Business Owner Q&A
Below are some of the most common questions we get from business owners. We will continue to add questions as appropriate.
Of course a strategic acquisition usually presents a more complex set of questions and considerations when it comes to existing teams.
Phase Two is about packaging and positioning. Of course that involves a lot of preparation in a lot of areas. The most obvious component of this difficult exercise is financials. Structuring financials so they can be devoured and digested by a private equity can be a task. What many sellers fail to do is to put together a cohesive narrative, a story that is grounded in reality and one that will interest the right investor. Private equities do not buy businesses solely based on financials and cash flows.
For Exit Strategies, the challenge is to help sellers construct a vision of opportunity that’s clear enough for us to marry that vision to the most compatible and promising private equity.
Needless to say, a buy side firm can’t make your company into something it isn’t nor make a private equity radically depart from its investment profile or strategy. Private equity isn’t for everyone nor is a buy side origination firm.
Another major mistake sellers make is entering the private equity market with a lack of clarity or resolution on key issues i.e. lack of a firm decision to sell or dilute their position, unresolved conflict with partners, a rational vision of valuation, their vision for the company’s future… Indecision often manifests negatively in the private equity engagement and negotiation process.
In strategic deals, buyers are usually in your industry or on its periphery. The common objective is to grow by acquisition. The strategic buyer knows exactly what they’re looking for. They may have decided they want you even before they come calling. In a lot of these cases it comes down to price.
Clearly the private equity and strategic buyer are not the only type of investors you may encounter, but they are the majority of investors we do business with. You may be a fit for only one type of buyer, or you may be open to both options depending on the individual characteristics.
Here are some of the biggest concerns we hear most often from business owners looking to sell or in search of a capital event. The most common concern we encounter is probably the most obvious, which is a fear of undervaluing their business and leaving money on the table. The majority of owners care about the future of the business they built. A minority of owners wouldn’t mind if the business burned down after the check cleared.
The stakeholders in your company often have objectives that are different from yours. It’s good for you to have a clear understanding of how all the stakeholders in your company fit into or fail to fit into the transaction you’re contemplating. Some of these stakeholders are your top management team. The questions of their ongoing participation may or may not be important to you, but this issue will almost always be important to your investor.
Many of the sellers we work with are often focus on transaction costs. One seller concern we almost always encounter is the fear that the seller will go through the expense, time and an emotional roller coaster only to wind up at a dead end. The value we offer to the seller is to dramatically reduce that probability through our in-depth knowledge of what players in the private equity opportunity best fit the investment opportunity.
Initially a private equity will assess how your business generally conforms to their over arching strategy, direction and existing portfolio. If at this point they like what they see, they then dive very deeply into the business. Private equities are smart money. They won’t get carried away with your highly subjective even romantic vision of what your business is. They deeply assess issues like; industry, positioning in the industry, history, growth trajectory, every component of the business’s risk profile, proprietary technology, method, process or other intellectual property holdings, competitive forces, management team, financials, the assets they possess to help leverage the business, a valuation for the business… The list is of course much longer. Owners need to prepare for a lot of questions many of which will by definition be sensitive in nature and conducive in some cases to giving offense.
- Is the owner in the right psychological position?
- Are partners and or family members on board?
- Does the buyer provide the right type of future for the company?
- Are the total proceeds enough?
Interestingly, we get a sense of how a seller is positioned on these issues not just by what they say but how they say it.
Needless to say, if you’re being approached by a strategic buyer (a company in your space), confidentiality becomes even more complicated. In addition to the basic confidentiality protections, it’s good to have an early conversation about what will be revealed and how.
We are happy to answer any additional questions you may have. If you have any questions we have not answered please submit below and we will respond quickly.