Picture this: Your business has enjoyed an excellent run over the past couple of years. Revenue is following an upward trend, and EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) is keeping pace with your growth.
If a private equity fund owns the business you are running, there is a good chance the owners are contemplating a sale. A sale may be based on considerations such as how long the fund has owned the business and the perceived attractiveness to interested buyers.
On the other hand, if you personally own the business, you may be looking at bringing on fresh equity and operational know-how to expand your success.
Whatever the motives driving change may be, a tremendous amount of incremental value may be unlocked through the way you approach the process of selling your business. The most attractive valuation can be achieved by focusing on a number of key factors during preparation and execution of the sale.
Jozef Opdeweegh, a Miami businessman with over 17 years of experience as CEO, Chairman and Board Member of private and public companies discuss how to sell your business at the most attractive valuation.
7 Key factors for valuation
The right time to sell is when: (1) there are many prospective buyers, (2) there is a significant amount of private equity money (that has yet to be deployed and is actively pursuing new deals), (3) the IPO market is hot (if you are contemplating going public) and (4) the general economic climate is attractive (specifically in relation to the industry vertical(s) your company serves).
2. Business Performance Sustainability
Business performance in the years preceding the sale process is a main driver in maximizing enterprise value. Simply put, a buyer will only be willing to pay a certain multiple on your EBITDA if that buyer is sufficiently convinced the run-rate level of cash flow is sustainable in the future. By way of example, not a single buyer will pay a 10 times multiple of cash flow without conviction that the company will be able to generate that cash-flow level for at least 10 years.
3. Investment Bank Expertise
First, it is important to select an investment bank (or a broker) with a proven track record in your industry. When selecting an investment banker, exercise balanced judgment of your valuation expectation – do not simply pick the banker who promises the highest valuation.
Having access to a competitive set of bidders for your business will likely yield a positive impact on the obtainable valuation. Therefore, it is typically advisable to organize an auction with a broad set of participants.
4. Memorandum and Management Presentation Effectiveness
You will command the highest price if you spend a large amount of time on preparation. You simply need to produce the most comprehensive, compelling and best Information Memorandum and Management Presentation. You, along with your fellow presenters, should excel and be confident in front of an audience. Demonstrate knowledge of every detail related to the business, and be agile and quick in your thinking. Eloquently answer all the questions from the buyers’ community. Be enthusiastic, perseverant and energetic. It is a worthy investment to practice presentation skills with your team.
5. Team Strength and Cohesion
When you are selling your business, you are also selling your management team. It is important the buyers are exposed to the entire senior team at some point during the sale process. The management team should be fully aligned on culture, core behaviors and strategic vision. Any dissonance will be viewed as a weakness, which may negatively impact price. If you are planning on selling your business, avoid making meaningful management changes in the 12-months prior to the sale. A tenured leadership team reflects stability. It also reflects your ability to plan for the long run and to provide the best, most scalable team to a buyer.
6. Strategic Plan Integration
The ability to work well with a new ownership team depends on the business’s strategic plan. The sale process, which typically runs over an extended period, allows for extensive conversation around this topic. Therefore, the level of consensus surrounding the business’s strategic plan (post-ownership change) becomes clear.
If you, as the business owner, are in the position of being able to singlehandedly select the buyer, you can vigorously drive this point home. If you are running a company owned by a PE investor, you typically do not have the luxury of weighing in on the future ownership decision. In the latter scenario, spend sufficient time with the acquirer to demonstrate the merits of your strategic perspective and proposed direction.
7. Cultural Alignment
You and your new shareholders should share the same value set. Disparate perspective on culture and core behaviors will lead to significant future issues with your new shareholders. Often, this is the reason for failed acquisitions. Again, during the sale process, focus on corporate culture to assess alignment to maximize future success.