I have had the opportunity to build businesses from scratch, buy existing businesses, run them and sell them. This is the final blog in our four-part series. Here, we will take a quick look at the exit – selling a business.
Selling a Business creds. I sold my national business-to-business service to four different buyers over a ten-year period, including the first location to a publicly traded company. I sold my satellite and radar systems defense related software engineering business to a Maryland contractor that manages NASA’s Hubble Telescope. I sold the extended stay lodge to a national private equity firm. I sold my technology firm which specializes in Migration to Cloud, Big Data, Data Analytics, and Data Modernization Competencies to my Capital Partner. I sold our IT staffing firm to my Capital Partner. Including deals not mentioned here, I managed the investment banking role on businesses I built of eleven separate exits, nine of which were seven or eight figures.
Congrats if you are planning to exit! It is an exciting time. Here are three of the many lessons I’ve learned in selling companies:
1. Perform prospective Buyer due diligence before signing anything. I sold the Michigan office of my Professional Employer Organization to a NASDAQ company when the market for that type of business was hot. A year later, a large competitor from the East Coast wanted to buy the remainder of the company’s offices. I signed an LOI with the business that contained explicit non-binding language, allowing either party to terminate without cause. I did some due diligence on the company and decided not to sell to that prospective buyer, so I terminated the LOI. He sued me. We countered for tortious interference since we quickly found another bone fide buyer. He tied up the company, causing us to miss the wave of high valuations. In the end, I won a multi-million-dollar judgement at trial. He appealed. I won again on all counts including interest. Sounds good, right? But it took seven years of cash, focus and energy. Even after the New York bond company grudgingly paid us the $5.5mm judgment, I lost millions compared to selling at peak.
Those experiences are hard to predict, but whether it is a piece of property or a business, beware of those who use litigation as a tool to attempt to bully sellers. In the real estate sector, there are bad actors that have used the lis pendens concept to tie up property with little risk. They entice you to sign something and then use litigation as a tool to try to keep others from buying from you. Under pressure, often the seller will relinquish the property at a lower price versus defeat the frivolous litigation. In my case, the prospective buyer was using the LOI in this manner, even though it explicitly gave both parties a walk away with no obligation.
Though this prospective buyer had no case, he thought I would eventually cave. After seven years in the courts, it probably cost him nearly $10mm, including legal fees. Regardless, don’t get too excited when you have a buyer come in quickly and give you what appears to be an attractive LOI. First, conduct “prospective buyer due diligence” before you sign a term sheet or a letter of interest or letter of intent. To the extent possible, consider the following:
a. Is too much of the value tied to the future performance of the prospective Buyer?
b. Is the prospective Buyer financially capable of making the acquisition, or are they using your platform to raise money after you sign the LOI?
c. Is the prospective Buyer a good actor; a company or individual with integrity and a reputation for fulfilling requirements in a reasonable manner?
d. Is the prospective Buyer sue-happy? Do a quick Nexus search to uncover if he initiates law suits as a tool to try to get his way.
2. Add some independent directors, or at least do some of what they would do for you if you did. Most entrepreneurs place family members and friends on their board. Independent directors who have industry wisdom and value chain skill can enhance your exit price. Here are a couple things that you can do through closing to gain that benefit:
a. Run past the finish line. While in the selling process, continue to focus on increasing sales and making smart decisions for marketing related expenses. The Buyer’s due diligence team will likely uncover any attempts at masking performance. They are looking for upside. They want to find some value that reflects some ROI on the other side of closing. They will be looking at sales pipeline, service delivery capacity, synergies, rollup efficiencies and client concentration.
b. Reduce risk for the Buyer. Continue to operate the business with a strong sense of protecting the asset. Make good decisions on litigation issues, as if you were keeping the company for the long term. Terminate problem employees before closing. Close the underperforming office. Leave as little to the Buyer to clean up or fix up as possible. In terms of risk mitigation, expect them to have sophisticated due diligence capabilities and tools to unearth anything you tried to hide. The less they have to fix post-closing, the higher your price.
3. Deliver a great culture. A great culture helps with the HR checklist on talent acquisition and retention and can increase the company value by up to 15%. A great culture helps with the SWOT analysis. A great culture reduces the pressure from the Buyer’s management team during transition. When you are in the process of selling your business, you might think you are in some way “defrauding” your team to have inspiring culture meetings. That is not the case – an uplifting work environment is a good thing regardless of your personal exit plans. And, the reality is that you are staying engaged to take great care of your employees so they will take great care of the customers to protect the company as an asset. This provides the Buyer with an easier transition.
If you are in the process of exiting, I hope these thoughts are helpful to you. And, I hope your business flourishes whether you are building it from scratch, buying a company, running a company or selling one.