There is so much to think about when it comes to selling your company. One way to get the best deal is to think like a buyer. Joe Hellman recently sat down with Ryan Alberg of Duco Capital for an episode of The Transaction Abstract podcast, to discuss how sellers can get into a buyer mindset.
Duco Capital is a private equity firm focused on lower middle market manufacturing businesses in Minnesota, Wisconsin, and Iowa with an emphasis on retiring owners. Duco’s strategy is to facilitate leadership transitions by bringing in business-enabled military veteran leadership and generate long-term, community-minded growth.
Ryan’s M&A experience spans corporate development for big brands such as Target and Ecolab as well as both sides of the table working with small, founder-owned businesses, especially in manufacturing.
Listen to this episode to hear Ryan’s insights about why company stewardship is such an important issue and how to avoid confusion or changes of heart that can cause negotiations to falter.
No matter the reason behind selling your company, you want to get the best deal possible. The common assumption is that the best deal equals the highest price. But there are other factors involved, including your reason for selling. Perhaps you do, indeed, want to take the money and retire, or start another enterprise. Or, maybe you want to stay on and keep running your ship as it enters new waters as part of another entity.
But, what is your buyer’s motivation?
Strategic buyers want to acquire your company to augment another company, often to obtain production or geographic advantages. They are playing a long game. Financial buyers such as private equity funds want to acquire your company to turn a profit and then make their own exit.
Ryan says that sellers often assume that strategic buyers are willing to pay top dollar because they can earn back their investment through synergies generated by the deal. That’s not the case because there are costs associated with achieving those synergies. “They’re not particularly interested in paying you as a seller for the work they have to do,” he notes.
Having built their company into the sales-worthy business it is today, sellers typically have deep emotional connections to their management team and other personnel. You want your company to find a good home, but what will happen to your people? Strategic and financial buyers often approach this very differently.
Ryan’s recommendation: “It’s really about finding people you’re comfortable with and who you think are going to be good, long-term stewards of the business…I think the biggest thing that some sellers struggle with is accepting the fact that once they sell the business, it's no longer theirs unless you're rolling equity along with it or have an agreement to stay on for the long run. Some owners want a clean break and they want to see somebody else take it and run with it. But it can be really hard to give up something that you spent your entire life building.”
Does the buyer want you to stay involved, and if so, what do they want that to look like? The same question applies to any team members who might make the transition. It is critical that you and your buyer are in alignment on this, so it is critical that you understand their future vision.
The buyer has legitimate concerns. If they acquire you as part of the deal, will you stick around or leave soon, leaving them in the lurch? Will you really be comfortable with being a “cog” instead of the top dog?
If you get into negotiations and the buyer starts to worry about your intentions versus what they want to happen post-close, or if it appears you might change your mind, the process could falter or even fail.
As a seller, you need to do two things to put the buyer’s mind at ease:
The only time a seller can stay on without losing control is if a private equity group purchases your company and you as CEO to continue running things relatively independently.
So, you have to dissociate yourself from the dollar figure, advises Ryan. Ask yourself what you really want from the transaction. Are you willing to do what it takes to get top dollar, or are you willing to leave a little on the table to get what you want from a best-fit perspective? Ryan believes buyers would rather you have a clear vision of what you want rather than doing whatever you can to get a few extra dollars.
Just as you work with your M&A team to prepare the financial documents required for due diligence and the ongoing negotiation process, these same experts can help you evaluate why you want to sell and what you want post-close. Clearly understanding your motivation and goals will also help them in their broader advisory role.
Clarity will give your buyer greater confidence, and it will do the same for you. You can continue managing the company productively and normally during the process to warrant the best valuation, and you can look forward to a post-close future for your business that meets everyone’s expectations.