Thursday, 27 October 2011
How Do I Attract a High Multiple for My Business: The Sale Process
I noted in the previous post that there are two broad answers to the question of: how do I attract a high multiple for my business. The first concerns the business itself and the second concerns the sale process. The when, to who, why and how much of selling. I will address the sale process in this post. The sale process cannot transform an average business into a high multiple business but, by following a few guidelines, it can result in a higher transaction value.
When to sell is the most important item to discuss here. Not only in the context of the economy in general but also with respect to the business’s performance and the owner’s objectives. The ideal time to sell is when there are positive trends in revenue and earnings with the expectation of more to come. Growth is very influential in attaining a strong multiple and, while valuation is determined by future prospects, historical performance is the most common way to get comfort with those prospects. By historical performance I mean at least two years of consistent growth. Many businesses grow in steps. A pattern of revenues at $20 million for several years and then jumping to $25 million does not present a convincing growth trend. Another jump to $30 million the next year will go a long way to realizing a growth multiple. Ultimately, whether a buyer is convinced depends on how the growth was achieved and what the current prospects are.
The selling process is one that takes seven to ten months to complete and therefore you will always run into the question of: “are you on track”.. “can we have a look at the latest quarterly numbers?” To underperform at this point is a worst case scenario. If you are four to six months into the process, then you will have already received a number of expressions of interest and are likely working with a small group of seriously interested parties. A quarterly profit number below expectations will open up the possibility of a revision to the value/structure in an LOI and may cause serious delay in the process as an alternate buyer may need to be found.
The second most important consideration in the selling process is who to sell to? I have written several posts about how to identify the best buyer (and I will address management as an option shortly) but, as an overriding comment, I would say your M&A advisor needs to run a thorough and diligent process. The four phases of a divestiture are: plan, prepare, market and complete (I will expand on how an advisor can add value in each phase in a later post). A critical factor in achieving a successful sale is to keep as many options open as long as possible. The seller has power when he/she has choice.
Finally, the why of selling is not a key driver from the perspective of realizing the most value in a transaction but it is a factor in the form of consideration and how long the process will take. Remember, if the business is dependent on the owner-operator, he/she will not be able to leave the business upon its sale. If the owner-operator has spent 20 years in the business, is nearing retirement, has made him/herself redundant, then he/she is in a position to structure the transaction to include as much cash as possible and make the transition period as short as possible. However, if the reason to sell part or all of the business is to take advantage of an opportunity to accelerate growth then, by partnering with a well capitalized entity that can bring investment, sales or distribution resources to the table, you may expect to spend many more years with the business. Finally, the best time to sell may have passed if the owner is no longer interested in the business (he/she is spending more time on other interests) or, he/she is compelled to sell for health reasons or, as a result of changing competitive/technology dynamics that are substantially reducing the economic prospects for the business.
The sale process, from consideration to 100% out, can take many years and with economic uncertainty as it is, it is best to start the planning from a position of strength.
Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.