Tag Archives: transaction readiness

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.

 

Optimizing for M&A and Growth

Buddy and I recently wrote a chapter in the 14th volume of Advances in Mergers & Acquisitions, published last month.  The book (and chapter) are a bit academic, but there’s some good content and ideas that might be of value as you think about M&A.

We find that private, middle-market companies that choose to implement mergers, acquisitions or growth strategies in today’s environment often face challenges when engaging with the capital markets, particularly when bridging the valuation gap between market values and owner values[1]. The chapter we wrote applies traditional corporate finance theory to the real-world dynamics of private, middle-market companies and outlines practical steps to shrink the value gap and increase transaction readiness.

For private, middle-market companies – those companies with annual revenues from $5 million to $1 billion – value creation is principally based on long-term, expected future cash flow. In practice, the activities that lead to value creation are nearly the same when preparing for a financing, a wave of growth or an M&A transaction. Owners of private companies tend to manage the business to minimize taxes and maximize the current cash benefit to the shareholders. While this approach makes sense in the short-term, it often over-weights decisions and strategies for immediate impact at the expense of what outside investors or lenders would consider long-term value creation. Many times, improving the realizable value of a company means shifting its approach and stance from one that is reactive to one that is proactive. Taking a proactive stance means, among other things, a company will tackle tough issues and instill disciplines like those on which an institutional investor would insist. A useful question for management to ask in readying their company for change is “What would a private equity buyer do to improve my business?” The answer to that question will likely provide keen insights and areas of focus, and is what we hope to provide in this chapter.

Essential to increasing the value of a company is increasing the amount and certainty of its cash flow while reducing the risk of achieving that cash flow. Optimizing the business should result in both a shift in the market value of the company towards the upper-end of valuation benchmarks and increase its alternatives (more buyers, cheaper capital, etc.) when engaging with the capital markets. Our discussion here hinges on those value levers most critical to the optimization of private, middle-market companies from the perspective of those in the capital markets, including institutional investors, lenders and buyers.

Keep in mind that strategic decisions need to be thought of and developed by aligning the company’s long-term growth strategy with the right leadership team, with the appropriate entity and organizational structure supported by scalable systems, and capitalized by the proper funding sources. Management must also consider changes to a company relative to its stage and life cycle within its specific market.

Calculating the value of a stream of cash flow can be viewed in mathematical terms by this simplified formula[2].

calc

According to this equation, we can increase value by increasing the absolute value of the cash flow, reducing the cost of capital or increasing the rate of growth of the cash flow (or any combination of the three). Reducing the cost of capital is, in part, directly related to the risk of achieving that cash flow. To frame the discussion and apply some basic corporate finance concepts, we will look at value creation and optimization of a private, middle-market company as an exercise with three distinct types of value levers: (i) pursuit of strategies that increase the return on invested capital, (ii) pursuit of strategies that reduce the risk of investment in the company, and (iii) pursuit of tactics and strategies that ease the transfer and reduce the company specific risk of transitioning a business to new owners (whether transferred in part or in whole).

Certain businesses don’t generate positive cash flow in the early phase of their lifecycle but do create significant inherent value. From a buyer or investor perspective, these companies may have captured (or are capturing) a significant customer base or developing a technology that will eventually lead to relatively large and material cash flows. These core concepts still apply.

[1] Owner value is the value of the business interest to the current owner, considering
the entire stream of value including both financial and personal considerations that
accrue to his/her total economic benefit. The risk implied by owners to this value
stream is usually less than what the market would otherwise impute, which exacerbates
the valuation gap.

[2]There are variations of this formula that account for fast growth businesses, and
for those with negative short-term cash flow and positive long-term cash flow.