With each product you ship, each delivery promise you make, each piece of advice you offer or service provide, it is the results that matter. When you hire a new employee or when you trust a key person to handle an important client, results matter. Most of all, when you explore what is likely the most emotional business decision you will contemplate since you made the leap to becoming an entrepreneur — the sale of your business — results matter. This guide will focus on facilitating business owners looking to polish their business so it presents well, protect their company so it will have value to others and be better able to realize the profits waiting within.
In 2005, Beacon Equity Advisors worked with a distribution business in the Boston area, a wonderful company founded by a husband and wife who immigrated to the United States following World War II. They started small and grew the company into a thriving enterprise with tens of millions in revenues, thousands of customers and handling more than 6,000 SKUs. They were fiercely proud of their business and reluctant to give it up, even as their health declined. The business was a part of how they identified themselves. The couple had two children, but neither was involved in the business as both had gone into medicine and neither lived locally. Thus, after much soul searching, when the couple decided it was time to retire, a sale was the only option.
Given all of the energy and effort this couple invested in the business over four decades, leaving it would not be emotionally easy. Further, given their personal touch was imbedded into each aspect of operations, suggesting, even delicately, that their business was not impeccable, was not a concept easy for them to hear.
The previous decade leading up to the sale was one of significant computerization and automation. This evolution was true even among small businesses and this particular business had not evolved or adapted with the speed of their contemporaries. They had a computer, a PC running DOS, with 5¼” floppy drives and a monochrome monitor. They tracked inventory using Lotus 123 spreadsheets. Recall that Windows 95 was released ten years earlier and Excel had replaced Lotus as the spreadsheet leader. Many desktop computers in 2005 were using dual monitors with larger color screens, smaller pixels and higher resolutions. Most inventory centric businesses at the time—even smaller ones—were tracking products in the warehouse using hand-held bar code scanners that updated the inventory software automatically. Our client required staff person to manually process data daily others were completing automatically on multi-tabbed Excel spreadsheets. They were not just behind the times; they were way behind their competitors, whose customers were beginning to place orders online. Amazon was already 11 years old, yet this company did not even have a website. Continuing to operate as they did in the 1990s was impacting sales, inventory turns and profitability. This situation had a tremendous impact on value. Buyers looked at the effort it would take to bring this company into the 21st century, and made offers that reflected a deep discount.
We calculated the owners would have received offers $5,000,000 higher if they had sold even five years earlier. In 2000, their infrastructure and systems were still relevant; they had not yet lost customers to more innovative competitors with easier reordering processes. Frequently, their pricing was higher compared to competitors who had cut operating expenses, kept prices low and made up for lower margins with higher sales.
Choosing when to sell is a very personal decision that rests entirely with the owners of every business. At the same time, if these owners knew how much it was costing them every day to fall further behind their competition, would they make the same choice? Perhaps they would have sold earlier, or they might have chosen to expend capital to improve the company and move the business forward with emerging technology. The choice on timing was theirs alone. Soon it will be yours as well.
This book will make you aware of some of the factors that affected the price and terms buyers were willing to offer for this business and others Beacon Equity Advisors has worked with over our thirty years in the marketplace. It is my hope that after reading these stories, you will come away with the knowledge and tools to make the best decisions for you, your family and your personal net worth.
Value is not just a mathematical formula applied equally to all businesses or even the same business all the time. Value fluctuates based on operations, employees and senior management, the economy, technological changes, competition and the mood of the investing marketplace. Choosing when to sell your business is a very personal decision for the owner and their family. It is often predicated on when the owner personally feels the time is right. However, owners should be aware that premium values are realized when the time is right for the business, separate and distinct from the owner.
Beacon Equity Advisors employs four tools to bring a deal to a successful culmination:
- A Shield to ward off the unworthy and unacceptable offers from experienced buyers searching for unwary owners who do not know how to defend their value in the marketplace.
- A Pen to tell your story successfully and ensure a buyer fully appreciates the benefits and opportunity your business represents.
- A Light to illuminate your journey with knowledge and data from other deals to learn what a great deal looks like.
- A Map to guide you, as missteps in this arena can be costly in price, terms, timing, exposure and commitments.
Most of this book focuses on The Pen, the story you tell and how to present the business more clearly so a buyer appreciates not only where the business has come from, but where the company sees the future. Investors can experience the hum of production and feel the heartbeat of operations, but to truly appreciate value, they need to hear your story: a well-choreographed narrative of evolution and innovation, change and adaptation, struggle and success, and your vision for how you will approach and dominate the future. It's the well-told story that will sell your business and enhance its value. The pages that follow will enable that story to be told better, stronger and more completely so investors will better appreciate what you have created.
The Road Ahead
Let me set the stage by making this analogy: if you were going to sell your house, you would likely paint the bedrooms, clean out the basement, replace worn carpet in the family room and refresh the mulch in the front garden. Each of these improvements is designed to present the home in the best light possible, attract premium offers and/or sell the house more quickly before it becomes “stale” on the market. They stage the house to present in the image of the home they believe the buyer is looking to purchase The homeowner wants to emphasize the house’s petals and downplay the potential thorns of a roof, while fine now, will likely need to be replaced in five years. Businesses can also be prepared for sale by enhancing aspects that attract buyers and reducing or downplaying attributes that suggest risk and make a business less attractive.
The strategies and suggestions outlined in these chapters will assist a business owner in preparing their enterprise for sale by looking at the company from the perspective of an impartial, prospective buyer. Inside, we identify aspects of businesses that would be attractive to a potential buyer, spotlight areas where the buyer might have concerns, and begin to quantify how those concerns affect the value a buyer is willing to pay for the acquisition. Ideally, once a business owner thinks like a buyer, they can implement changes in their business or in their presentation to alleviate potential issues, thereby increasing the value of the business.
In Beacon Equity Advisors role of representing owners in the sale of a business, we typically communicate with more than a hundred buyers about each business. For many mid-sized businesses, the right buyer is either a larger competitor with a business acquisition team on salary or a private equity firm, which is basically a group of investors who spend all day, every day, looking for a business to buy. Both of these groups are professional, experienced buyers who have analyzed and considered thousands of businesses, have met with hundreds of business owners and made offers on dozens before they looked at yours, likely including businesses that are your competitors, suppliers and customers.
Most of the time, the business is simply not the right fit for the buyer. The geography is inconvenient; the revenue size does not meet their target objective; the industry focus is not perfect or some similar objection an owner can do little to change. However, during our search for the right buyer, there are usually a dozen or so buyers where the business is a strong fit, and yet they pass on the opportunity anyway. We identify in this book many of the top reasons buyers often mention as a primary reason they chose not to pursue the purchase, or as a justification for offering value significantly lower than expected.
By identifying issues and working to correct them, we can eliminate much of the buyer’s list of objections, remove reasons for an inadequate, low-ball offers and begin negotiations at a higher value.
We have grouped our suggestions into six chapters, each around a central theme. Each area provides a summary of an issue and then shares suggestions to help an owner better align the business with what typical, experienced buyers look for in a business. Not every suggestion will apply to every business, however you may be surprised to see how many of these enhancements apply to your business. If you have questions about any of the topics in this report, feel free to give us a call. We love speaking with business owners and hearing their stories, and perhaps even playing a small role in their success.David A. Humphrey, CPA, CVABeacon Equity Advisors, Inc.781.551.8000Dhumphrey@BeaconEquityAdvisors.com