STS Capital Partners has a history of successful mergers and acquisitions. In fact, in 2015, we received the Telecom Deal of the Year Award, presented by M&A Advisor. Working with companies, we have been able to turn $30 million dreams into offers of over $400 million.
So what is the secret? How do you drive a higher valuation for your company at the time of exit? Here are 9 tips that we are sharing from the Deal of the Year experience.
1. Be Clear on Ideal Outcomes
Before you get to the negotiating table, you have to be clear on what you want to get out of the deal. We recommend thinking about it in terms of requirements and preferences.
An absolute requirement is something that would make you walk away if the buyer did not offer it. This is different from preferences, which are ideal but would not make you pass on the deal.
What dollar figure is required? Is your management team staying a requirement? What other conditions are ‘must haves’ for the deal? If you can’t tell your advisors what’s required and what’s preferred, you’re not ready to go to market.
2. Think about Life after the Deal
The ideal outcomes you set should support what you want to do or achieve after the transaction is complete.
What are you going to do next after your exit? You have to be clear on this, or else you are probably not emotionally ready to go to the negotiating table.
3. Create Your Management Team
It’s vital to identify strategic advisors and set up a strong management team within your company. Your value will go up with strategic buyers if you have a strong management team that can handle things so you, the business owner, do not have to be involved in day-to-day operations. You must also realize that a management team that is not on board with the transaction can sour a good deal. You want everyone rowing in the same direction, together as a team.
Whether they tell you or not, your management team will wonder how the transaction will affect them. We suggest making it a win for every member of the team, as big a win as possible. The CEO should create an incentive plan that accounts for employee salaries and income, and what is meaningful to them and their families. Since there is a potential for your team to lose their job when new ownership comes in (although this can be negotiated), you want to make it a big home run for them if the deal turns into a big home run for you.
4. Find out What Strategic Buyers Value
What is the strategic buyer looking for in the purchase of your company? These are the things that will increase the business’s value and drive the price up.
To understand this, make sure to look at your business from the strategic buyer’s perspective, to stand in their shoes. What are the critical success factors for them? What are they going to do with the business and how much money are they going to make owning it?
Understand what drives value for strategic buyers will allow you to command a maximum price for your business.
5. Increase Enterprise Value
Before you sell, you must start looking for ways to raise your EBITDA number, which will increase the value and offers.
There are several ways to increase enterprise value. For one, you must really understand your numbers so you can prepare a normalized set of statements to present to the buyer. Most business owners keep books that optimize the least amount of taxes, but you must also keep books that optimize the maximum deal value. This is about being assertive about your financials and making sure your numbers accurately reflect what the buyer is buying and future cash flow potential.
You can also increase enterprise value by purchasing acquisitions. In our Deal of the Year, we made two strategic and creative acquisitions that pushed value up.
6. Wait to Pull the Numbers Out
Although your financials should be prepared well in advance and ready to share when needed, you should always wait to pull out the numbers until the buyer is in love with your business.
Conducting a successful business deal is a process, much like dating. It takes time to build a relationship with strategic buyers and to get them to the point where they really like and want your company. At that point, the cost will be less of an issue.
7. Start Now
If you’re thinking about selling your business in two or three years, start finding creative ways to talk to strategic investors now. This will create value down the line.
Having initial conversations two years before the transaction allows you to set up and create the synergies, so both parties are comfortable, and the seller is on the radar of the buyer.
You can start initial discussions with four or five strategic investors at a time. At this point, you are not for sale; you are just talking. However, these early conversations will help you figure out what your company is worth to them.
8. Keep the Soft Auction Going
In our Deal of the Year transaction, the business owner started out with a goal of $30 million, but we were confident we could increase that number. I recall one meeting where we sat down with a buyer with a starting point of $40 million. By the end of the meeting, the figure was over $100 million.
Later on, when we were in the parking lot, the client grabbed me and started swinging me around, ecstatic about the million dollar offer. I told him that we could get a better deal, and to do so, he had to act like he was still going to market and not happy about the offer.
You should remain warm and honest in your relationships with each strategic investor. However, to get more out of your business, you must stay in the market and talk to more buyers.
9. Go International
To continue on with the story above, we ended up going international, and a Japanese buyer offered $120 million.
Beyond what other value your business offers them, many international buyers find value in U.S. businesses because it gives them the ability to enter the American market. In our negotiations, we had several meetings with strategic buyers from other countries.
If you are looking for international buyers to drive up the sale price at your time of exit, it is wise to hire an investment banker that has international relationships and offices. They’ll be able to bring international buyers to the table.
Throughout the exiting and negotiating process, you’ve got to keep the curve going up to drive a higher valuation of your business. These tips have proven to be effective in our own negotiations, and you can leverage them to plan a successful exit for your business as well.