Business owners seeking to boost the value of their business for a potential sale often take actions that do more harm than good, says UHY Corporate Finance Director Jeremy Falendysz.
“Some business owners will say, ‘Hey, I can just grow my revenue by 20 percent and then sell off of that,’” Falendysz says. “But you can destroy value if you’re taking on business at a lower margin. A different take would be someone in the manufacturing space who chooses to buy this million-dollar piece of equipment for the business. If you write a check as a business owner for a million dollars and then you go to sell, you may not get full value for that purchase.”
Falendysz has 15 years of investment banking experience, having completed more than 60 corporate finance transactions and representing more than $60 billion in total transaction value. When it comes to selling, he says business owners need to think about the reasons why they are going to market and the advantages that making a deal could provide the business.
“My recommendation in most of those scenarios is to bring on a partner and articulate what the capital expenditures will look like over the next several years, including that piece of equipment, and have someone else write the check for it,” Falendysz says.
In this Dealmakers feature, we spoke to Falendysz about selling strategy and the importance of time in maximizing the value of your sale.
Lens of a buyer
Most business owners put a high priority on building revenue and cash flow and the ability to pay themselves a dividend or a distribution. The challenge when they go to sell their company is they’ve had that singular focus on their business, and they don’t see things through the lens of a buyer, Falendysz says.
“There are all kinds of things you can do to add a tremendous amount of value to your business in a sale,” Falendysz says. “But you can only do so much when you’re looking to sell the business tomorrow. So if you’ve got three to five years, you can really focus in on margins and efficiency.”
When Falendysz prepares to go to market with a business, he’ll often hear business owners say something like, “I can enhance margins 5 percent at the snap of my finger. I could go out and do these very simple things.”
“That’s hard for me to hear because I know the buyer is not going to give us credit for any of that in their value, even though I believe the business owner,” Falendysz says. “I like to get involved early so we can do all those easy things and have it be proven out in the numbers for a year or two. Then we will get value for it. I look at a true sale timeline as a five- to 10-year process, with the sale transaction itself being about six to nine months. There’s three to five years of things you can do to build value before a sale.”
Once the sale is complete, owners should expect to have some kind of continued attachment to the company.
“If you want to be completely done and retired and doing other things, you really want to evaluate a liquidity event sooner rather than later,” he says. “Because if you want to walk away from the business right after a sale, usually, depending on who the buyer is, the value of your company is negatively impacted. A lot of buyers are going to say, ‘I’d like you to stick around for two or three years.’”
Expanding the buyer universe
Another common misstep is when sellers come to Falendysz with an ideal buyer already in mind.
“A lot of business owners come to us and say, ‘Look, I know who the buyer is going to be. It’s this company, and we don’t want to go out to a bunch of different groups for confidentiality reasons,’” Falendysz says. “I usually am able to educate a business owner on the merits of going out to a broader group, even if that means 10 to 15 rather than one. So there’s a lot of benefit in expanding the buyer universe.”
The premise is simple. If you reach out to a wider pool of suitors, you open the door to more offers and perhaps even some level of competition.
“Someone may have an angle that allows them to pay a higher value for your business,” Falendysz says. “Or they may have a plan for the company that better aligns with you in terms of legacy and otherwise.”
When you have good representation in your sales effort, you can take steps to set up a process that protects your confidentiality.
“Yes, you’re going to have to share some information about your business, but we’re staging the disclosure of that information,” he says. “We’re limiting it to later in the process. We’re giving out more information to a smaller group who has already proven an ability to buy the company.”