“It’s all about leverage,” veteran dealmaker Michael E. Gibbons says. “Once you give exclusivity to one buyer, generally the price only goes down.”
As the founder of Brown Gibbons Lang & Co., Mike may be the most experienced middle-market investment banker in the country.
We sat down with Gibbons to talk about what CEOs need to know right now about selling their businesses. What follows is a transcript of the above video, edited for readability.
Special note: We got so many great insights from Mike, that we created two bonus videos on selling in a global market and maximizing your real estate when selling your company.
Selling a business is a full-time job
Selling a business is really a full-time job if you’re going to do it the right way. And if you’re going to do it the right way, you really need to do preparation way ahead of time. You need to have your accounting systems in place. You need to have the proper corporate structure in place. You need a succession plan and likely individuals to take over if you're going to leave, if you’re going to exit the business. These things have to be thought about before you go into the marketplace.
In one transaction, you're going to realize the wealth that's been created as long as you’ve owned that business. It's a very important time. The most important six months in the history of that business is that six-month period while you're selling that business.
It's important to emphasize that it's a lot of work if you want to get an optimal value for your business and you need somebody else to do it — because you can’t take your eye off the ball.
If you’ve not met your projections, usually, you know, the price is going to go down. And you want to get that information out as soon as possible because as bids are being formulated, they’re basing it on those projections; you've got to hit them. So as I said, the most important six months in the history of that company, as far as — if you considered the reason for that company to exist is to create wealth for the people that founded it and ran it and owned it. The most important six months is during that sale process.
It’s all about leverage
It's all about leverage. Once you come — once you give exclusivity to one buyer, generally the price only goes down. And if you have a good, you know, professionally experienced investment banker, that shouldn't happen.
We'll keep buyers, one or two buyers, even three buyers, we’ll move along with one and we’ll keep a couple of them warm saying, hey, we think we have a buyer, but we'd like you to stay involved. Often times we’ll convince our clients to actually pay for the due diligence of those secondary buyers because it's worth keeping them there.
Second bite of the apple
The M&A market has evolved over the last 20 years. And when I started, the great bulk of companies were sold in their entirety at the close. Well, a lot of that has changed. When private equity particularly, and they are the ones right now that are driving the prices, when they buy a company.
They won't always buy 100 percent of the company. They’ll want existing management and ownership to remain with a piece of ownership so that there's an alignment of interests. So you may get a very nice price for your business. Usually, it's more than you expected. But you may end up holding 20 percent or 30 percent or 10 percent.
When you do own that 20 percent, the idea is to grow that business over a five-year period and then sell that business again. I can say numerous examples where they may only own 20 percent and the profits they’ll make on that second sale may exceed the profits when they sold 80. It's pretty incredible, but it happens. We call it the second bite at the apple, and we've had third bites at the apple, where that manager will continue or that owner — the individual that was originally the owner stays with that company through two and three private equity shops of ownership. And every time they sell, they end up profiting from that.