Acquiring the Acquisition Mindset (part 2) – Planning Your Exit
By Nitin Khanna, CEO MergerTech Advisors
In my previous post, I talked about how to run your business as if you were planning to sell tomorrow. Building a high growth business that minimizes operational risk and has good margins will not only provide you with a high level of personal income, but also make you an attractive acquisition target. While the business may have been created and sustained with an acquisition mindset, your exit process requires proper timing and, more importantly, execution. A poorly timed exit, whether it is too early or too late, will lower your valuation as your business is not at its prime; moreover, a poorly run process will ruin your chances of even landing an offer now or in any future exit attempts.
Maximizing value is based on (1) understanding what buyers want, and (2) becoming an educated seller.
Understanding What Buyers Want
How do you know when to sell?
“I can’t sell now. Last year was a down year and I want to show growth before I sell.”
“I can’t sell now. I’m growing 40% a year. I want to make the company much bigger before I sell”
“I can’t sell now. I’m just about to get a very large contract and I’ll sell after I get it.”
“I can’t sell now. The actual value of my product is SO MUCH higher than my financials show.”
“I can’t sell now. Because of the recession I’m sure buyers are not paying a lot.”
All of the above reasons show a lack of understanding of the M&A process and why some companies get sold for so much more than other companies. Full and highest prices are paid by strategic buyers, which means your company, management team, product, fulfill a strategic need of the buyer and lead them to believe that there are synergies between the two companies that go beyond financial performance.
Being on the front end of a consolidation wave is essential to getting multiple offers which is what generates the best price and terms. Once a buyer buys a company to meet a certain need they will not replace that company by buying another one in the future no matter how much better the newer one is. And while you are growing at 40% a year, buyers with money are spending it on other companies which means that right at the time your growth slows down, there is a potential for fewer or poorer buyers thus driving down value even more. And buyers perceive a step down from 40% to 30% as a stumble not a sign of a maturing business and they tend to be wary of it.
Sell when you are growing to maximize cash at close value. But also because you will have the best opportunity to have a great relationship after the close and to maximize your earnout.
Becoming an Educated Seller
Understand that highest growth rates and higher revenue don’t necessarily lead to highest exit valuations. Having an exit mindset and running the company that way from day one will give you a much better chance of being a strategic acquisition target.
Educate yourself on the strategic outcomes that are possible for your company; organic and inorganic (acquisitions) growth methods, recapitalizations, full or partial sale of the company, ESOPs, IPOs.
Avoid the following mistakes:
- Overinvesting in one off offers for your company. The surest way to maximize value is by running a process and having multiple offers.
- Using the wrong advisors, or no advisor at all. The correct advisors can add 10% – 100+% to the value of the deal by bringing in additional buyers, minimizing due diligence mistakes, and being a strong advocate on your behalf.
- Marketing your company multiple times.
- Not thinking about your employees and management team during the exit process.
- Sloppy due diligence practices
- Legal risks and liabilities (pay your taxes and vendors, keep a harassment free workplace, and deliver what you promise to your clients)