Private equity has changed the way business owners approach the sale of their company, says Mike Dingwall.
“It used to be if you were a family-owned company and you sold, it meant that you were retiring or getting out of the business,” says Dingwall, partner, assurance services at RSM US LLP. “Now there are so many different options. A lot of the funds are buying minority shares and you’re still as involved as you always have been. It gives you an avenue where maybe in a couple years, you can get out and retire.”
If you want to stay a little longer, that’s an option too, Dingwall says.
“There are other options of selling where private equity is going to hold not just for five years, but for the long term,” Dingwall says. “You can stay for eight or nine years and then they'll buy you out of your percentage at the end when you want to retire. So there are definitely a lot of options.”
One thing that hasn’t changed for a seller is the importance of preparation and due diligence.
We spoke with Dingwall about sell-side strategies to set you up for a positive outcome in the sale of your business.
Get professional help
The best way to get started when you’re looking to sell is to hire a professional firm that has done it before.
“I don't care how big you are,” Dingwall says. “Sometimes companies will think, ‘Well, I'm small. Why would I hire someone like that? That's something only big, huge companies do.’ But it is the No. 1 thing you can do to make the process go faster, quicker and really get the best offer.”
Dingwall recalls a client — a smaller, family-owned business — that had never done a professional audit.
“They hired a large, reputable firm to come in and do sell-side due diligence,” he says. “The firm came in and scrubbed their records and put together a good EBITDA number, going through their processes and procedures, their budgeting and their forecasting and cleaning all that up.”
As a result, the firm had clean financial records and presented a strong case to potential buyers.
“It speeds up the process and maximizes the dollar you'll get on a sale,” Dingwall says.“They were very successful in selling a portion of their business. It's really been a win-win for both sides. They are doing well financially, the family is still involved and is capitalizing on the new ownership to expand and do some add-ons to their company.”
Validate your financials
In most cases, buyers are looking at a number of companies to acquire. If you can’t make a good case as to the value of your business, or your financial reporting structure is flawed, you may have trouble getting the deal you want.
“The buyer wants to know that what they're looking at is accurate and true, whether it's good news or bad news,” Dingwall says. “They want to know what the EBITDA is and whether that's accurate. The sooner that a seller can prove that to the buyer, decisions can be made much more quickly.”
Calculating data like EBITDA may be secondhand to some companies. Others struggle with it.
“There are aspects of EBITDA that companies may have never even thought about based on their accounting practices,” Dingwall says. “Maybe they never had a good financial person in there. They never had a quality audit formed or perhaps no audit. Just having the proper controls in place and the proper processes to do things like budgeting and forecasting can go a long way.”
Even a company that has its records together can benefit significantly from a professionally prepared sell-side side due diligence report.
“They'll present the future and what the quality of earnings look like going forward,” Dingwall says. “It’s all about the advisers you hire who can help market your company. They help you look at the future and think outside the box as to what your company can be and not what it has been.”
Timing can vary
As with other aspects of M&A activity, timing can vary greatly from one deal to the next.
“I’ve seen deals go as quick as a couple months,” Dingwall says. “All of a sudden, that product they have is hot and they have a bunch of potential buyers. I’ve seen companies go two years and they keep going back and forth because they can't get comfortable in the numbers they’re looking at.”
The best advice is do as much prep as you can to present your company in the best light possible.
“If you have one guy that's doing everything from HR to keeping the records, that never helps,” he says. “You want to have to the right department heads with the right qualifications.”