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Professional management is critical to getting your house in order, whether you’re raising capital or preparing your company for sale.

“When you think about your house, what does the realtor say to you every time they tell you the value of your house: location, location, location,” says Craig Heryford, partner at Gordon & Rees Scully Mansukhani and chair of the firm’s Business Transactions Practice Group. “When you look at a middle-market business, it is management, management, management. It doesn’t start or end anywhere else.”

It’s not uncommon for family-owned businesses to not know how to manage cash very well, he says. They focus on revenue growth, without really understanding the strain it puts on working capital — especially in an industry where they’re subject to raw material prices.

They also might have trouble separating their sense of personal financial risk from business financial risk, because when you’re thinking of selling a middle-market business, size does matter, says Heryford, who concentrates on M&A, VC and corporate finance matters, as well as representing mature and emerging businesses.

“If you hit various milestones, you’re going to get more turns of EBIDTA,” he says.

Heryford shared his thoughts on how challenges like these translate directly to value at the 2019 ASPIRE conference earlier this year.

What’s your advice for business owners about professionalizing their business before a sale?

What’s really important is to remove as many roadblocks as you possibly can for a buyer. You have to assume that the buyer is very professional and you have to assume that the buyer has a multitude of choices.

If there are questions about your financials, if there’s questions about your customer relationships and whether you have contracts or don’t have contracts, whether your files are in decent order, whether you look like a nicely organized business and whether you act like a nicely organized business, is really important.

The best deals I find are the ones where I didn’t get a phone call, ‘Hey, I got an LOI. Can you come in here and help me figure out here what we do with negotiating this deal?’ You want a long-term relationship from recapitalization to hiring management to having regularly scheduled board meetings and having trusted advisers provide strategic advice.

How can an investment banker help?

You don’t have to bring in an investment banker just to sell the business. You can bring in a financial adviser to advise the business on what the value of business is and how to maximize that value. It gives a roadmap.

That process is measured in years, not in months. So that when you do actually get to the point where you want to put a book together and you want to sell the business, you’ve already got your shit together and you look good and you feel good and the business is very, very presentable.

To me, I think that planning in advance is critically important.

What’s a scenario where a buyer might walk away because the seller didn’t plan well enough?

The worst thing you can have is to try to sell a business and have your internal financials and your internal QoE (quality of earnings) just shot to smithereens by whoever the buyer brings in — to get a diligence report back from the buyer’s lawyers with 28 pages of stuff that’s missing from your data room. That is just pure deterioration of value.

I’ve seen deals walked away, more often than not, based on the QoE coming back that is very different than what the buyer presented.

How important is it to lock in the key management team in advance?

The most successful businesses are ones where ownership aligns management’s behavior to match theirs.

So, that’s creating, change-in-control bonus plans, stock option plans, restricted stock plans, some form of equity-based compensation that aligns ownership with management — that keeps people incented to stay on the team and to drive value. The really successful businesses understand that’s not a time to get greedy; that’s a time actually to grow the pie much, much bigger.