We will occasionally meet a company owner who is personally motivated to sell but feels that there are several things that need to be improved before the company is ready to be put on the market. This might involve hiring a key manager. Or finishing a major internal initiative. We certainly maintain that there is a minimum threshold of company preparedness needed for a company to be in a position to be brought to market. However, we also know that companies can be successfully marketed even if there are some significant gaps or weaknesses.
When we meet with business owners we go through a 25 point Value Drivers checklist to assess their company. The farther to the right hand side of the scale the better. This checklist includes a section called “Deal Killers” and we will not take a sell-side assignment with a weak score on one of these criteria. For example, if there is no depth of management team and the owner is essentially mission- critical to the company, this is a deal killer situation.
Other than Deal Killers, most of these checklist items are for us to assess the company. We want to know its strengths so we can highlight these. We identify any weaknesses so these can be disclosed and explained and maybe even presented as opportunities. There are several reasons why sophisticated buyers may be able to overlook what appear to be flaws in a company they are considering for acquisition:
1. The Buyer Can Fill in the Gaps
Almost always the buyer is much bigger and deeper resourced than the selling company, whether they are a strategic buyer or a private equity firm. For example, the buyer may have a needed department head in place. We sold an Internet security firm last year. At the time our client had an open position for its Chief Technology Officer, a key management position for this kind of enterprise. This proved not to be a problem at all, as the acquiring company was twenty times larger and had a deep team of technology leaders.
In 2012 we represented a medical device manufacturing company and had a private equity firm as a finalist bidder. This buyer had a long relationship with a medical device CEO who had successfully grown one of their portfolio medical device companies to a successful exit and was now ready for his next gig. He was potentially an ideal fit to fill the role of the retiring CEO/Owner.
2. It’s a Seller’s Market
Buyers may be willing to overlook more flaws in a target company right now given how eager they are for acquisitions. Many company owners are still on the sidelines due to the rocky economy the past few years. Private equity firms have over $400 billion to deploy and strategic buyers have balance sheets loaded with cash that is often targeted for an acquisition driven growth strategy. Valuations are generally up, which may offset any discount for a particular company weakness.
3. Prioritization of a Key Profit or Growth Driver
A company may have one or two very key attributes that are attractive to a potential buyer. Perhaps there is some unique intellectual property that fits perfectly with the buyer’s growth strategy. Or perhaps the selling company has a long standing relationship with a key customer and access to this customer is the backbone of a deal. In cases like this the buyer may not care that the new accounting upgrade isn’t ready or the ERP system integration isn’t complete. A key company attribute may drive the deal.
4. Owners are Often Tough Critics
No company is perfect. Owners often have a tendency to be tougher critics of their operation than outsiders. This attitude probably helped them build their successful company, but may not provide them with objectivity when looking at the marketability of their company.
The sale of a company should always be driven by the owner’s personal goals and motivations. Age, energy, financial and family situation are all factors. If an owner is thinking about selling but fears the company isn’t marketable due to some gaps or flaws, it might be wise for this owner to meet with an experienced Investment Banker who is immersed in the current M&A market to get an objective assessment of the situation. The owner might be surprised at the favorable marketability of the company and be closer to retirement and wealth diversification than he or she thinks.
Written by Jeff Wright, Managing Director, Corporate Finance Associates | 612-216-4466 | firstname.lastname@example.org
Corporate Finance Associates (CFA) is an investment banking firm that specializes in working with private company owners to help them sell or recapitalize their companies at a high valuation. CFA’s FINRA licensed dealmakers manage the entire sale process, cast a wide net for high value buyers and run a process that creates urgency and competition. The partners of CFA’s Minneapolis office have bought, run and sold multiple businesses so they relate well to what their clients are going through.