Before engaging a private equity we advise company ownership to inventory and prioritize the concerns they have about a transaction. A high level of “seller” self-awareness has very positive implications for a selling process or capital event. Uncovered and well-articulated concerns will inevitably inform how a company is packaged and positioned and the types of investment entities best suited to the specific nature of the opportunity. Although seller concerns are innumerable and diverse there are six issues we encounter most frequently.
Valuations: Leaving Money on the Table
This is of course a universal concern. Who wants to leave money on the table! It’s helpful to arrive at some valuation benchmarks based on your own research and thought. That research might include considering other transactions in your industry or formulas that tend to be standard in your space. You might consider consulting an objective third party that specializes in and has some experience with businesses like yours.
The Legacy of the Business
Some sellers don’t care if the business burns down after the closing. They are very much in the minority. Where a seller is on the spectrum of concern over legacy is an important factor and a dangerous one if it hasn’t been fully explored before the transaction progresses.
When a buyer and seller are on the same page regarding the legacy of the business, it represents a powerful deal making asset. In our experience a shared vision on legacy issues can create the psychological capital needed to deal with other issues. If you have any questions or concerns it is important to raise them as soon as possible! Many times we see owners who will have a concern early but wait until it materializes. While we can appreciate the patience it is important that the investor knows what concerns you have and if they cannot address them, you can waste minimal time.
A seller may have contractual obligations to certain non-equity stakeholders. Beyond these cases we find that many business owners feel a deep seated moral obligation to stakeholders.
We recommend that instead of viewing stakeholders as a faceless population of concerned parties that a much more individual assessment be undertaken. Segmenting a stakeholder population into classes can sometimes be useful. After all, your current CFO whose been with you since the beginning is not the same kind of stakeholder as that new hire on the loading dock. It could be argued that both are impacted by a transaction and thus stakeholders. What this example illustrates is that all stakeholders are not created equal.
A seller with an ordered, coherent understanding of how they feel about and want to treat stakeholders is better able to perform in a negotiation and evaluate an offer.
Continuity of Management
Continuity is clearly connected to the stakeholder and legacy issues. When we talk about continuity of management we refer not to the protecting or compensating of top management, but preserving the productive continuation or direction of the business.
In the majority of transactions the buyer is very concerned with management continuity. If your top management or c-suite has been unstable be prepared to address it. Of course in strategic, add on purchased this emphasis may be reduced. This again goes back to communication. Let the buyer know your feelings early and where you are and are not flexible. This can be on either side of the equation. In some situations an owner may tell the investor that it is important they replace him with a new CEO. In others, they may place priority on keeping the current team in place. Regardless of your preference, the important aspect is that you are open and honest so the investor is aware and can avoid a late stage argument.
Investment bankers, accountants and lawyers are not cheap dates. The numbers get very big very fast. Like any business investment or project, sellers are well served by understanding the costs of a transaction and how they feel about the number.
Buy side origination allows a potential seller to enter the investment marketplace with less financial commitment and exposure because fees are paid by the buyer after a transaction is completed. This path is not however a free lunch though it involves far less front end exposure.
Most business owners who have built a business with balance sheets worthy of private equity consideration haven’t done it by wasting a lot of time. A lot can be done to minimize owner and top managements involvement and time expended, but at the end of the day the process requires time and effort.
Due diligence can have the same visceral feeling you get from a hospital stay where you’re poked, stuck by needles and asked the same questions repeatedly. A lot can be done to minimize these frustrations but the point is that no one wants to go through a difficult process and come up empty, with no deal.
In our experience sellers who lack self-awareness have a lot more difficulty navigating the selling process. This type of seller experiences more negative personal realizations, unpleasant surprises and negotiation road blocks then a seller who has carefully inventoried and ordered their goals and priorities.
At Exit Strategies we believe there’s great value in informal but somewhat structured conversations with sellers. If you’re a seller contemplating a capital transaction there is substantial value in working through the really tough questions about your business and the transaction you contemplate with a third party who is not a potential buyer. When you talk to a potential buyer your brain chemistry understandably changes on virtually every issue discussed. Hearing yourself address key issues and questions is not chiefly a rehearsal process but an evolutionary one. When a seller refines their position on key issues regarding their business’s their positions inevitably shift in very small and occasionally much larger ways.
If you’re a seller about to enter a capital transaction our advice is simple, know thyself!