Strategic Exits: Leverage strategic assets to sell your business for a very high price
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Many owners have a disproportionate amount of personal wealth tied up in their company. Financial vulnerability is determined by the extent to which income and wealth are derived from the same source. Findings suggest that business owners face unique financial vulnerability because of their reliance on the business as both a source of income and wealth. A loss of either can greatly undermine household financial security. If these two are tied together, the vulnerability is even more pronounced. Further, the stronger the relationship is between the two, the greater the risk. Emotional Biases The ownership of the business introduces its own idiosyncratic risk.
This risk extends to both wealth and income flows. Business owners not willing to accept any risk, ironically, tend to have higher allocations to their business. Research is consistent on this point and confirms the notion that entrepreneurs do not see the business as risky and have more faith in their own business than investing in others. In addition to defining oneself through your business, other emotional biases at play include over-confidence in both the business and sustainability of the industry within which it operates, and an entrenched view of the value of their business that often does not ebb and flow with the realities of the general economy, credit and capital markets.
These biases and the lack of an objective framework to recalibrate expectations may also create a real financial risk. Among those business owners with a strategy surveyed the principal options were to:. On the flipside, a study of U. Advanced preparation allows you to sell the business on your own terms with set financial objectives in mind. According to the Financial Post, out of one hundred business owners that recently sold, the majority claimed they made crucial mistakes and wished to do it over. Advanced planning gives the opportunity for valuable tax planning opportunities to maximize the cash or other securities you receive from the monetization event.
Selling a Business and Maximizing Acquisition Value | Toptal
It gives you ample time to enhance the value of the business if a preliminary valuation does not offer the financial objectives you had hoped to achieve, and it allows you to position and present your business in the best possible light to interested parties. Most importantly, strategically planning your exit gives you control over the structure, timing and outcome of the liquidity event. Both have recently sold their family businesses. Through their discussion it becomes obvious that one of them was much more successful than the other at running their business, timing its sale and cashing in on its full value.
Underpinning the twelve questions is a fundamental precondition to running successful family businesses: Whether or not management and shareholders are related, preparing a blueprint by honestly reviewing and answering these twelve questions and updating it annually serves as an excellent, objective framework for developing a sound exit strategy.
A Word on Valuation If an owner decides to monetize all or part of their business, then they are faced with an equally tough question: How much is my business worth? As stated earlier, the entrepreneur typically has an emotional bias that may create a deeply entrenched view on value. In our experience, expectations need to be recalibrated based on a fact-finding mission to effectively determine the appropriate valuation range for the business in the context of the market at the time. Two important valuation principles need to be addressed: For example, different businesses and industries might use a multiple of EBITDA, price to book, price to revenue, etc.
Secondly, owners need to inform themselves, as much as possible, about comparable transactions which, similar to looking at comparable residential real estate trades when selling a home, can provide direction on valuation. It is equally important for owners to engage an accredited business valuator with proven experience in selling and acquiring private businesses in their sector. A standard business valuation addresses areas such as financial reviews, facilities and equipment, information technology, management track record, market conditions, as well as intangibles such as intellectual property.
Many owners are disappointed when faced with the fact that valuations do not reflect the time and personal commitment to the building of a business. Early planning identifies the actual value and gives owners the opportunity to take steps to increase it. Maintained revenue trends over time; 2. Increased market share; 4.
New management hires; and 5. New products in development. Value is in the eye of the purchaser. A smart business owner knows that and those planning an exit strategy will consider that there is no more important a challenge for their business than to ensure that they maximize the value. Once you have developed your blueprint for an exit strategy, what next? It is important to select a good set of advisors who:. In addition, some of the monetization strategies may be combined.
While an in-depth examination of each strategy is beyond the scope of this paper, we will touch on the following monetization events:. Public equity investment or strategic sale; 2. Private equity investment or buy-out; or 4. Succession passing to family or management.
Public Equity Investment or Strategic Sale A buyout by way of an initial public offering IPO into the public capital markets may be a viable option to gain liquidity. The decision of whether or not to sell to the public sector largely depends upon business cycles and the overall economy. Larger payouts are available during market highs. First, we should outline the basic differences between a financial buyer and a strategic buyer.
A strategic buyer has a specific reason for wanting to purchase a company. A strategic buyer will generally pay a premium for a business more than the intrinsic value or EBITDA valuation because it solves a specific issue such as time to market, product acquisition, client list acquisition, new geographical area etc. There are far too many stories out there where a potential buyer starts to court a business by initiating a LOI and due diligence process only for the relationship to turn south after the buyer backs out….
Other firms believe their job is just to sell the business. To put this difference in perspective, firms that add a lot to the fundamental value probably invest about two man years of professional time in a typical exit.
Firms that are more focus just on the transaction might put in one quarter to one half of that — around one half to one man year of senior time. Some part of these monthly fees are typically not applied as a prepayment on the success fee.
Part of the reason is that the amount of work required to sell a larger business can actually be less than that to sell a smaller company. Where this becomes especially evident is at the smaller end of the transaction size range. At the smaller end of the transaction range, most businesses are sold by smaller firms usually called Business Brokers. Very large firms have offices in downtown towers with human receptionists and assistants.
The mid-sized firms have smaller offices in less expensive buildings, use automated phone answering and have no assistants. The individuals in boutique firms answer their own phones. For a transaction to make sense for the big firms with downtown offices, the total fees have to be several million dollars.
Smaller firms can afford to do exit transactions where the fees are only a few hundred thousand dollars. Smaller transactions are usually done by business brokers. These numbers shift up or down depending on how busy the firms are. This is a competitive industry and fee structure are very consistent between firms of similar quality. At the extreme ends of the range there are firms that will undertake engagements with no work fee and also firms that structure their fees entirely on an hourly basis with no success fee.
If you see these different fee structures and the reason for the difference is not obvious to you, I suggest you find an Exit Coach or experienced mentor who can help put them in perspective. This formula was created by the old Wall Street firm bankrupted by the mortgage crisis. The ideal alignment is probably closer to the exact opposite of the Lehman formula.
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The converse is also true, perhaps the economy changes, or the business suffers a setback, after signed the engagement. A change in the fee percentage would be equally unfair in that situation. The selling company commits to a work fee at the beginning of the engagement. Some firms will invoice monthly over the first four to twelve months. This initial fee can also be called a retainer, engagement fee or upfront fee. Lower work fees are often an indication that the firm has people who are not completely busy. Part of the reason is that anyone involved with exits has seen a situation where, at the time of the initial engagement, the shareholders and board are enthusiastic about an exit; but by the time an offer gets to the table the shareholders have reconsidered.
This alone can result in shareholders changing their minds and deciding to continue to own the company for a while longer. The work fee is a fair way for the professionals to protect their initial investment in helping to facilitate a transaction. It is also a test of how serious the sellers are to actually sell the company. Please keep in mind that these success fees are for a fully marketed transaction. If the company being sold already knows who the buyer will be, or has it narrowed down to a few prospects, then the success fee should be one half to two thirds of the amounts above.
The success fees above are also typical of gold quality services. Bronze quality success fees are about half and silver are between gold and bronze. More on the different service levels is available in this post. I find the psychology of minimum fees fascinating. Just think about it. This is because the buyers for smaller companies tend to be either the junior people in the large company acquisition teams, or the CEOs and CFOs of medium-size companies. Similarly, the legal and accounting professionals tend to be less experienced.
We are in the business brokerage business and I would say your analysis was pretty good. Could be a little more on the low end of the range. Andrea 1 year ago question: Sucess fees for southern european deals would be quite lower than the figures you point to. Smaller deals are harder to do, but do not usually command higher rates. Wingedlion and 2 more liked this. What happens if I own the startup company and the company interested in buying my company approaches me?
It was all very rushed, the proposal had to be written and presented in less than a week. My client took my proposal and pitched his company directly to the other company without anyone else involved in the pitch. The deal never went through. Do these people get a percentage of the sale? It took me a while to realize the answer. The value of my company as a going concern was irrelevant to them.
The move would vault them into a dominant market position where security was concerned, and that was their primary objective. In that light, the time it took to get their money back was not a factor. They were paying me a multiple of our revenue. The price was good. It was more money than I had ever imagined earning in my entire life. I feared that if I accepted their first offer, they might grow suspicious. They would raise their offer, I expected, and they did. First, they asked for a counter-offer from me, and I quoted a figure twice the size of theirs.
They did, and their new offer was comfortably higher than their original one. After some feigned consideration, I agreed to accept the new price, which was substantially more than their first offer …. Of course I was, in one sense. Yet as much as I acknowledged the impact the deal would have on my family and the personal pride I took In generating a substantial personal net worth, one thought kept running through my mind as I added my signature to the deal: So, Basil, was this type of acquisition merely an example of the buying frenzy during the dotcom boom?
Or do you think this type of acquisition can still happen today in a similar way today, especially with fortune companies, and even more so with Fortune companies? Often, both the buyer and the sellers have their own. In other words, completing a transaction is part of their core job description. Great question at the end — and yes that type of acquisition is still happening.
That sounds like a well executed negotiation. I hope you do it again. I have noticed some regional variations in some parts of America. The above Advisor Work Fees assumes a properly constructed Business Plan and Budgets are in place as well as Accounting Systems and all share registry and other secretarial files are up to date including Board and members meeting minutes, all Compliance work including; taxation, returns and Capital Gains records; other regulatory corporate returns are up to date and available for review.
Should You Sell Your Company to a Strategic Buyer?
The correcting of these issues is expensive requiring a multi-disaplinary team and often attracts fines and penalties. You are correct that these items can add expense and delay. In some cases, they can even jeopardize the transaction. Generally, individual advisors are reluctant to discuss fees for many reason; not the least of which it could be considered collusion or price fixing tin he U. Gentlemen and Ladies of course we have to be cognizant of the Sherman Anti-Trust Act; however, there are just so many structures for compensation that I think that is what Basil was going for not a fixed fee opinion, but a survey of methods of compensation and a discussion of them…by the way the article is very good and thank you!
The idea is that I would run these companies once they were acquired. This acquisitions would be financed by a large PE group who is a investor in the parent company. What range of retainer should be expected? Should I expect a success fee? And if so how much? If it was my money that was financing the acquisition, I would want to see you with a fair and equitable amount of equity in the business post-transaction.
IMO your upside should become liquid on the sale of that business, not the purchase. Thank you for a great post. Do you also happen to know average success rate and closing period in months of deals sized between 10 to million dollars? I have been gathering data on success rate for many years. Yes, that is difficult to believe.