It was a crisp January morning in Raleigh and the sharp aroma in the warm coffee shop was a combination of pastries, dark roast, and confidence. After the obligatory small talk, Bill jumped right in with, “You guys were the most organized, prepared, and responsive acquisition target we’ve ever worked with. We had difficulty finding areas to negotiate price.”
We knew this – we designed this – but the confirmation from the buyer was sweeter than my Choux.
Bill was the CFO of the strategic buyer of our client, a $45M second-generation, value-added distributor in the building products market. The deal had just closed on December 31st after a tight three months of due diligence, purchase agreement negotiation, and finalization.
We’re all familiar with “the process” of selling a business; the book, the competitive environment, the LOI, the exclusive due diligence, the purchase agreement, the financing, and the finish line.
Like any major life event, preparation helps. In the case of monetizing the value you have created in your business, the better you prepare for your trip to the market, the better your market experience.
This preparation should begin 12-24 months prior to going to market and consists of three main elements.
- First is a candid and comprehensive strategic discussion and forecasting exercise. It begins on the P&L, then progresses through the Balance Sheet, and culminates with a Cash Flow statement and detailed EBITDA recast schedule. Once modeled, it is stress tested with ‘good-better-best’ scenarios substantiated by enticing strategic assumptions.
- Second, a thorough due diligence preparation program. This is where the skeletons are cleaned out of the closet and the gaps creating potential areas of negotiation are closed – items like tightening customer contracts, curbing customer concentration issues and reducing the reliance of the business on the owner.
- Finally, mock sale process meetings are designed to address the most likely questions owners receive from potential suitors. Examples include current meaningful business challenges, details of outstanding customer issues, and the earn-out conversation.
The result is a business and an owner that has trained for the marathon of the sale process.
The dividends of preparing properly include:
- More for a buyer to get excited about. A reasonable base projection that the business continues to achieve through diligence. An upside projection with documented strategic assumptions to drive a positive conversation. A management team that can articulate the vista of post-acquisition possibilities the buyer may not have previously considered.
- A much tighter sale process. An intermediary will gain confidence quickly and be freed up to focus on creating a competitive environment. Once under LOI, a pre-prepared data room allows you to address incremental data requests. The buyer’s due diligence questions and data requests are cleared expediently.
- Preservation of the multiple. With elevated confidence in the business and management team, a tighter process, and no skeletons to discover during due diligence, the buyer generally finds fewer reasons to negotiate the price. Deal fatigue is avoided, and the value expressed in the LOI can be significantly preserved.
During our three months working together, Bill and I developed mutual professional respect and settled into an efficient working relationship. Our post-deal CFO transition conversation concluded in the span of one cup of coffee. The weather had warmed a bit as we left the coffee shop, as had our mutual belief that the transaction was valuable for both sides.