Optimizing the Sale of a Private Business in Economically Challenging Times
Every economic slowdown comes with its own set of challenges for business owners. After more than two years of unprecedented disruption in supply chains, rising interest rates, inflation, global conflicts, tight labor markets and public health crises, the current global economic and business climate is still marked with uncertainty. Any of these factors can influence the stakeholders involved in a potential company sale and, in the end, could impact the ability to execute a transaction. Many entrepreneurs have successfully navigated through past downturns and recessions, and this article explores current considerations when selling a private business.
Selling a business is a complex endeavour even in the best of times, and the current environment has shifted the appetite from certain buyers and placed the focus of buyer due diligence. The market remains open, particularly for high-quality businesses valued less than several hundred million dollars. That’s why approaching a sale process with clear and informed goals, comprehensive preparation, and a sound management team are essential elements of an optimal transaction. So, what are the steps you need to be aware of to mitigate market risk and optimize the sale of your business?
Clear stakeholder goals keep a deal on track
There are many objectives you need to consider before selling your business. Many business owners begin the conversation focused on the topic of valuation, but other factors—such as deal structure, process speed, protection of proprietary information and the roles of key employees post-sale—are just as important.
Some of the general elements that can influence a sale process, both in terms of valuation and the overall timeline, include the ability to accurately forecast business performance, the strength of the intellectual property and the nature of customer relationships. Most buyers, especially financial investors such as private equity firms, will also pay close attention to the track record of the management team, the capital required to grow the business and a company’s resilience to broader economic shocks.
A buyer with existing operations in a similar or closely adjacent business may be able to enhance their valuation by considering cross selling within their broader business, synergies (economies of scale, procurement savings) and brand integration. When forming an internal view of value, it’s important for business owners to consider the relative priorities of different potential buyers and the prism through which they typically approach a transaction.
The underlying structure of a sale transaction can also impact valuation. A seller willing to retain an equity stake and continue in a management or advisory capacity could expand the universe of potential financial buyers, as well as create more varied and actionable options. Conversely, a requirement to sell 100% of the equity and leave the business quickly after closing, especially when the owner has a significant operational role in the business, could restrict the universe of potential buyers to those who can quickly fill the operational roles of the exiting shareholders and parachute executives into key leadership roles.
Process confidentiality is also important. A formal process is designed to provide increasing amounts of information to a progressively smaller, more qualified set of buyers. When seeking a buyer, a seller should be willing to take a measured risk by disclosing information to third parties and investing time and resources to investigate and understand market interest.
BMO, for example, recently advised a regional service business that had expressed concerns with process confidentiality with their suppliers and key employees. A targeted process with five highly qualified buyers and clear messaging regarding goals and timelines resulted in a premium valuation and a compact, quiet process.
While revealing confidential information can feel uncomfortable at first, a structured approach designed with confidentiality safeguards can mitigate process risks and is crucial to generating reliable market offers. Ultimately, it’s a matter of calibrating your goals with your risk appetite.
Comprehensive preparation reduces friction during the process
When negotiating with a buyer, it’s crucial to maintain momentum through a well-managed process. That means being prepared to make decisions and answer questions from various stakeholders in a timely fashion. That’s why we advise our clients to invest in upfront preparation (well-organized corporate records, defensible forecasts, clear presentations) so you can answer questions from various buyers quickly and comprehensively. Doing so helps buyers not only feel confident that the information you’re providing is reliable, but that you understand the business, its future prospects and sustainable cash flow—all of which allows them to put their best offer forward. This confidence has a positive impact in their discussions with lenders and sources of capital, which is even more important in a tightening economic environment.
The biggest risks to closing a deal are negative surprises and inconsistent momentum. Lack of preparation can lead to requiring extra time, and anytime you’re unable to provide timely answers, you’re intensifying the buyer’s uncertainty. And during an uncertain economic environment, buyers will use that to their advantage. That’s why in addition to collecting, organizing and reviewing corporate information, many buyers choose to engage the services of an external accounting firm to perform a detailed financial review.
A detailed financial analysis identifies nonrecurring expenses (which can increase the value of your business) and quantifies the future impact of operational improvements, which buyers may ask about during the detailed due diligence process. Such insights are also useful when preparing forecasts for presentations to potential buyers. In our experience, a forecast should be “optimistic but achievable” as negative variances during the negotiation phase create an opportunity for the buyer to change the terms of their offer.
Recently, BMO advised a national distribution business with many shareholders on a sale process. There were many categories of potential buyers, and our preparation involved a lot of financial and operational analysis. This allowed the deal team to highlight different aspects of the business to different buyers and many (30+) credible offers were received. Potential buyers were very informed in advance of in-person meetings, and this allowed the shareholders to make an informed choice regarding the ultimate buyer.
Preparation allows the shareholders to understand the different approaches used by different buyers and also helps to maintain process flow and momentum, which are critical to optimizing the ultimate deal terms and structure.
Showcasing the management team builds buyer confidence
The sale of a business is time consuming for key executives. That’s why talent management becomes crucial during negotiations. During the process, you may need to increase staff or outsource where possible so that key individuals can effectively manage both the transaction as well as their current responsibilities. If key managers or leaders are distracted by the sale process, they may not provide the level of service your key clients are accustomed to, which can introduce longer-term business risks.
We’ve also found that companies too dependent on a single individual are often less desirable for acquirers. If the person who holds all the expertise and maintains all the key relationships is the same person looking to sell, that tends to have a negative impact on value and salability. The acquirer needs to know the company will continue to be strong even after the leader is gone; there’s simply too much risk involved when one person holds all the cards. Also, the process tends to be slower because stakeholders get logjammed dealing with an individual rather than a team.
It’s important to put your management team in a position where they’re focused and putting their best foot forward when dealing with buyers. Part of this often involves specific financial arrangements that are tied to a successful outcome. These contingent payments are often structured to be received at certain milestones post-close and convey confidence to the new owner that key leaders will remain with the business post-transaction.
In one such case, BMO advised the family of a multigenerational, international business on a sale. The family had, in advance of a formal process, transitioned operational control to a management team and fully supported this team throughout the sale process. In addition, the shareholders had offered significant contingent payments to key management personnel, and this allowed both shareholders and management to remain focussed, aligned and motivated throughout the process.
Even during an economically challenging time, the goal is to attract the right buyer and optimize the overall transaction. Owners of companies that maintain the fundamentals—accurate forecasts, strong customer relationships and a highly motivated management team—and commit the time and resources to prepare for the process are in the best position to optimize the sale of their business.
Gary Chung, Managing Director of Middle Market Mergers & Acquisitions, contributed to this article.
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Cameron Hewes
Head, Mid-Market M&A, North America
Cameron Hewes has executed more than 100 M&A, advisory and financial transactions during his career. Prior to joining BMO from Greene Holcomb Fisher, he was pre…(..)
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Alex Baniczky
Head, BMO Capital Partners
Alex is the head of the BMO Capital Partners line of business with a focus on private equity and subordinated debt transactions across North America. Alex brings ov…(..)
View Full Profile >Every economic slowdown comes with its own set of challenges for business owners. After more than two years of unprecedented disruption in supply chains, rising interest rates, inflation, global conflicts, tight labor markets and public health crises, the current global economic and business climate is still marked with uncertainty. Any of these factors can influence the stakeholders involved in a potential company sale and, in the end, could impact the ability to execute a transaction. Many entrepreneurs have successfully navigated through past downturns and recessions, and this article explores current considerations when selling a private business.
Selling a business is a complex endeavour even in the best of times, and the current environment has shifted the appetite from certain buyers and placed the focus of buyer due diligence. The market remains open, particularly for high-quality businesses valued less than several hundred million dollars. That’s why approaching a sale process with clear and informed goals, comprehensive preparation, and a sound management team are essential elements of an optimal transaction. So, what are the steps you need to be aware of to mitigate market risk and optimize the sale of your business?
Clear stakeholder goals keep a deal on track
There are many objectives you need to consider before selling your business. Many business owners begin the conversation focused on the topic of valuation, but other factors—such as deal structure, process speed, protection of proprietary information and the roles of key employees post-sale—are just as important.
Some of the general elements that can influence a sale process, both in terms of valuation and the overall timeline, include the ability to accurately forecast business performance, the strength of the intellectual property and the nature of customer relationships. Most buyers, especially financial investors such as private equity firms, will also pay close attention to the track record of the management team, the capital required to grow the business and a company’s resilience to broader economic shocks.
A buyer with existing operations in a similar or closely adjacent business may be able to enhance their valuation by considering cross selling within their broader business, synergies (economies of scale, procurement savings) and brand integration. When forming an internal view of value, it’s important for business owners to consider the relative priorities of different potential buyers and the prism through which they typically approach a transaction.
The underlying structure of a sale transaction can also impact valuation. A seller willing to retain an equity stake and continue in a management or advisory capacity could expand the universe of potential financial buyers, as well as create more varied and actionable options. Conversely, a requirement to sell 100% of the equity and leave the business quickly after closing, especially when the owner has a significant operational role in the business, could restrict the universe of potential buyers to those who can quickly fill the operational roles of the exiting shareholders and parachute executives into key leadership roles.
Process confidentiality is also important. A formal process is designed to provide increasing amounts of information to a progressively smaller, more qualified set of buyers. When seeking a buyer, a seller should be willing to take a measured risk by disclosing information to third parties and investing time and resources to investigate and understand market interest.
BMO, for example, recently advised a regional service business that had expressed concerns with process confidentiality with their suppliers and key employees. A targeted process with five highly qualified buyers and clear messaging regarding goals and timelines resulted in a premium valuation and a compact, quiet process.
While revealing confidential information can feel uncomfortable at first, a structured approach designed with confidentiality safeguards can mitigate process risks and is crucial to generating reliable market offers. Ultimately, it’s a matter of calibrating your goals with your risk appetite.
Comprehensive preparation reduces friction during the process
When negotiating with a buyer, it’s crucial to maintain momentum through a well-managed process. That means being prepared to make decisions and answer questions from various stakeholders in a timely fashion. That’s why we advise our clients to invest in upfront preparation (well-organized corporate records, defensible forecasts, clear presentations) so you can answer questions from various buyers quickly and comprehensively. Doing so helps buyers not only feel confident that the information you’re providing is reliable, but that you understand the business, its future prospects and sustainable cash flow—all of which allows them to put their best offer forward. This confidence has a positive impact in their discussions with lenders and sources of capital, which is even more important in a tightening economic environment.
The biggest risks to closing a deal are negative surprises and inconsistent momentum. Lack of preparation can lead to requiring extra time, and anytime you’re unable to provide timely answers, you’re intensifying the buyer’s uncertainty. And during an uncertain economic environment, buyers will use that to their advantage. That’s why in addition to collecting, organizing and reviewing corporate information, many buyers choose to engage the services of an external accounting firm to perform a detailed financial review.
A detailed financial analysis identifies nonrecurring expenses (which can increase the value of your business) and quantifies the future impact of operational improvements, which buyers may ask about during the detailed due diligence process. Such insights are also useful when preparing forecasts for presentations to potential buyers. In our experience, a forecast should be “optimistic but achievable” as negative variances during the negotiation phase create an opportunity for the buyer to change the terms of their offer.
Recently, BMO advised a national distribution business with many shareholders on a sale process. There were many categories of potential buyers, and our preparation involved a lot of financial and operational analysis. This allowed the deal team to highlight different aspects of the business to different buyers and many (30+) credible offers were received. Potential buyers were very informed in advance of in-person meetings, and this allowed the shareholders to make an informed choice regarding the ultimate buyer.
Preparation allows the shareholders to understand the different approaches used by different buyers and also helps to maintain process flow and momentum, which are critical to optimizing the ultimate deal terms and structure.
Showcasing the management team builds buyer confidence
The sale of a business is time consuming for key executives. That’s why talent management becomes crucial during negotiations. During the process, you may need to increase staff or outsource where possible so that key individuals can effectively manage both the transaction as well as their current responsibilities. If key managers or leaders are distracted by the sale process, they may not provide the level of service your key clients are accustomed to, which can introduce longer-term business risks.
We’ve also found that companies too dependent on a single individual are often less desirable for acquirers. If the person who holds all the expertise and maintains all the key relationships is the same person looking to sell, that tends to have a negative impact on value and salability. The acquirer needs to know the company will continue to be strong even after the leader is gone; there’s simply too much risk involved when one person holds all the cards. Also, the process tends to be slower because stakeholders get logjammed dealing with an individual rather than a team.
It’s important to put your management team in a position where they’re focused and putting their best foot forward when dealing with buyers. Part of this often involves specific financial arrangements that are tied to a successful outcome. These contingent payments are often structured to be received at certain milestones post-close and convey confidence to the new owner that key leaders will remain with the business post-transaction.
In one such case, BMO advised the family of a multigenerational, international business on a sale. The family had, in advance of a formal process, transitioned operational control to a management team and fully supported this team throughout the sale process. In addition, the shareholders had offered significant contingent payments to key management personnel, and this allowed both shareholders and management to remain focussed, aligned and motivated throughout the process.
Even during an economically challenging time, the goal is to attract the right buyer and optimize the overall transaction. Owners of companies that maintain the fundamentals—accurate forecasts, strong customer relationships and a highly motivated management team—and commit the time and resources to prepare for the process are in the best position to optimize the sale of their business.
Gary Chung, Managing Director of Middle Market Mergers & Acquisitions, contributed to this article.
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