Tag Archives: exit strategy

How Long Does it Take to Sell a Company

A common question we hear is “how long does it take to sell a company?”.  As with many things in life, the answer is “it depends”.  So what does it depend on and what are the norms?  To frame my response, I’ll start with the big picture.  Selling a privately held business from initial idea, through planning and preparation for the sale, through the transaction and until the seller(s) are completely off-the-hook for the post-closing commitments takes between 3 to 5 years.  I know this might sound crazy-long, but give me a chance to talk you through the process.  While I’ve segmented the major steps in preparing for, and selling a company… keep in mind that these topics and discussions are all interrelated.  Lastly, there are out-of-the-norm examples of opportunistic sales that have taken place in a very short time and have incredibly favorable terms to the sellers.  These situations have resulted in the owner(s) closing a transaction in 3-4 months and being completely out of their business (and all post-closing commitments) a year later.

Clarity of Owner Objectives – We usually start the process by trying to understand what the owner(s) of the business want and why.  This understanding is much more than just maximizing the valuation of the business.  It includes clarity around how much after-tax cash they desire (and need); when they want it; are there people they need to (or want to) take care of in a transition; are there social or community objectives; and how they might think about their legacy as it relates to their business.  The plans and answers to these questions are rarely well defined and open a dialog with the owner(s) and a number of advisors and individuals surrounding the owner(s).  The resulting discussions and planning can take a few months to a year to really get fully vetted and defined.  Bringing clarity to each of these topics usually requires having a personal financial plan, a succession plan for the business and establishes the basis for what is referred to as an exit strategy or exit plan.  Keep in mind that the sale of a company is only one of a number of alternatives to create shareholder liquidity, to potentially diversify personal investment, and to potentially gain access to growth capital.

Business Planning – Part of answering the questions above includes understanding the current value of the business and having a clear forward looking business plan.  We find that having a compelling strategic reason to sell a company is a stronger argument for gaining interest in the business than simply “the owners are ready to retire”.  Of course there’s nothing wrong with the latter reason, but it’s helpful in the sale process when selling for a business-driven need that the buyer can fulfill or help with.  Examples include access to capital, buyout a partner, accelerate growth, change in competitive environment, etc…  Articulating a growth strategy and valuing the company can take from 1 to 6 months, depending on the level of existing preparedness and the time management can allocate to working the process.

Transaction / Transition Readiness –  An outcome of the valuation and planning process should be a realistic understanding of the enterprise value of the business and identification of the value gap that might exists between the owner’s objectives and the current market value.  In our firm, we look at the Value Levers that can be managed and pulled to optimize the readiness of a company for sale and help close that valuation gap.  We wrote a short book about this topic titled Value Levers: Increase the Value of Your Business from 3X to 7X.  We talk about the three basic levers that management can act on to improve the value of their company and to improve transaction readiness.  For those serious about starting the process and benchmarking their readiness, we have a free online tool at www.ValueLevers.net. Becoming transaction ready can take from a month to more than a year.

Sale / Transaction Process – Once the business is ready to sell, the actual transaction process usually takes from 5 to 15 months.  This includes preparing materials to market the company, organizing a data room, developing a buyer list, conducting an organized auction, negotiating a letter of intent, engaging with the buyer for due diligence, negotiating definitive documents, integration planning (when appropriate), obtaining approvals and consents, and completing closing items.  Financial buyers (like private equity) tend to move quickly and have shorter process times.  Strategic buyers tend to have longer buying processes given integration planning, the number of individuals involved in the acquisition, and timing of corporate and regulatory approvals.

Post-Closing Commitments – The valuation and purchase price in selling a privately held company is only part of the deal.  Equally important are the terms and conditions that accompany the stated value.  These terms and conditions can dramatically impact the true value and realizable cash to the seller(s).  In most transactions there are representations and warranties that the seller(s) make to the buyer(s).  These involve many aspects of the business, how it has been historically operated, and what liabilities and claims exist at closing.  In the event that these representations and warranties are proven false, the seller(s) will have to indemnify (or financially protect or reimburse) the buyer(s).  This means that a seller(s) will usually have some financial risk after the sale of their business for an extended time. In addition, the sale of privately held companies often include future payments due the seller(s) as part of seller financing, an earnout, or another form of contingent consideration.  Each of these means that the seller(s) is connected to their business beyond the closing for some time. Unlike the sale of a public company where the shareholders sell their shares and move on the next day, the typical post-closing financial commitments and indemnification period for privately held companies ranges from 1 to 3 years, depending on the issues/risks, the outcome of negotiations, and the market conditions at the time of sale.

Other factors that impact the timeline and eventual success of the sale process are the sophistication of the buyer and the transaction experience of your deal team (accountant, attorney and M&A advisor). If you have interest in learning more about the process and understanding the ideas better, you may find our book titled Middle Market M&A: Handbook for Investment Banking & Business Consulting helpful.  As always, please feel free to reach out to me via phone or email.

 

How Do I Know When the Timing is Right to Sell My Business?

This is a reprint from my interview with Divestopedia

Historically, at a high level, we know that the M&A market runs in cycles. Understanding the broad market as to where we are in the overall M&A cycle is step one. But, that’s not always the best indicator. That’s only one element of understanding when it’s right to sell. Determining when to sell should also take into consideration the specifics of the industry and what’s happening within a given industry. The best time to sell is when the industry trend is going positive at the same time that the M&A trend is positive.

So for example, if you have a Software as a Service (SaaS) company, you should consider the broad technology trends. Where does the company fit in the industry, and who are the other players in that space? You can begin to get a sense of if the timing is right and if the dynamics within that industry will value or appreciate what your company has to offer strategically as well as the core economics of the business.

Particularly if you think about the lower middle market, we tend to deal with this issue of the company has made investments that haven’t materialized or have been realized in the P&L. The business owners are always wanting to get paid for value that’s inherent in the business but isn’t showing up yet in the company’s cash flow. One of the best ways determine the right time to sell is to really articulate and understand that strategic component of the business and how it plays into a market trend in a positive way. When this is mapped out, you will be able to determine if you’re on the growth curve that buyer like to see; you’re not too early in it but you’re not at the very peak either. When you wait until you get to the peak, it may be too late to sell for maximum value.

Where Does the M&A Advisor Add Value?

We surveyed private company sellers after their deal was done to gain insight into what was important to them and to better understand the selling process through their eyes.  While we are located in the Research Triangle Park area of North Carolina, we leveraged our national network of contacts to gain broad perspective in a variety of industries and states.  Below are a few statistics that might help you as you think about selling your company (or helping your client in the process):

Number of survey participants 63
Years in which companies were sold 2010 – 2014
Industries represented 18

As you can see from the chart below, companies representing the lower-middle and middle market participated, with revenues ranging from a few million dollars to nearly $250 million.

hrp-survey-demo-081314

 

So where did the advisors add value?  That’s the chart below, ranking the area of value-add by highest or most value to lessor.  As you can see, the highest ranked areas were about the credibility attributed to the seller based on the advisor’s credibility coupled with leading the process and having an understanding of the transaction to negotiate on the seller’s behalf.  On a combined basis, these should enable the seller to achieve value that they might not otherwise have realized on their own.  Contrasting the value of legal counsel in the negotiating process, a M&A advisor should be able to assist in structuring the economic elements of the transaction to optimize the deal for you.  Surprising to many sellers is that “finding or identifying the buyer” is not on the top of the list.  It is important, and there should be solid process for understanding the logical buyer groups and who the key players are in each; however, actually contacting and get to the buyers is much easier in today’s environment than you might expect.  What is not so easy, is getting through their filter as a viable acquisition target ….in our view, this is why credibility of the seller ranked higher.

hrp-survey-value-081314

Two additional areas of value add are worth noting.  First, preparation for the sale process is so critical and relates directly to credibility.  A key concept above all is elimination of surprises to the buyer.  Surprises Kill Deals!  It is better to spend the time, understand the issues and opportunities specific to your company, and proactively prepare and address them at the right time in the process.  The second and last area of value add in this post deals with communication and negotiations. Private equity and strategics are the two main groups of buyers.  In both cases, management needs to preserve and build their relationship with the buyer as the process gains traction.  Invariably there will be tough issues to be communicated and tackled.  The M&A advisor should be able to run interference for management on the difficult and contentious issues, allowing the seller to preserve their goodwill in the relationship. Having a third party push on these deal points also gives the seller a fallback if the advisor pushes too hard.  After all, you can always fire the deal team …you can’t fire yourself as the seller.  So what you say is hard to retract.

I realize that this is self-serving, but we found in the comments, consistent feedback from experienced sellers indicating that they use a third part to facilitate their transactions.