Sep 24, 2020
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Middle Market M&A: Making Money After Your Sale — Part 3

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In the first installment during this series we identified that some sales of companies are structured in a fashion that the sellers proceeds vary with post-deal performance of their firms. There is a range of financing tools to get the deal done. The specific use of those tools – for instance 10% cash 10% adjustable note 30% earn-out and 50% external financing – might be as plain vanilla or Neapolitan as the vendor and buyer want it

 

You are able to even have caramel and sprinkles. In our second episode we discussed prepping your firm for sale. Conceptually an organization s systems might be divided into business development operations finance and infrastructure. How well does each of those systems run? We talked with Jack Borelli of KnowledgeConnect

 

His firm is a facilitator of mastermind groups for Fortune 500 companies. Mr. Borelli offered us key themes that KnowledgeConnect emphasizes to its member firms to assist them bring each system to its full potential. Now once we take this tune-up concept and apply it to your sale there is a class of advisor called an exit planner

 

During this field there are two primary professional certifications. There’s the Certified Exit Planning Advisor offered by the Exit Planning Institute (www. Exit-Planning-Institute. org). And there’s the Certified Exit Planner overseen by the Business Enterprise Institute (www. ExitPlanning. com). When do you have to start your exit planning? Yesterday. Truly the time to be thinking about the sale of your organization is when you start it

 

Everything you do from Day 1 ought to be targeting driving enterprise value upon sale. But that isn t what happens. Let s be honest. What really happens is you go along after which get to some extent at which you are saying I desire to sell in six months

 

Without a doubt in case you ve been using an organization like KnowledgeConnect or participating in a native Vistage group for several years you perhaps set. The chances are high that isn t the case. So what do exit planning professionals say? Typically they’ll say that to do it right you start your value enhancement process about two to three years prior on your sale

 

But here s the problem: what do you do concerning the out-of-the-blue offer that is available in tomorrow? We talked about this in a previous article. Most engaging middle-market companies receive several inquiries a month. Anything that you’ve done to spice up what a selling price could have been is behind you

 

Via the out-of-the-blue offer you really do ought to start your planning yesterday. (Of course I am compelled to say that the sooner you start your planning the greater the likelihood you would possibly achieve greater tax savings. ) Here we’re within the planning phase. Let s think about who your buyer goes to be

 

Within the middle market there are four categories of buyers: family employees financial and strategic. Below the middle market there’s another category of buyer – lifestyle owner/operator – whom we are able to not address. The order in which we ve listed buyers is the order of valuation – from low to high – that a given buyer is willing to pay

 

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5 Ways Employers Can Support Black Employees: A Young Leader s Advice Without a doubt wouldn t all of us like a strategic buyer? But it s not that simple

 

Actually that as many as 70% to 75% of deals do not meet their objectives – that is the idea of the acquisition or merger. Harvard Business Review periodically presents overviews of studies on M&A success. Through the years the studies that HBR reviews consistently discover a low success rate. In case your proceeds depend upon post-deal performance how does this statistic make you feel? Some argue that the low success rate has to do with compatibility of the vendor s firm and the customer s organization

 

In a previous article we talked with Alese Stroud of MergerMatch. Her firm does the equivalent of eHarmony for mergers and acquisitions. Ms. Stroud s firm employs a system called Actionable Gap Analysis. This system compares gaps between the vendor and buyer in terms of their organizations operations culture etc. Consider the way you ve organized your firm and the way a buyer s company is organized

 

Let s say that you’ve got multiple operating locations and also you ve delegated certain decisions to local managers. You ve felt a key on your success has been that local managers have an intangible sense of local business conditions. But then your buyer s organization makes those self same decisions centrally

 

How will that affect operations? How will that affect post-deal success? How would that affect your ultimate buyout proceeds? Now let s consider sales process. Then marketing. Then firm culture. . . even dress code. All of it adds up. eHarmony seeks to create successful personal relationships via analysis of compatibility. Ms. Stroud means that an identical thoughtful process is important for a successful merger or acquisition

 

With this in mind as a seller whose buyout proceeds are depending on post-deal success you would possibly stack the deck in favor of success by employing this kind of process in selecting a buyer. Don t simply shop your firm. Strategically decide who your buyer goes to be. On the surface one prospective buyer provide you with a certain price and a second prospective buyer provide you with a lower price

 

But when considering the compatibility issues the low cost offer might yield the greater post-deal success. It is an extremely difficult issue for you. Take some time to think about it. In an identical way that you recognize your small business in and out you want to understand your ideal buyer inside and out

 

It s easy to be charmed on the first date. But you re after an enduring marriage. Here s a quick story before we close this installment. Recently I used to be at an M&A conference in Denver. The story was told a few 50-year-old family firm that was the dominant player in its locale

 

An extremely large strategic buyer offers the family a big cash price. Coupled with the cash the vendor represented that the firm would continue on because it have been for years. Within a year after deal close the entire operation was shut down. The customer was simply after the vendor s customer list

 

What concerning the buyer s representations about continuing the firm? Too bad. Sue us. A dozen years after the sale the family patriarch openly cries when the topic comes up. His reputation locally was destroyed. The moral of the story is that there s more to post-deal success than simply the money

 

In our next episode we ll continue almost about post-deal integration. For a free PDF copy of my book about tax savings when selling your small business please email me at todd@integratedwealth. com

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