September 13, 2021
For many entrepreneurs selling their company is the end goal. An exit represents the potential to capture the value tied up in the company and by doing so generate significant economic returns of the entrepreneurs. However, the process is not as straight forward as one would think. Here are six hard truths to consider when selling your company:
I can’t tell you how many times our clients have mentioned “all cash deals” that their business owner colleagues received when they sold their business. The sad reality of this is that it generally means the buyer would have paid more and/or made further concessions to get the deal done but never needed to as the seller was content with the cash portion of the deal. Typically, all cash M&A deals are not a sign of a seller who maximized the value for their business.
Assuming the seller wants to maximize the value of their company; it is realistic to expect some level of vendor financing (VTB’s) and performance-based elements to the transaction (earn-outs). The more the transaction value increases, the more likely the buyer will require some assurance that the business will perform in the future and hence the need for these types of instruments to be included in the deal structure.
Yes, some deals get completed quickly, however due diligence and transaction financing can take time and will likely take 90 to 120 days before a transaction is completed. The more complex the business and/or the weaker the internal operating systems the longer due diligence process will take.
Getting hung up on EBITDA or MVIC multiples is a quick way to lose sight of the actual desired outcome of the transaction itself. Focus more so on the desired outcome for the transaction rather than a specific multiple. More to this point, we’ve seen many deals where the seller is so insistent on a walking away with a certain EBITDA multiple that they are willing to fundamentally alter the structure of transaction to the point where it is riskier for seller and in some cases less likely to be achieved.
Unlike other assets (think of a commercial building, house or a car), which have verifiable asset values; a business is only worth what it is worth to a buyer. One buyer may observe a value significantly higher from buying the same business then another (think synergies, customer acquisition, can the company run itself and etc.) which invariably yields a much better outcome for the seller. For this reason it is especially important to run a competitive process (see point 6.)
If you were selling your house, you would likely want multiple offers right? Selling your company is no different. The goal of a competitive process is to generate multiple interested buyers and by doing so improve the probability of receiving a higher transaction value for your business.
To close, selling a business represents a huge opportunity but comes with subset of challenges and considerations. If you are considering selling and would like to have world class M&A expertise in your corner; please contact RWT Growth today as we are eager to help maximize your transaction value.