When selling a business, everything starts with the fundamentals — preparing historical financials, readying a data room, etc. But beyond fundamental preparation is preparing a business to get the maximum valuation.
Fairmount Partners Managing Director Charles M. Robins says it takes a year or more of preparation to put a company in a position to maximize its valuation.
“And what I'm talking about is there is a typical business operator — a VC-backed company maybe is getting guidance and pressure along the way — but a typical owner/operator-type business that is focused on its operations. That business is undercapitalized relative to what it could do,” Robins says. “It is psychically stretched. It lacks infrastructure. Almost by definition, a lower-middle-market or a middle-market company, especially a growth company, is going to have all these issues.”
Robins spoke at last year’s Dealmakers conference and offered his take on how to position a company to get maximum valuation in the market.
Framing perspective
Preparing to go to market, Robins says, is analogous to writing a book. If the seller picks the wrong partner to take the company to market, that partner will write a book. That book will describe the business as it is today, and the seller will get a valuation that is half of what it could have gotten, or will get no interest in the market at all.
To get the alternative — a presentation that leads to a successful sale at maximum valuation — an owner has to step out of the business, something that’s admittedly difficult for owner/operators to do, and start asking questions about what the business could look like if it were to restart with all of its current assets.
“Where could we drive it over three to five years if we were unconstrained reasonably by capital or infrastructure or people? Because that is what your buyer is going to be looking at,” Robins says. “They're going to be looking at synergies. They’re going to negotiate based on the comparables.”
He says owners want to shift the dialogue to synergies.
“Often when you do that, it opens up a whole new world and, I could tell you, working with dozens of entrepreneurs, the first effect of having these dialogues is a deep sigh and a big grin because nobody has given themselves permission think this way for years at a time,” he says.
In this exercise, ask how you can double or triple your business in three years. By starting to answer these questions, an owner can change the dialogue with potential buyers because, as Robins says, these things are proxies for negotiations with buyers who have their own infrastructure and ability to make things happen.
Homework
As buyers look at an opportunity, some of what they consider includes how the company is positioned, the size of the company’s moat that protects its products or services from competition, and its bottom-up market size. Sellers that can show prospective buyers that they've got a unique market position, have identified opportunities and have a large, unique market opportunity that the company is prepared to address can drive up value. But the only way to do that is through preparation.
“By doing the homework upfront, doing the detail work upfront and planning the business well, it dramatically changes the valuation of what people are going to pay for the business,” Robins says. “And it changes how you operate your business, as well.”
Recap situation
Owners who have built a strong enough management team and are not considered the key person in the organization can often simply exit the business. More often than not, however, buyers are going to want the key person who built the company to continue to be involved. Robins says that there are instances in which an owner can negotiate relationships where their involvement can be more consultative and less operational.
There are also options to sell the business partially and remain involved. If the business is healthy, meaning the company is growing profitably, then private equity groups will often be very eager to step in and do a majority recap, buy 75 percent business and allowing the original entrepreneur to roll the money over. However, it’s unlikely that a private equity group will do this if it can't see a way to make 25 to 35 percent compounded return.
“In cases like that, you can continue as the CEO of if you're inclined to do that and you’re operationally oriented,” Robins says. “Or a lot of these private equity groups would be very open to bringing others in to manage things on a companionable basis.”
