In this article, we continue our discussion of the BEI's Seven Step Exit Planning ProcessTM. We kicked off this series with a comparison of Exit Planning and succession planning and followed that with: setting the owner’s goals, the critical importance of defining cash flow, and protecting business value. In this, and the next several articles, we turn our attention to three primary exit paths.
Too many advisors learn that one of their best clients has decided to sell when they receive a phone call that goes something like this, “I just signed a Letter of Intent for the sale of my business, and I’d like you to look it over and get your thoughts.”
This story began weeks or months before when a buyer approached the owner (unannounced and unsought) and expressed an interest in acquiring his or her company. It is not at all uncommon for owners to engage in discussions and even begin negotiations to sell their businesses before contacting any advisor.
If the only consequence to owners in this situation was that they limited what advisors could do to help them, it would be unfortunate. Instead, the consequences assume biblical proportions, “But I was like a gentle lamb led to the slaughter” (Jeremiah 11:19 and The Definitive Guide, page 146). The “owner without an advisor” is the ideal scenario for professional buyers. They likely prefer to come to an agreement with a successful business owner without the owner understanding the full range of options available to sellers in today’s M&A market.
Lambs To The Slaughter
If your owner/client is one of these lambs, there are three possible outcomes:
1. Least common1: The business is sold to the best buyer at the best price;
2. Not uncommon: The business is sold, but either the buyer or the price paid is not ideal or maximal; or
3. Most common: The business is not sold.
In this article, we’ll look only at the third, and most common, result of a buyer-initiated sale process: No sale.
No Sale For Stan
Stan Adams’ company operated in a niche market—the online sale of South American organic foods. His market was growing and was already dominated by four international firms. It was one of these four who approached Adams and initiated several months of haggling over price. Ultimately, the two parties parted ways leaving Stan emotionally drained and his company with lost ground to make up while Stan had concentrated on the negotiations.
This was not the first time Stan had waded into the marketplace unprepared, nor the first time he had halted negotiations. Two years earlier one of the other four firms had expressed interest in buying Stan’s company. Again, the parties negotiated for months before giving up over a failure to agree on the company’s value. In that case as well, Stan’s business had suffered from his inattention, and Stan was quite discouraged.
Only after two strikes did Stan realize that his unplanned approach was both inefficient and ineffective. He contacted two investment banking firms to assess his sale prospects, but in their preliminary market analyses, they discovered that the likeliest buyers for Stan’s company were the two companies that had already walked from negotiations. The investment bankers approached these buyers, but both passed on taking a second look at the company. Stan finally recognized that his prior approach was worse than inefficient and ineffective. His actions had turned the two best buyers into uninterested bystanders. Professionals in the M&A community see this scenario so often that they have a name for it: “tainting the marketplace.”
At best, talking to buyers without preparation is an expensive lesson in terms of time, energy and money. For Stan and many others, the consequences can prove to be far worse.
What Can You Do?
You can help your clients avoid this scenario if you reach out to them before they talk to buyers, and before a buyer chooses the third-party exit path for them. You must educate owners on several key points:
1. Moving forward with the first qualified buyer who approaches them is not the same as moving forward with the best buyer who will offer the best terms.
2. Most buyer-initiated relationships do not end in sales that maximally benefit sellers. In the pursuit of what seems to be a great opportunity, owners give leverage to one buyer rather than making several buyers compete for the opportunity to own the company.
3. Responding to prospective buyers consumes—and often wastes--money and energy.
4. Owners who respond to the likeliest buyers in their niches “taint the marketplace ” because buyers rarely look again at a business they have already rejected. They justifiably wonder: Why is the seller coming back? Is something wrong, seriously wrong, with the business? Has it suffered setbacks?
The Advisor Dilemma
How do you reach out to owners before you receive the “Can you look over this Letter of Intent” phone call? If it is any consolation (and it shouldn’t be), BEI’s owner surveys indicate that few owners (about 15%) have ever had even one conversation with an advisor about their plans to stay or exit their businesses. The only way you can preempt the “Letter of Intent” phone call is to target your owner/clients with consistent information about the most important financial decision of their business lives—their business exit. Call it a marketing campaign if you prefer, but we know that you must take the initiative. Owners will not.
1. My assessment of the likelihood of a sale is based on the experience of hundreds of BEI advisors who have been involved thousands deals.