We receive calls and emails from individuals, companies, and investors looking for lower middle market businesses almost on a daily basis. A typical kind of request would go like this:
"We are a [blank] and are looking for a company or companies to acquire. Our basis for interest is companies with $5-$25 million in revenue, and a minimum of $1 million in EBITDA with a history of profitability. This should be a company where the owner is ready to retire and has no successor in place. The industries in which we prefer to work are..."
That is the headline. You would think that with this kind of activity going on that two things would happen:
- Companies that fit this profile would all sell—quickly—and at high multiples; and
- Many business owners with companies that fit this profile would be rushing to put their businesses on the market.
But the reality is quite different.
It is true that there are a lot of companies looking for businesses within this space. However, it is also true that many—if not most—will quickly turn away from the majority of businesses that are put before them that theoretically fit their parameters. It is also true that a significant number of businesses that go to market within these parameters will not sell.
In his October 23, 2013 submission to the United States House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises on behalf of the proposed changes to M&A regulations in the United States, Michael Ertel, Managing Director Legacy M&A Advisers, said, in part:
"For most business owners, the sale of their business is one of the largest personal financial transactions of their lives, but something many will likely do only once… While business owners may be experts at managing and growing their own businesses, they generally have little or no experience in preparing their business for sale; identifying and screening prospective buyers; assembling, packaging, and presenting information relevant to prospective buyers; valuing their business, its assets, and its income streams; assessing the pros, cons, and quality of purchase offers; structuring the transaction; managing the pre-purchase due diligence process; guiding the transaction through unexpected operational and human resource obstacles; preparing for the transition of ownership and management; and completing the transaction."
It is a constant source of amazement to me that there is a huge pool of what should be potential sellers available and a huge pool of what should be potential buyers, and yet buyers express frustration at the difficulty in finding good companies, and sellers overwhelmingly avoid accessing a huge pool of buyers.
The 5 Misconceptions that Feed the Gap Between Buyers and Sellers
The major gap that we see today flows from a relatively short series of missed assumptions on the part of business owners and their traditional advisers. The 5 key missed assumptions include:
Misconception #1 — The timeline for selling a business is misunderstood
This timeline is misunderstood by many, if not most, business owners and their operating advisers. This leads to expectations by business owners that will not be met and, in some cases, results in the dissolution of the business. It is difficult for many business owners to think about the selling process in terms of years—but that is, or can be, the reality.
Misconception #2 — There is a view that the "right person will knock on the door"
Often, this is assumed to be a direct competitor who will sweep the current owner off their feet. While this occasionally happens, it is also true that if the time to sell does not align with competitors' desire to grow or acquire, there is no fit—period. The value in a sale to a direct local competitor is often much lower than it would be to other parties... but that is another discussion.
Misconception #3 — The value of the business is grossly misunderstood
Businesses will sell at well below market and at fair market value, but will not sell for a higher price that is not representative of the business being sold. A statement of "I need" by the seller doesn't mean anything to a buyer, unless it is aligned with what the buyer needs! Businesses often are sold at a discount because the owners either don’t know better or need to sell now. Businesses that are put on the market at well-above-market prices feed the urban myth that "my business can’t sell—it only has value to me."
Misconception #4 — I can sell it myself
"Not only can I sell it myself, but my operating advisers are all the help I need." Even if you and your advisers are general practitioners, you wouldn’t perform heart surgery on yourself, would you?
Misconception #5 — The operating company has no value, beyond its asset liquidation value
There is a strange view within companies and their operating advisers that the operating company has no value, beyond its asset breakup value, and therefore putting it on the market would not be useful endeavor.
What We Ultimately Have Learned Is...
While it is true that there are many parties looking to find businesses, it is also true that preparation, presentation, marketing and negotiations are all key factors in the success both of selling the business and of selling a business for the maximum value it can attract.
For those business owners who operate smaller businesses, with less than $1 million in EBITDA, have no fear. We receive the same calls each day from parties wanting to purchase those businesses as well. The approach to the market may vary depending upon the business and the size, but the fundamentals hold.
For those business owners waiting on the sidelines either for a material change in their business characteristics prior to a sale, or for their investment portfolios to return to former levels, or for the "right buyer" to walk through the door, there are a few fundamental truths to consider:
- If the business has not materially changed over the last 2-4 years, what makes you think it will change over the next 2-4 years? What is the catalyst for this change?
- If you postponed selling the business due to a recession, you are now that much older.
- The bulk of baby boomers are entering retirement years. At some point in the not-too-distant future, there will be a significant number of businesses that need to sell—or close. At this point, only very good very good or exceptional businesses may attract real buyers, a valuation premium or both.
What Should You Do?
The last point above in particular is not fearmongering, but rather a call to action for small business owners. If you are contemplating transitioning into retirement, and one of these transition steps entails the sale of your business, now is as good a time as any to start preparing. You need to start thinking about how you will prepare emotionally, the steps to take now (not when you're ready to sell) to maximize the value of your business and also which adviser you can count on to steward the sales process to guarantee you are not only able to sell your business, but also receive the highest possible purchase price for your life's work.