KeyBank, has seen an increase in the number of unsolicited offers to buy a business. Sellers are often completely unprepared when this happens, and that can negatively affect the price, or blow up a deal entirely.
“In my experience a lot of processes or deals start with an unsolicited offer,” Getty said at the Philadelphia Smart Business Dealmakers Conference. “And that means by definition, in many cases, the seller is working along, running their business, then all of the sudden someone pops out of the woodwork and says, ‘Hey, I’d like to buy your business.’ And they’re completely unprepared for what that looks like. We deal with this on a daily basis.”
When Getty talks to clients who are thinking about exit strategies or transitions or transactions, ideally he’d like them to engage in a pre-due diligence process. That process evaluates the business on a number of factors with the intention of giving them an idea of what it will look like after a sale price is initially negotiated and the due diligence process starts — essentially, what are the hidden warts and issues.
There are 54 value drivers looked at in the pre-due diligence process. But most of the emphasis is on three main areas.
The first area is management. In this category, what’s being examined is whether manager agreements are locked in, particularly around key employees; and if there are retention bonuses. It also explores a company’s intellectual property. He said it’s surprising how many business owners think their IP is locked up, but when scrutinized it’s not as protected as they thought it was, which could blow up the deal or drive down the value significantly.
Operations is another major component. Through the pre-due diligence processes, the effort is in trying to understand whether a buyer can take over a business and integrate it within its existing business or let it run as it is.
“There has to be some way from the buyers perspective that they can see taking this over without the necessity of relying too heavily on the selling owner,” Getty said.
The third area, and the one that’s most often misaligned, is financials. He said he’s surprised how difficult it is, at times, for sellers to pull together the appropriate financials, or to even articulate what’s behind some of the numbers.
Getty said he recommends to companies that don’t have a good financial person to find a good temporary CFO to come in, or hire someone if there’s enough runway, and have them really clean up the financials. It’s also important to get a strong sense of what drives the company’s revenue, the weighted costs of capital, how to articulate sustainable growth rates with some cushion, and how to show, based on true financial metrics, that there’s space for a buyer to enter into.
By putting effort into addressing those areas, Getty said sellers can begin to close value gaps or find value enhancements that can alter deals for the better.