The death of “THE DEAL” has been greatly exaggerated since the financial meltdown of September 2008. Yes, there has been a dramatic slowdown of deal closings for business owners seeking to raise capital or sell their business but the deal has never died. While few predict a dramatic pickup in deal volume any time soon, people are completing transactions and there are signs that deal activity is on the rise. You just need to know how to position yourself and how to attract capital or buyer.
As a business owner, have you done everything you can to maximize the value of your company? Below are some helpful insights that can assist you as you endeavor to answer this question as well as successfully close a round of financing, transition ownership or sell your business in this challenging environment.
Are you ready? Is your business ready?
Your company’s value is not simply determined by earnings and industry multiples alone. There are a host of issues inherent to closely held businesses that can impact deal value or even kill a deal.
Certain issues may arise that will make an investment or sale virtually impossible, I call these red flags – they signal to an investor or buyer not to go into the water.
For example, how large is your largest customer? If it’s 40 percent or 60 percent or higher then you may face a serious obstacle. Other issues won’t necessarily block an investment or sale but can significantly detract from what someone is willing to pay you. We call these issues yellow flags – these signal an attitude of it’s OK to go in and swim, but be warned, there’s something you cannot see underneath. For example:
1) Key man and/or woman issue(s).
2) Financial reporting has not kept pace with the growth of the business.
3) Failing to document business processes.
4) Lack of a business plan or ownership transition strategy.
5) Legal and company formation documents in disorder or not up-to-date.
Without examining these various issues, what you expect may be quite different from what you will receive at closing. Worse yet, what lurks below the surface may kill a deal.
What to Look for in an M&A Adviser.
Big or small, the size of your company should not matter. Your adviser’s experiences and network of buyers and capital providers should span the entire private placement market, from growth equity to buyout firms and strategic buyers.
I also recommend that you select an adviser that has a network that consists of buyers and investors throughout the United States and internationally, across industries. This will allow you to find your company’s ideal partner or multiple buyers to maximize valuation – that said, the process should remain targeted and efficient.
Too often investment banks seem to send information to 80, 100, 200 potential buyers and capital providers. It’s as if they have their standard list of investors and that’s it. The same investors/buyers, regardless of appetite, experience or need, receive every assignment. As your representative, an investment banker needs to understand who is looking for what and what each potential investor or buyer brings to the table. This is a key component to executing a process for you that is smooth and discreet and achieves results that maximize your value and meet all of your objectives.
By truly knowing who you are trying to attract, you will not need to run a loud auction that exposes your company’s proprietary information – it is your life and blood and you should guard it carefully.
If you shop your opportunity widely and indiscriminately by internal resources or with the help of an investment banker, do not be surprised if your employees, customers, competitors and others gain access to information that can damage your auction or worse yet, THE COMPETITIVE POSITION OF YOUR COMPANY.
Final Thoughts – Focus on the Future.
Lastly, something for business owners to consider before deal closing – your “new” board member and business partner DOES matter. After closing a round of equity investment or selling control in your company, either for growth or liquidity purposes, it’s too late to realize your new partner is incompatible with your style and/or is not a value addition.
About the author
R. Travis Coley is a partner at Hidden River Capital, where he specializes in representing expansion stage and closely held and family-owned middle market companies. Contact him at: firstname.lastname@example.org, (856) 577-3398 or visit www.hiddenrivercapital.com.
© Copyright R. Travis Coley 2010. All Rights Reserved.