Ideally, there are six stages to selling a business. When a deal isn’t successful, one of those stages was likely derailed.
Beth Bershok, regional marketing director of Herbein + Company Inc., moderated a discussion at ASPIRE 2018 about those six stages, which included advice on best practices and pitfalls, with two business leaders who’ve sold their companies and two expert advisers:
Dr. Matthew D. DiAndreth, president, Precision Dental Specialty Group
James Gillespie, co-founder and CEO, GrayMatter LLC
Thomas L. Bakaitus Jr., tax partner and operating officer, Herbein + Company Inc.
David Eichenlaub, managing director, Confluence Advisors LLC
1. Pre-planning your exit.
You can’t plan too early. When DiAndreth buys a business, a week later he starts figuring out where he needs to be to exit. But it’s not just taking the time, you also have to plan smart. Otherwise, two or three years later, you’ll be out looking for a job.
“The thing to think about before you get to the selling process is, ‘OK, am I going to have enough money to live the lifestyle I’m accustomed to?’ If I’m not, then I need to increase the minimum price I’m willing to sell at, and I won’t take any less or I won’t sell,” DiAndreth says.
You also need to determine what you’ll do afterwards.
“If you’ve been doing this for 30 years and you do it every day and it’s your life, and you really don’t have a lot of hobbies or activities, once you sell and you’re not doing that anymore — I don’t care how much money they give you for the business — you’re going to be miserable trying to fill your day,” DiAndreth says.
2. Preparing your business for a sale.
Along with building a great management team, Eichenlaub says a quality of earnings report is important. Buyers use it to verify and validate the EBITDA. So, why would a seller want one?
“When I’m on a sell team, I’m a bit of a control freak,” Bakaitus says. “The quality of earnings lays out various assumptions; I like to control at least the first pass at the assumptions that have an impact on true quality of earnings.”
It helps tell the story, looking beyond the balance sheet to the true earnings capacity of the business, typically on a 12-month trailing basis.
If sellers need to choose between a quality of earnings report or business valuation, Bakaitus believes your money is better spent controlling the assumptions you’ll feed to a potential buyer, rather than determining a value that will ultimately be set by the market.
3. Creating a book, or confidential information memorandum.
A CIM packages the story of what makes the company successful to take it to market and achieve your objectives, Eichenlaub says. It’s not a regurgitation of historical statements; it’s a sales document that presents the company in the best light to potential buyers and capital providers.
In GrayMatter’s 2017 recapitalization, Gillespie says after the executive summary went out to get initial interest, the book ended up at 60 pages.
4. Looking for a buyer.
To find both financial and strategic buyers, your advisers use their proprietary database of private equity and venture capital firms and look at the market to see who is active in your space, Eichenlaub says. Financial buyers tend to be stratified; they want a company of a certain size with certain growth parameters in a certain industry.
If you want to stay on, DiAndreth recommends finding a buyer that you can partner with because you’ll be working together.
In Gillespie’s case, 16 entities came back with an indication of interest. One was eliminated right away. In the interview meetings, he explained GrayMatter’s goals. The company got three detailed offers, so Gillespie spoke with people who had been invested in by those entities.
“We ultimately found a really great partner through the process. We’re happy with the match,” he says.
5. Getting your advisers on the same page.
Your attorney, accountant and, possibly, your broker all work together to get to a close.
Even though the business owner is the boss, to have a structured sale process, Bakaitus prefers to identify each person’s role, including a team leader who can step up to deal with difficult issues and determine when to bring in other advisers.
“It’s important that everybody check their egos at the door, understand what their role is on the team, and then, frankly, never overstep those boundaries,” he says.
Time is another factor. It can take six or eight months from the time you hire an adviser to the deal close, Eichenlaub says. A lot can happen in that timeframe to impact the earnings, so it’s better to keep it moving forward.
6. Post-event issues.
Sellers have two choices when it’s time to close. They can take all cash, or they can take some cash and some equity, Bakaitus says. This rollover equity can be profits interest, carried interest or preferred stock or options, but ultimately it means you, the seller, have invested in the buyer.
You have to consider the tax ramifications of rollover equity, as well as your role in the company going forward, he says. You need to understand your hierarchy in the capitalization table, which lists all the owners. Will your ownership be diluted if additional rounds of equity come after your transaction?
Some final words of advice
One of my good friends said to me, “You don’t try to hang your own drywall. Why are you trying to be your own investment banker?”
— James Gillespie
Time is the enemy of deals and, generally, the longer a deal drags on, the more risk there is that that deal doesn’t close.
— David Eichenlaub
Your life will change. You are no longer the owner; you’re part of the ownership, and that changes your lifestyle.
— Matthew DiAndreth
Surprises are not good for the buyer; they’re terrible for the seller. And to the extent you can avoid surprises, you have to work hard to avoid surprises.
— Thomas Bakaitus Jr.