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Successful business owners don’t always make the best business sellers, says Chris McKenna, managing director at investment bank Carleton McKenna.

“When we’re engaged with companies looking to sell, they’ve typically got a list of people who have been contacting them over time who have shown interest,” McKenna says. “It could be a competitor, a customer, a supplier — someone they think is an ideal candidate and the most likely buyer who should pay the most and be the best fit from a strategic industry standpoint. The reality is that most of the time, that’s not the eventual buyer.”

One problem with this approach is that a single-buyer process almost always leads to a transaction that leaves money on the table. The greater concern to McKenna, however, is all the steps that were skipped to get to that point in the process.

“Our view is that the way to maximize value in an exit is by having preparation along the way so when you go through the actual sale process — which is a six-to-nine month process — those prior years have set you up for success,” McKenna says.

Smart Business Dealmakers caught up with McKenna to talk about pre-transaction strategy and how it can lead to a more lucrative exit for the seller.

Alternative viewpoints

The problem for many business owners who are preparing to sell is that they have a hard time getting past their own view of the company they’ve worked so hard to build.

“In some ways, the numbers are the numbers,” McKenna says. “But we see companies with the same dollar amount of earnings have a wide range of multiples paid. We always view one of our key roles as being able to describe what’s going on in the company in a way that explains its history, but also shows where the company is, what its strengths are in the marketplace and how that will translate into the future in terms of future earnings.”

Potential buyers are not impressed that your company has been named three years in a row as the company of the year in your niche, McKenna says.

“What they are really concerned about is the durability and direction of your earnings and your ability to have a team inside the company be able to continue that momentum,” he says. “Being able to describe the narrative of that and ensuring that the numbers bear out that narrative and that story, that’s hard for somebody inside the company working in the business to do. It’s a little bit easier for us as an outsider to come in and describe that. Not because we’re smarter in any way, but having a little bit of a distance helps a lot.”

Untapped potential

An external adviser can dig into your financial reporting, your sales figures, your margins and who and where you’re selling to get a clearer picture of the status of your business.

“Does that information inform the way you go to market?” McKenna says. “When you have someone come in from the outside who can look at your business in a very honest way — the same way a buyer or an investor would — you can address some of those internal things that can make a difference in a buyer’s confidence in paying a high-market multiple.”

There are often pieces of a business that have a higher value for a buyer. If you’re a manufacturer of equipment, maybe you have a spare parts segment that is a component of your business.

“You may have developed a recurring revenue business of preventative service,” McKenna says. “Developing that component of your business will enable a buyer to pay a higher multiple. It might be small to begin with and grow over time. Having it in place, the systems, the documentation, the personnel — a buyer can look at that and say, ‘OK, I can grow that.’ If it’s in place, up and running and something they can leverage, perhaps with another company that they’ve got in their portfolio, then they can see paying at the higher end of a market multiple for a company.” 

Getting higher multiples

Working capital is another aspect of your company that should be addressed leading up to a sale. Interested buyers will look at your working capital over the last 12 months and then want an average of that to be on the balance sheet when they buy the company.

“Cleaning that stuff out ahead of time, managing working capital as aggressively as you can for a period running up to a sale, is always a good thing,” McKenna says. “That makes the required working capital lower when you go to a close. That’s a mechanical planning thing that just takes some effort.”

The more robust the information you have in place and the more defined the strategies are to drive the higher-margin, recurring revenue parts of their business, that’s a big deal for buyers.

“It gives them more confidence that when we get in there, we’ll be able to really figure out how to maximize this,” McKenna says. “They don’t have to come in and start from the ground up. All of that translates to what kind of multiple they are willing to pay.”