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Taming the Beast: Navigating Third-Party Sales

Submitted by John Brown on Sun, 07/23/2017 - 6:00pm

Throughout this series, we’ve highlighted the advantages of The BEI Seven Step Exit Planning Process™ for owners and their advisors. We’ve discussed the importance of setting goals, why determining the Asset Gap is critical to a successful business exit, how increasing business value and cash flow benefits owners and advisors, why Value Drivers matter, and minimizing threats to business value. Today, we’ll examine the nuances of a third-party sale, and we’ll begin by looking at the mergers and acquisitions (M&A) marketplace.

Today’s M&A Marketplace

M&A intermediaries often tell us that inadequate value is the culprit behind most failed third-party sales. Today’s buyers are flush with cash and are competing fiercely for the few well-prepared businesses going to market. According to Keith Dee of Osage Advisors, “There’s so much money in the lower middle market, and even more being raised on the equity side. Equity investors and strategics [sic] alike are all looking for quality deal flow. It all comes back to supply and demand. It continues to be a seller’s market due to a short supply of quality companies.”

Additionally, investment bankers and business brokers commonly lament that sellers’ value expectations are unrealistically high.

Failure is the inevitable result for business owners who go into the market without a “quality company” armed only with an unrealistically high value expectation. These would-be sellers waste large chunks of time and money, become discouraged, and—unaware of any alternatives—go back to doing what they were doing. You’ve likely heard the adage, “Insanity is doing the same thing over and over and expecting different results.” You can help owners break the vicious cycle of third-party sale failure using The BEI Seven Step Exit Planning Process.

Planning and Preserving Sanity: Benefits for Business Owners

The Exit Planning Process lends owners four overarching benefits:

1. Prevents “Insanity”

You can protect business owners from insanity by doing something different—namely, engaging them in a pre-sale process that prepares both the company and owner for a successful sale. In a nutshell, there are three steps to preventing your clients from falling prey to the insanity of expecting positive results from a flawed approach:

  1. Determine the amount of money business owners need from a sale to achieve all of their financially related goals.
  2. Confirm that non-financial exit goals and aspirations will not interfere with the business owner’s choice to sell. For example, if owners want to maintain their company’s legacy, culture, or location in the community, a sale to an outside party will need to be carefully constructed.
  3. Obtain an estimate of likely sale proceeds from the investment banker or business broker on your Advisor Team. Work with tax counsel, a financial planner, and other advisors to determine the expected net proceeds of sale. Finally, determine whether this amount, combined with an owner’s other assets, is adequate to achieve all of that owner’s financial and other needs.

2. Sets a Course

Using the Exit Planning Process (recast as a pre-sale process) accurately tells business owners what they have, organizes everything around what they want, and sets the course for what they must do to successfully exit via a third-party sale.

3. Organizes the Team

Business owners benefit from working with a team of advisors coordinated and facilitated by an Exit Planning Advisor (i.e., you). As an Advisor Team, various advisors from relevant professions can work to prepare both the owner and his or her business for sale.

4. Improves Chances for Success

Using a proven pre-sale process eliminates the waste of emotion, energy, time, and money involved in taking an unprepared business to market.

Aiming High, Working Realistically: Benefits for Advisors

Using the Exit Planning Process to approach a third-party sale provides advisors with five key benefits.

1. Owner-Centric

Using the Exit Planning Process is consistent with your focus on your business-owner clients. You can confidently engage them knowing that all you do is based on their goals, their resources, and their gap.

2. Creates Quality and Success

Your work to help business owners and management teams create quality companies greatly improves the owner’s chances of attaining his or her expected sale price.

3. Creates Realistic Sale-Price Expectations

Thanks to the M&A advisor on your team, you can provide business owners with a current expected sale price and what the company must be worth to meet their goals and aspirations. We find that owners are far more motivated to build value when they understand the relationship between what their company is worth to a third-party buyer and what it needs to be worth to meet their exit goals.

4. Strengthens Relationships With Owners

Even though you may not be an M&A advisor, as an Exit Planner, you can continue to support business owners through the sale process. This support often consists of acting as a sounding board for the owner’s frustrations and worries.

There is an old saying among M&A advisors: “If a deal hasn’t been in the ditch at least five times, it’s not a real deal!” M&A advisors are used to derailments. Business owners are not. Especially when their hopes for themselves, their families, and their businesses seem to be constantly teetering on the edge of disaster. Being a source of emotional support and understanding during the sale process positions you to continue to represent the owner post-sale.

5. Lays the Groundwork for the Sale

After completing Steps One, Two, and Three of the Exit Planning Process with you, the business and the owner will be ready to go to market. Even though you may not be an M&A advisor, you continue to support the owner through the sale process. There are many actions you can take during the sale process as the business owner’s Exit Planning Advisor, including those listed above.

The Exit Planning Process prepares businesses for successful transfers. In the context of a sale to a third party, advisors use it to discover and eliminate potential Deal Killers before the sale process begins. We’ll discuss identifying and dealing with these Deal Killers in future posts.

In next week’s post, we’ll move on to Step Five: Transferring Ownership to Insiders. We’ll look at the value of using a process to ensure that owners maintain control of their companies until they achieve their financial security, and all of their other goals and aspirations.


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