Selling ownership in a privately held middle market business is hard; and without the owner’s 100% commitment, transactions rarely make it across the finish line. The selling process is time-consuming. It is disruptive. Confidentiality is at risk. Owners’ emotions often swing wildly in many directions – from fearful, to joyful, to angry, to hopeful, to feelings never experienced before – and all these may occur in a single conference call. Negotiations can be offensive. Tempers frequently flare. Due diligence is invasive and interminably long. Legal and other professional fees never seem to end. These and many other destabilizing elements occur almost every time a middle market business is sold.
Why, then, would any owner voluntarily expose themselves to such a process? Because no one can take what they have here into the hereafter. Everything one owns will remain here after they are gone. The biblical character Job described it this way, “Naked I came into the world, and naked I shall return.” Therefore, all business owners must transfer their companies to others someday; and voluntary transfers produce better outcomes than involuntary transfers every time.
The selling decision belongs exclusively to business owners, but M&A intermediaries are primarily responsible for preparing them for the difficult selling journey. When intermediaries effectively deliver M&A knowledge, owners are empowered to make wise decisions and confidently face transaction adversities when they inevitably arise.
In order for owners to make wise selling decisions, they need meaningful information in key areas.
- Transaction options – Many owners do not understand recaps, ESOPs, management buyouts, strategic acquisitions, standalone acquisitions… They don’t appreciate nuance differences between private equity firms, family offices, SBICs, and SPACs. It’s our job to inform them. The more clearly owners understand the options available to them, the better decisions they are likely to make.
- Transaction needs and desires – Owners often struggle to differentiate transaction needs from wants. For example, they may need all the proceeds from sale to support their retirement, but they may desire to sell to the management team, which typically requires substantial subordinated seller financing. The need for 100% of the proceeds versus the excessive risks a management buyout would create presents a conflict. M&A advisors should always make sure the transaction delivers on the seller’s needs first and desires secondarily. When needs and desires are known, the most suitable transaction options are easier to identify. In the above case, a private equity sponsored management buyout is preferable to a seller financed management buyout.
- Next chapters of life – Owners often sell when the call of the future is more alluring than ongoing ownership. Some simply desire to unload chronic burdens. Others envision starting schools as part of an overall philanthropic plan. Whether the vision is modest or grand, owners must know where they are heading after the closing; otherwise, they will prefer the life they know over the uncertainty they don’t know. Without alluring next chapters, owners can be unreliable sellers. They should never begin the selling process with a half-hearted commitment.
- Business value – The sale of a business is a financial transaction in essence, so owners should establish valuation expectations based on reality. Value depends on multiple factors like the financial performance and outlook for the business, the nature of buyers, transaction terms, availability of capital, prevailing interest rates, economic outlooks, regulations, geopolitical factors… For example, transaction terms can cause the purchase price to go up or down. An all-cash deal will trade at a lower price than one where the seller shares risks with the buyer through rolled equity, seller financing, or earn-outs.
- Taxes – Owners should involve tax experts early in the process to explore various taxing scenarios based on transaction structures, asset allocations, etc. This allows sellers to compare offers on net closing proceeds, not gross proceeds.
- Timing – The IBBA/M&A Source’s Rich Mowrey famously says, “The time to sell is when the business is ready, the owner is ready, and the market is ready.” M&A advisors should certainly guide owners through the implications of business and personal readiness. Perhaps more importantly, sellers need on our insights on private capital markets – the place where privately held middle market companies are bought and sold. M&A advisors are expert market makers within the private capital marketplace. With our fingers on the market’s pulse, our guidance can be invaluable.
- Market-making process – All transactions follow linear stages and steps, but intermediaries must customize market-making strategies to fit each business. Sometimes hundreds of buyers will be included in a process. Other times, we might only approach a handful of public companies. Owners can contribute to strategy creation when they understand how various approaches can deliver specific outcomes.
- Deal teams – The seller’s deal team typically includes attorneys, CPAs, wealth managers, and an M&A advisor. Each professional must have significant M&A expertise; otherwise, they might do more harm than good to the seller’s interests. Most middle market buyers are sophisticated professionals investing capital from institutional sources. They come with the best accounting and law firms. Buyer’s counsel may have three or more attorneys working on the assignment simultaneously. This is no time for the seller to rely on a college buddy turned attorney who works at a small law firm. Buyer’s counsel will out-gun small firms leaving sellers with inferior outcomes. Similarly, the seller’s accounting firm should be able to work effectively with the buyer’s quality of earnings experts. Sellers who go cheap on their legal or accounting representation should expect sub-optimal transaction outcomes.
- Definitive purchase agreement terms – Long before closing, the buyer’s counsel delivers a draft definitive purchase agreement to seller’s counsel containing basic provisions like the deal structure, purchase price, forms of consideration, seller deliverables… Sellers should also understand more complicated provisions such as net working capital, representations and warranties, indemnities, holdbacks, baskets and caps, and others. Sellers should fully comprehend anything that affects the money received at closing and increases post-closing risk exposure.
- Due diligence and closing – Sellers will make legal commitments to buyers assuring that all the company-related information provided in due diligence is accurate and complete. A good principle to follow is to disclose early, disclose often, and disclose completely. When sellers spring informational surprises on buyers, deals fail.
- Reinvesting proceeds from a sudden liquidity event – For most owners, the business represents the lion’s share of their net worth, so they should have a plan for when the business ownership converts to cash. To that end, owners should consult with high-net-worth wealth advisors before taking the business to market. Some estate planning elements may need to be in place before the seller can execute an LOI.
M&A Source members provide empowering knowledge to business owners allowing them to make wise decisions on the most important transaction in their lifetimes. Owners with transactional foreknowledge are equipped to withstand inevitable adversities and finally hear the sweet phrase, “The wire transfer just hit your account.”
William “Bill” Loftis is Managing Partner and co-founder of Blue River (www.goblueriver.com). Mr. Loftis has assisted buy and sell-side clients through the M&A process in multiple industries, such as, financial services, military equipment, forestry, automotive, mining, specialty chemicals, steel, surgical equipment, business services, construction, real estate, title insurance, pharmaceutical clinical trials, food distribution and others. Mr. Loftis is a former board member of the International Business Brokers Association and M&A Source, the nation’s largest association of middle market deal making intermediaries. He serves as a faculty member writing and teaching courses. For his contributions, he has been recognized as a lifetime Fellow of M&A Source, the highest honor awarded by the association.