This post is part of Acuity’s Master Class Series, dedicated to shedding light on financial and other influential industry topics. Our goal is to provide expert insights to empower the business community to make more strategic decisions. We recently sat down with Don Bravaldo, Founder and President of Bravaldo Capital Advisors, to discuss what business owners considering an eventual sale should be thinking about now.
Selling Transactions open up a huge door of opportunity and risk – here’s how to prep in advance.
Entrepreneurs put everything they have into their businesses, both emotionally and financially. Some create their businesses with the intention to sell from day one, while others end up there for a variety of other reasons. Selling can be a challenging and emotional process.
Bravaldo Capital Advisors are a boutique Mergers & Acquisitions and Corporate Finance Advisory firm. They are a generalist firm helping owners of privately-held lower middle market businesses plan and execute exit plans as well as raise capital and grow through acquisitions.
Q&A Lightning Round with Bravaldo Capital Advisors
What inspired you to enter this market?
I originally transitioned from public accounting to M&A by taking a job with an acquisitive public company where I worked on the corporate buy side of the equation. There I noticed that most of the closely held and family run businesses we met with were not prepared for a sale, and few had professional advisors on their side. As a result, they were leaving a lot of money on the table. It struck me that companies at the lower end of the middle market were incredibly underserved. So in 2001 I started working with privately held business owners directly as a sole proprietor advisor. Later, I joined a newly formed business brokerage firm and built and directed their large transaction practice. In 2011, I decided to launch my own firm to further focus on larger private businesses in the lower middle market as a boutique M&A advisory firm.
What is the profile of companies going through transactions?
We see a wide range of clients. We work with baby boomers who have built their business as founders or have taken over from a predecessor generation and they come to us interested in designing and executing a successful exit. They have worked in their businesses most of their careers and for a myriad of reasons, recognize that timing is right to consider their exit strategies. We also see young, serial entrepreneurs who thrive on getting a business to a certain size but then are ready to hand over the reins and leave it to someone else to take it to the next level. Both groups need to be cognizant about getting out at the right time – it’s all about timing in this business.
How does the M&A market look today?
We’re at the highest valuation environment that I’ve seen since 2007. That means there’s lots of money chasing deals and there are fewer high quality companies in the market for sale when compared to previous cycles. We’re at the top of the M&A cycle where both strategic industry buyers and private equity buyers are extremely active. Many private owners are unaware of the seller’s market we are in and they are jumping on the first unsolicited offer that comes knocking on their door, but that’s a mistake.
How should the M&A market work?
They need to prepare for a transaction and then create a confidential, competitive, auction style sale process. This will assist to drive up the price and get them the highest valuation for their business. Companies also need to make sure that a transaction is consummated on terms that are originally offered. One of the oldest tricks in the acquisition book is for a buyer to approach an unprepared seller who is not working with an advisor and offer what seems to be a high initial valuation, but as weeks stretch to months of negotiations, the buyer slowly whittles down the valuation and restructures the proposed terms, ultimately leaving the seller to have to make a hard choice – accept the lower price and changed terms, or walk away with nothing to show for their efforts but lost time and high professional fees.
What would you say to business owners who are thinking about selling their business down the road?
1. Prepare in advance.
Business owners are moving at 100 miles per minute and often lack the time necessary to be proactive. About 80% of our clients are event-driven, coming to us after (what we like to call) one of the 3 D’s – death (realization of mortality), divorce, or discouragement. Unfortunately, while they prove to be strong motivators, we prefer the 20% that are planners and are looking at a runway of around 3-5 years to really begin a multi-year planning process to exit their businesses on their terms. You can certainly work with a short runway to affect a successful exit from their businesses, but long-term preparation is a critical piece of the exit plan for maximizing value.
Start first by asking yourself, “what is the true value of my business?” A lot of business owners aspire to sell to a public company (public companies typically pay more), but don’t understand the value drivers that buyers in today’s market are looking for and evaluating on every acquisition they conduct. Upgrade the quality of your business’s financials and get outside assurance on your numbers. You may think you run a good ship, but a potential buyer isn’t just going to take your word for it.
2. Document historical and future performance.
A potential buyer, bank, or investor will want to see two things: where your business has been and where it’s going. If you’re not already documenting the historical performance of your company, start now. Have an outside accounting firm provide audit level assurance on your annual results two to three years in advance of a sale or major financing transaction. Also, when entering a transaction environment with an emphasis on providing accurate figures like earnings before interest, taxes, depreciation and amortization (EBITDA), it is imperative that sellers implement the ability to track their past twelve months’ financial performance in real time. Understand and document how your company generates revenue streams as well as the margins by product and service line. Know now that documentation from the past five years of operations will be requested during transaction due diligence.
Improve your forecasting ability by implementing annual budgeting and documenting your sales pipeline. Track the effectiveness of your efforts – a company that has a long track record of hitting their projections has a much stronger case to make to a potential buyer regarding its rosy projections than one that simply provides a typical “hockey sticks” forecast that it has prepared for the very first time during a transaction process.
A buyer is paying for the historical performance, but they’re really buying the business for the future cash flow generating capacity. You should be prepared with a three to five year forecast of where you’re headed. I cannot emphasize enough the importance of a strong reporting system. When you’re looking to move into that next phase of your business, it takes more than an opinion to close a deal. You need vast amounts of documentation to prove your value: a pipeline, sales funnel, your conversion rates, past forecasts and how you met those expectations, and more. If you’re not willing to keep that information up-to-date, hire someone who will.
3. Mitigate your risk.
The more you can eliminate risk, the higher the value of your business and the more transferable it becomes. Risk can be mitigated in a number of ways, both operationally and financially. Let’s say, for example, you have a customer that represents a large percentage of your revenues and profits. The potential of that customer going away is a huge risk for potential buyers. You can mitigate that risk by securing a long-term contract that protects your revenue stream. Or, maybe you’re a one man/woman show and lack a strong management team. There’s definitely a point where you need to scale back on your direct involvement, transfer your knowledge and build up your management team. A potential buyer will find huge value in that as the risk of having a single key manager is mitigated by an experienced management team all capable of running the business in the absence of the owner/founder.
4. Surround yourself with expertise.
These big, public companies or private equity firms that private owners are looking to eventually sell to…it’s their job to get the highest return possible for their shareholders. They are experts at buying, often undergoing multiple acquisitions per year. I’m willing to bet you’re not an expert at selling a business, and that’s okay. Great advisors bring leverage and knowledge to the table that keep the other side honest and where appropriate, they introduce competition into an exit/sale process.
What guidance would you give for a business selecting an advisor?
When you’re looking for a high-quality advisor, look for someone with a great reputation that other professionals in the M&A community can vouch for. Assess their background, education and experience. Most importantly, make sure they do business the way you want to do business. There are millions of dollars at stake and you’ll want someone with strong integrity and morals. Look for an independent firm that’s willing to fight for their clients. While there is a time and place for specialist firms, there is also a potential risk for firms that are focused on only one sector to overlook potential buyers from outside the industry. There is also the pull of temptation to “not rock the boat” by pushing the envelope to the max on valuation and structure. The large acquirers they routinely sell businesses to within their industry sector will remain large buyers they will continue to transact with long after this deal has closed.
When should people start working with an advisor?
If you’re thinking about potentially exiting your business in the next 5 years, you should be working with an advisor right now. In fact, you’re already late. We are currently 8 years into this current slow growth U.S. expansionary cycle. U.S. economic expansions have typically lasted approximately 5 years on average since 1854. If you’re an owner and want to exit your business, you won’t find a better time than right now. Valuations are at all-time highs, financing is readily available and buyers and investors are extremely active. Seek out a high-quality advisor before the current seller’s market conditions change.