Well, he says, it’s important to realize that when you have a consultancy like Quantive appraise your company, “essentially what we’re doing is creating a risk profile that becomes a roadmap for what is impeding value and what we should be fixing before we go to market.”

So, again, it’s important not to wait to value your company. You want time to follow that roadmap to improve your position before going to market. “The real question,” according to Dan, “is how do we begin to drive more value and return a bigger rate on this investment?”

To answer this question, you need to think carefully about who your buyer might be and think like her. While the majority of small business owners are baby boomers (65+), buyers are likely to be in the next generation. What do these buyers want? What do they care about? Why is your company a smart investment for them?

And recognizing that we all tend to overprice our own assets can help you adjust expectations. As Dan says, selling a business is really not that different from going to market with a house. “Everybody thinks that their own house is a special unicorn. As a business owner when we go to market we want to get the most for that asset, obviously. But the market is looking at your business relative to alternative investments.”

Thinking of your business in these terms, as one possible alternative in a sea of potential investments for a buyer, you’ll want to look at several key factors to help you stand out:

    • Timing: we want to sell when the company is in a good position and when the market is in a good position.
    • Value of the company vs. how it fits into your overall portfolio: if you’re in a position where you want to liquidate your business to fund your retirement, you’ll want to have these two numbers in mind: how much is it worth and how much do I need?
    • Be ready for the personal transition: Most business owners spend more time working on their company than doing anything else in their lives. So when they sell the company, they suddenly have a lot of time on their hands. You have to look in the mirror and figure out what you’re going to do with that time. Otherwise, what invariably happens is the week before closing people look for excuses not to close. Releasing control can be hard, so make sure you’re ready.

As challenging as it can be to sell your business (which, let’s face it, feels more like “another child”), if you start early, consider how to influence business valuation, and take the necessary steps, you will be happily enjoying mai tais (or another drink of choice) before you know it.

To make the whole process less challenging, it’s smart to enlist the help of experts early on. At Audacia Strategies, we talk a lot about how to differentiate companies in a really crowded field. We can help you negotiate the best possible price for your business. Why not contact us to set up a consultation? It’s never too early to start strategizing!

Photo credit: Dmitriy Shironosov

communications strategy

Congrats, You’re the Proud New Owner of a Business! Now What? Prepare for a Smooth Transition With a Strong Communications Strategy

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We teamed up with Richard Phillips of Crossroads Capital to create a webinar guiding the smaller financial buyer eying the middle market. We’ve included the link to the full 60-minute webinar at the end of this article.

In a recent blog article, we discussed a communications strategy for turning buy-side challenges to your advantage when purchasing an existing business. Smaller financial buyers looking to get their feet wet in the middle market face stiff competition. But if you play to your strengths such as flexibility on terms and show the seller that you understand her perspective, you stand a good chance of making a smart deal.

Once that deal goes through, the fun really begins! Making sure the transition goes smoothly following a merger or acquisition is one of the most delicate communications situations in all of business. Getting this right calls for a strong communications strategy. So let’s talk about how to plan for a successful transition.

Key Questions

As you begin to develop your communications strategy for the transition, you will want to keep many of the same questions in mind as when you were deciding how to close the deal. At this point, you already have well-thought-out answers to key questions such as:

  1. Why this deal?
  2. Why your organization?

But now it’s time to think about repackaging your answers. Previously, you needed a strategy for winning over the seller. You wanted to talk about why your deal was superior to those of the larger sellers. You wanted to position your organization as an asset and key to the future of the business. Now, it’s time to think more broadly about selling the deal to additional stakeholders.

You’ll need to ask and answer the following questions:

  1. What does this deal mean?
  2. What’s next?

Each of the stakeholders crucial to making the organization’s transition smooth will want to know what the deal means for them. Employees will want to know if their jobs will be on the chopping block. Investors will want to know if their risk is about to rise. Partners and community members will want to know if they can work with you and trust you to keep the business engaged in their goals. And customers will want to know if they can expect the same quality product or service they have come to appreciate.

Transition Announcement

After you have thought through your best answers to the key questions above, it’s time to devise your communications strategy for announcing the transition. Here it’s important to come up with a plan for announcing the transition and key steps to those in the “inner circle” and a plan for announcing the transition to the public. Carefully coordinate these two plans.

Timing is everything here. If the deal gets leaked to the public ahead of letting key personnel, investors, and partners know about the change, you could have a PR nightmare to deal with on top of a transition starting off on the wrong foot. This can kill your credibility and it won’t be easily rebuilt. So do what you can to control the timing of your announcements.

Employee Communication

Employees play a huge role in making sure an M&A transition goes off well. Consider holding an all-hands, townhall-type meeting for employees where the old guard and the new guard come together to demonstrate solidarity. Explain what’s next and introduce new leaders and any exciting new initiatives that benefit them. Allow employees to ask any questions in this forum and invite further discussion to establish open lines of communication too. Taking steps like these will go a long way toward engaging employees in a positive way.

Investor Communication

You’ve probably already thought about how to introduce yourself and your organization to investors. Make sure KPIs, metrics, and milestones are part of these communications. Being mindful that you can’t use numbers to tell the entire story, the last thing you want is to get caught flat-footed during these first few meetings with investors. Remember that communicating with investors goes well beyond the initial M&A announcement. An ongoing plan should be part of your communications strategy going forward.

Partners and Community

Suppliers, distributors, and community partners also play an important role in any successful transition. Get out of the building and meet face-to-face whenever it makes sense. A firm handshake and steady eye contact will help partners put a name with a face and open the door to a strong relationship. Make sure you talk to your seller about any insider tips and tricks for dealing with business partners. Are there some partners who deal only in cash? Will having cash on hand give you key discounts that will increase profitability? Is there only one supplier in the state who can sell you a particular part in the volume you need?

Customers

Last, but certainly not least, you need to communicate with your new customers before, during, and after the transition. Even if you expect little to change on the customer-facing side of the business, you want to let loyal customers know about the acquisition. A strong customer communications strategy demonstrates that you aren’t simply paying lip service to the mission and vision of the business.

In this market, realize that many of the most loyal customers may have interacted with the previous owner of the business and may even think of her as part of their team. If the previous owner is willing to attend those initial customer visits or write a letter or heart-felt email about her decision to sell, this can go a long way towards winning over loyal customers and easing their transition. This helps you pragmatically too. Losing a significant number of clients immediately after the sale goes through does not look good.

Transitioning after an M&A deal is one of the most delicate communications moments new business owners face. Fortunately, the team at Audacia Strategies loves a challenge! We’ll jump in with both feet, roll up our sleeves, and get to work developing the right communications strategy for you.

If you haven’t heard Katy and Richard’s full 60-minute webinar, there’s no time like the present! You can check it out here: Succeeding as a Small Financial Buyer in Mid-Market M&A.

Photo credit: Cathy Yeulet

buying an existing business

So You Want to Buy a Business? Turn Buy-Side Challenges to Your Advantage with Our Strategies

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Buying an existing business is one of the best ways to break into a new market, acquire valuable copyrights or patents, or leverage your expertise to steer a stagnating business in the right direction. While acquiring a business typically requires more funds upfront, the risks tend to be less than starting your own business—as long as you buy smart, that is.

We teamed up with Richard Phillips of Crossroads Capital to create a webinar guiding the smaller financial buyer eying the middle market. We’ve included the link to the full 60-minute webinar at the end of this article. Here we specifically address two key insights about buying an existing business: buy-side challenges to consider and how to develop a communications approach that turns those challenges to your advantage. So, let’s get to it!

Buy-Side Challenges Facing Smaller Financial Buyers

Because the mid-market M&A environment is highly competitive, if you are a smaller financial buyer looking at buying an existing business, you are unlikely to be able to compete on price alone. Bigger, strategic buyers will be in a position to offer better deal terms and be able to outbid you in most cases. This means you need to get clear about who you are and what you offer AND you need to be creative in coming up with a strong target list, developing your relationships, and negotiating deals.

First, keep in mind that opportunities to buy are not limited to brokers’ lists or small business auctions. In fact, investment bankers, who advise smaller commercial buyers recommend looking closely at not-for-sale companies. While it is tougher to find business owners who are willing to sell here, when you do find one, it can be easier to close a deal.

One key advantage you have over bigger buyers is flexibility, so use it. Your flexibility may allow you to shape a deal that’s more attractive to the seller. Consider that small business owners willing to sell often have concerns beyond price. An owner who has built her business from the ground up over the past 40 years may prefer an agreement that includes provisions for her continued involvement as a consultant or a guarantee that loyal employees will be protected. Bigger buyers often can’t or won’t make such promises.

Because many owners of middle market businesses care as much (or more) about non-financial concerns as they do about the money, it’s important to think about the transaction from the seller’s perspective. This may be challenging since, as a buyer, you will be primarily focused on the business valuation and financials. But this broader focus will pay dividends in the long run.

As you begin discussions, keep the following likely differences in mind:

  • Personal: Business owners are often at a different stage in life than buyers and have different motivations. This makes sense if you think about when an owner might be in a position to sell, e.g., when she’s ready to retire. Also, according to recent reports, America’s business owners tend to be older (50% over 55). There may be important generational differences between you and the seller.
  • Cultural: While you may be a numbers person, keep in mind that your seller is likely not tracking KPI’s or sweating over spreadsheets. Most business owners in this environment are independent-minded and focused on qualitative measures. Many entrepreneurs build their businesses by making smart short-term decisions and keeping their noses to the grindstone, rather than thinking about their exit strategy. Sweat equity may be all they know.
  • Situational: Above all else, remember that while this may be one deal among many for you, this business owner will likely sell only once. Be respectful of this mindset difference and realize that if the seller expresses “sellers’ remorse,” resistance, or reluctance, he’s probably not trying to be a jerk—he’s trying to get things right. It can also help to keep in mind that you’re both doing something you’ve never done before. You’ve never bought this business and he’s never sold this business.

Overall, if you approach discussions with the owner of a not-for-sale business with an attitude of respect and a willingness to be flexible on the terms of a deal, you both stand to gain. Now let’s get specific about what your approach should look like.

Key Ingredients in Your Communications Approach

Keeping the above challenges in mind, it’s clear that if you approach a potential seller with complicated spreadsheets and graphs, you’re likely to be met with polite stares, if not a quick invitation to show yourself out. This is not to say the numbers aren’t important to a seller, but buying an existing business is all about how you present the rationale behind the numbers, not to mention yourself and your qualifications as a buyer.

Ask yourself: What’s my differentiator?

Although you want to buy this business, your approach should come from more of a seller’s mindset. Your goal should be to articulate your value and sell your organization to the owner. Above all, gain rapport by listening to the seller, figuring out what she needs most to be comfortable selling, and then being willing to adapt to those needs. The bottom line is you have to build credibility with the business owner or you don’t have a deal. Period.

Key ingredients in your winning pitch:

1. Articulate your organization’s value. Be ready to talk about your mission and how buying an existing business fits into the broader vision you have for your organization. Bonus points for connecting this with the seller’s values.

2. Come up with a seller-focused message. Paint a clear picture that explains why this particular business, what your aspirations are for the future, and how you are uniquely positioned to usher this business into that bright future. This message needs to be authentic. If you simply say what you think the seller wants to hear, without buying in yourself, the owner will see right through you.

3. Emphasize how you stand apart from other potential buyers. It’s not unheard of in a competitive environment, such as the mid-market, for there to be 10 other buyers offering all-cash deals. It’s imperative for you to talk about how you and your team could be an asset to the company you want to buy. Talk about the unique strengths can bring that help them achieve their vision for the business.

Again, go beyond the numbers and consider the owner’s mindset. She is considering turning over her company, which is more like her baby, to a complete stranger. You would have reservations too. Help her see past those reservations through your message.

Remember: This is Personal

Finally, as you consider how to set yourself apart from other buyers, know that making the personal connection and gaining the seller’s trust can absolutely determine who wins the sale in the end. You’ve probably heard stories about home buyers in competitive markets writing heartfelt, handwritten notes to sellers and getting the house because of the letter. The same strategy can work in buying an existing business.

But before you pull out the stationary, it’s crucial to locate the point of overlapping values early on and expand on those points of relevance throughout the process. Describe your respect for the seller’s legacy and her motivations, talk about your investment plan and growth strategies, and discuss your philosophy on performance-aligned compensation. In other words, appeal to the owner’s beliefs about what it takes to successfully run this business.

There’s no doubt smaller buyers face several challenges in buying an existing business. But the right communications approach can turn those challenges into a winning strategy. If you remain open to opportunities to show that your aspirations align with the owner’s aspirations and that you can be creative with your deal structure, you can succeed in the mid-market M&A environment.

Once you’ve decided buying an existing business is your next move, it’s time to find the right advisors to guide you through the 16-18 month process. At Audacia Strategies, we’re here to support you before, during, and after your acquisition. We live for strategy!

For additional insights on this hot topic, follow this link to hear Katy and Richard’s full webinar: Succeeding as a Small Financial Buyer in Mid-Market M&A.

Photo credit: Wavebreak Media Ltd