A lot of preparation is needed for a business owner to reach their goals when selling a business. Speaking at the Philadelphia Smart Business Dealmakers Conference, Guardian Capital Partners Managing Partner Peter Haabestad says ahead of going to market, sellers should be thinking about their last 24-36-month financials as well as the next one- to three-year financial outlook, ensuring that those numbers are as strong as possible. And when it comes time to present those numbers to potential buyers, he says sellers need to be precise.
"Be careful with your forward projections," Haabestad says. "If you are thinking about being a target to be acquired, throw out numbers that you know that you can hit because there's nothing worse in your valuation to stall momentum and give the buying party an upper hand than when you stumble, you miss a number and then you're floundering try to figure out and explain to someone why you missed your number by 20 percent for the month of August."
His advice is to be conservative when projecting the upside as surprises to the upside are received much better than even the smallest change to the downside.
"And as the acquirer, we're looking for soft things that weren't disclosed in the Q of E," he says. "People look very closely at the business, and I think that's our job is to look for weaknesses to have another discussion about the value that we're talking about in the business once we get you under exclusivity. That happens out there with any acquirer because it's money and it matters. You always want to hit your numbers when you're the target. When you're the buyer, you're looking for a weakness as you might be able to push it into a seller's note, some reduction in price or change in terms that will be more beneficial to buyer."
Companies that are large enough should consider engaging an investment bank ahead of a sale, interviewing a few to find the right fit. They'll identify the universe or buyers and will be open about what they like or don't like about the business that's looking to sell. In many cases, that will lead to running an auction and having an indication of interest deadline. Then there's more diligence and then a letter of intent deadline. It's also practical to have a good adviser and M&A attorney watching over the process to help maximize value. Sellers will also want to think about whether they want to roll over additional equity to stay in the deal and get to a second bite of the apple, or just cash out and be done.
To the last point, Haabestad where he's had a lot of success in his firm is by retaining the owner because so much of the tribal knowledge — how that business really runs, the customers and so forth — is in the owner.
"And so we would say, Why don't you let us acquire your business," he says. "Public markets are really tough. Do you really want to invest in the market today? Who knows whether it's going up or down? Why don't you invest in what you know, rollover equity capital alongside of us as the sponsor and the portfolio company, and then together we're going to keep you involved in the business — potentially, assuming you want that management team involved in the business. We're going to pull really hard on the oars and two to three years later we're going to sell this thing at $300 million in revenue and $45 million of EBITDA — multiples tend to go up, EBITDA multiples, purchase price multiples tend to go up. The larger the company the less risky it is. And it's a great way to not have to put as much capital on the table"
However, keeping all that tribal knowledge in the company is great only if all the players get along.
"And that's a big if," he says. "You need to spend time with them. Make sure it's a fit. But we've had a ton of success minimizing our cash outlay while getting them on board and ultimately selling the business. And you can create a ton of value, but you've got to make sure you want to be in that sandbox with that target that you're working with."