Positioning a Business for a Merger or Acquisition (Part 1)
Be sure to prepare your business and yourself before you go to market.
Selling a business, in whole or in part, requires considerable strategic planning and preparation. Whether you are the CEO of a corporation looking for a new financial partner for a merger or acquisition, or the sole owner of a small business you’ve worked years to build and hope to find someone to carry on your life's work, successfully closing a deal and putting together an optimal sale will depend on the steps you take to prepare for this unique event in the life of the business.
Validate Your Value Proposition
An M&A event is unique because it is outside the day-to-day operation of the business and will require additional effort and, potentially, the addition of dedicated resources to be performed effectively. You will need to plan for this additional effort. Whether you are looking for someone to acquire the entire business or just trying to bring on a financial partner that will leave you in charge of operations, you need to position the business to fully demonstrate its value proposition.
Your business should be positioned well ahead of the anticipated deal closing date. Ideally, planning will start at least a year ahead of your intended closing (and two years is not unreasonable) to capture and optimize your return. Of course, you may not be able to delay the closing for that long for many reasons, which will then constrain the activities you are able to take to prepare. The steps you take to position your business, and the extent to which you are constrained from taking those steps, will affect the outcome of the deal.
There is a school of thought that you should always operate a business as if it’s for sale. I fully support that approach because it means paying constant attention to the optimization of the business' operating efficiency and paying close attention to its position in the market. This could potentially help limit your positioning activities. In practice, it may not be possible to do because there may be differences in the long-term versus short-term strategic approach you use when planning an exit. The argument is that continuing to emphasize a long-term strategy may enhance the value of the business, but are you ready to make the same capital commitments to a business when you’re looking for a near term exit as one you intend to operate long term? You will very likely be trading near-term financial performance against long-term capital improvements. Unless there is a quantifiable value proposition improvement, it may not make sense to invest in long-term improvements. Strategic planning that includes the detailed development and maintenance of a roadmap with key decision points for the business, including both near-term and long-term goals, is an important tool in making these decisions.
Set Reasonable Expectations
There are many reasons for seeking an M&A event, but some can best be described as "getting out from under." If you’re holding a fire sale and in a rush to exit, you probably won't achieve the same level of return as a business poised to move to its next stage of growth. It’s important that you have a clear understanding of your goals and reasonable expectations of the businesses potential. More importantly, you have to be prepared to take the necessary steps and provide the needed resources to accomplish your goals. If you are holding a fire sale, though, don’t be discouraged. Keep in mind that there are investors who look for fire sales.
Closing a good deal with the right investor takes planning and forethought. You may be an executive who regularly closes deals and moves from one business to another, or this may be the one time in life you make a deal to sell a business you’ve built from the ground up. You’re preparing to enter a high stakes game that you may just be beginning to learn the rules to... and there are people who play the game all the time.
Given the stakes, don’t be surprised if you find there are people who make up their own rules. Selling a business, whether you sell businesses frequently or this is a once-in-a-lifetime event, and whether you are looking for a strategic buyer or a financial investor, always includes an element of risk. This is a case of "let the seller beware." Given the stakes, it makes sense to seek professional help.
This is Not Like Selling Your Home
Some people mistakenly believe positioning a business is like staging a house. Staging a vacant house, by minimally furnishing it, is a marketing technique that allows prospective real estate buyers to envision themselves living in the home. Since your business is operating and not "vacant," a staging approach won’t work. An investor wants to see products moving off the shelves and services being provided to understand how the business operates and you’ll want the investor to see the business in operation to validate its value proposition.
For other people, positioning a business is about hiding the truth or somehow misleading potential investors about the shortcomings of the business. This is the "let the buyer beware" scenario. Hiding or falsifying information about the business is unethical and a fool's game that will be discovered in an effective due diligence and could end in litigation. Neither staging nor intentionally misleading is a good reason to position a business. Even problem businesses can be sold honestly to an investor looking for an opportunity to restore the business.
Even when you find yourself positioning a business for an asset sale, you will have work to do. The nature of business is that things can and do go wrong. Keeping a business at its peak operating efficiency is difficult. Markets change, major clients leave for reasons outside the business' control, and even nature disrupts the business' operations. Smart investors know this and understand that all businesses have warts somewhere. Investors will try to find the warts during their due diligence to help negotiate a better price. Be prepared to take the high road in negotiations by explaining, “We tried something. It didn’t work and we moved on.” Your goal is to be able to negotiate from a position of strength. You can’t do this if you ignored an issue or tried to hide it. You should have already factored any issues in your valuation. “Yes, we introduced a loss leader product to see if we could sell into that market, but withdrew when it became clear our price wasn’t supported.” “It wasn’t part of our normal operations.” “We included the expense of our experiment as an adjustment when we calculate the EBITDA for the business.”
It's More Like Selling Your Car
Actually, positioning a business is more like selling a car than selling a house. It’s hard to keep the car clean, waxed and polished when you're driving around town, but when you know a potential buyer is coming by to see it, you will want to wash it and vacuum the floor mats. If you’ve been performing regular maintenance on the car you won’t need to take the time to change the oil or do any of the other things that should be done as part of the normal maintenance.
Routine maintenance should be done on a periodic schedule... and you should have those records to show a buyer. A car buyer may look at the dipstick to see that the car has clean oil, but showing the receipts for the regularly scheduled maintenance you've performed adds value. Showing the records for the normal operation of your business is also a primary way to demonstrate value. You want to demonstrate that the business has been maintained. If the car’s oil is dirty or the level is low, the buyer is likely to try to use this to negotiate a lower price. The same is true for a business. If your business uses specialized equipment, showing maintenance records for that equipment or a regular upgrade of your software says a lot about the value of your business.
If the business is operating well but starting to show its age, you may want to improve its value by updating the software to the latest version or installing the latest machine tools. To continue the car analogy, you might improve the curb appeal of the car by adding a new set of tires to get more value.
Effective positioning means you are prepared to make the tradeoff between the expenses of an upgrade against your sale price and keep a potential investor from negotiating the price down by saying it will cost them to do the upgrades. Positioning needs to be performed with your anticipated negotiating strategy in mind well before you get to the deal table.
Prepare to be Prepared
It takes committed resources to correctly position a business. Collecting your records in preparation for due diligence, recasting your financials to identify valid financial adjustments, identifying potential strategic partners, reviewing the legal structure and ownership of the business, writing a business plan that will serve as a marketing brochure for the business and on, and on... If your business is going to operate at its most efficient, your staff will be busy and may not be available for these additional duties, and you will not want to expose your exit strategy to your staff. You need to consider bringing on a team that is committed to the success of the sale.
Read more in part two of this series where we explore some of the specific steps you will need to perform in order to effectively position your business and improve its value proposition.