When William Wennberg, today the CEO of Tactical Medical Solutions LLC, went through two change of controls as president of Nobles Worldwide, the last of which was to a public company sale. He says when people become too focused on trying to get the best price for the company, they can lose sight of what value actually is.
“It's important that you try to create value early, and when you do that, usually through an investment — it might be an investment in capital equipment and most likely it's an investment in people; getting the right management team in place — that's very big to be prepared for a sale,” Wennberg says.
Also, he says it’s important to think about your business as if you were the buyer. He suggest thinking through the process as if it were a war game — turn the map around think about what exposure you have, what risks you might have, and then try to talk through mitigation strategies.
“It's not good for the buyer or the seller to have things come up in diligence,” he says. “So just try to think through all that exposure. In most cases it's not material to the business. But if it's left unsaid or undealt with, it could turn out to be during the process”
In any deal, there are different types of arrangements allowing the sides to get creative and find something that works for the objectives of both the buyer and the seller. But one important piece is valuation.
“Valuation can be tough for a seller that has potentially a lot of idiosyncratic value in the business,” Wennberg says. “It's a family business. They've invested a lot of their time, a lot of their money, perhaps it's been passed down from generation to generation. And it's important that they get a feel for how a buyer is going to value their business.”
What oftentimes happens is it results in some sort of earnout or contingent payment so the seller feels like he's got more value than the buyer does and the buyer gets some insurance to see if the market opportunities the seller has come to fruition. And if they do, then the seller can earn more money.
He says with most private equity buyers, there’s often an expectation in the deal that the owner keeps skin in the game — not necessarily a majority stake, but they are going to want owners to roll over some equity, which can be a very unique opportunity with different advantages.
Further, whether it’s a private or public deal, there are going to be key members of your team who aren't going to have any type of equity or stock opportunity with the deal. In those cases, it's important to try and negotiate retention bonuses for those folks.
“Because after transactions, things can be very different. It's important that you don't lose the talent that you have,” Wennberg says. “So you want to find ways to incentivize them to stay on board and retention bonuses are a great way to do that.”
Wennberg, along with Bryan McGrath, Senior Wealth Director, BNY Mellon Wealth Management; Daniel McDonough, Partner, Troutman Pepper Hamilton Sanders LLP; and Marty Babitz, Vice President and Family Wealth Strategist, BNY Mellon Wealth Management; talk more about liquidity strategies and how to prepare them ahead of a transaction. Hit play on the video above to catch the full panel discussion.