Strategies & Analysis
reasonable hold period the PE will one
day seek to monetize its investment by
exiting the business to a new owner.
Seller Considerations
With cheap capital, increased competition for deals and the resulting increase
in valuations in recent times, what should
potential sellers of private companies do
to maximize their potential?
First, and this may seem obvious, as
they teach in the boy scouts: be prepared.
The owner who is considering selling
needs to prepare himself/herself mentally to go through the process of selling.
Being ready to sell does not mean simply
being of retirement age or having a long
bucket list. We often see owners genuinely struggle with the emotional aspects of
making a major life change such as selling their company or exiting their life’s
work. For many, even those that say they
are most ready, the separation anxiety is
akin to the grieving process one experiences after the death of a loved one or the
end of a long relationship.
In addition to managing the potential
inner turmoil, the seller has to be able to
work with the prospective buyer(s) to support the necessary due diligence process all
buyers must complete in advance of closing the transaction. The seller must become
comfortable (if not comfortable then at
least accepting) sharing detailed, confidential information with strangers. Answering
detailed (perhaps invasive) questions as
the buyer works toward achieving the
necessary comfort level to make the investment is a critical part of the process.
Patience is indeed a virtue here.
The need to share sensitive data raises
the issue of internal confidentiality. Who is
going to be involved and in the communi-
cation loop with the buyer? This also can
raise questions related to succession plan
expectations, retention of key non-share-
holder members of Management, and
overall workforce continuity. Managing
who, when and how plans to sell are com-
municated to the employees is a critical
element in securing on-going support for
the new owners. In many cases, purchase
agreements will contain earn out or hold
back provisions making partial payment of
the purchase price contingent upon future
performance of the business. Missteps can
be very costly to both parties.
Understand the priorities and hierarchy of needs on the buy side of the table.
As noted in this series of articles, not all
buyers will view the business through the
same lens, and smart sellers understand
how to use the discrepancy to their advantage. Ask probing questions of the
buyer to develop a clear understanding
of his/her strategic intent and determine
where your company fits their needs.
Armed with the feedback, what can you
do as a seller to maximize your fit with
buyer value drivers?
Finally, sellers need to have a clear
understanding of their personal priorities and desired outcomes before
entering into a negotiation or a selling
process. Everyone knows a fantastic anecdote about “that company” that was
bought/sold at that incredible EBITDA
multiple, but do not fall into the trap
of thinking every asset trades at the top
of the market and your company is the
next record setter. In all likelihood there
will be unavoidable trade-offs raised
in the negotiation process, and both
sides want to steer the conversation in
their direction. Prevent being caught
off guard and manage the emotions at
the table or in the moment of proposal/
counterproposal by spending some time
anticipating and prioritizing the inherent compromises with specific deal
points. Be realistic and set aside your
rose-colored glasses if possible.
Because the selling process is imprecise
and fraught with emotion, many owners
will elect to engage third party support,
consultants and/or investment bankers,
to manage the process. Intermediaries
are a key element of many types of
transactions as sellers and buyers benefit
from the emotional distance that is cre-
ated as well as the technical inputs from
an objective outsider who brings specific
transaction or industry expertise and in-
sight. This approach can expedite matters
and pay great dividends.
Seller Keys
• Emotional Preparation
•Manage Information Flow /
Maintain Confidentiality
• Uncover the Buyer’s Priorities and
Needs
• Understand Personal Priorities and
Desired Outcomes
•Consider Using an Intermediary
to Provide Distance, Expertise and
Objectivity
Conclusion
Over the past three installments of the
Business Corner, we have touched on a
wide array of topics and concepts associated with buying and selling companies. We have discussed the tendencies
and reputations of different buyer types
and attempted to link those generalizations to real business needs. In doing so, we have examined quantitative
considerations and demonstrated the
basics of how transactions are modeled,
and we have analyzed the qualitative
concerns of buyer and seller and suggested some tactical considerations for
managing the negotiation process. This
series is by no means intended to be
an exhaustive treatment of the subject
of M&A, but hopefully it was a good
conversation starter. We at CHEMARK
hope that you have found this series to
be informative, thought-provoking, and
perhaps a bit entertaining. CW
“With cheap capital, increased competition
for deals and increase in valuation...
what should potential sellers of private
companies do to maximize their potential?”
