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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
A comprehensive handbook for middle-market business sellers
In Selling Your Business with Confidence: A Practical Playbook for Mid-Market Owners, veteran M&A advisor David McCombie delivers an insider's guide to navigating the mergers and acquisitions (M&A) sales process. In plain English, this book covers every essential topic for owners considering the sale of their business. Readers will fully understand the process, the range of options available, and their implications.
In the book, you'll learn to navigate every step of the exciting—yet stressful—business sale journey, such as:
- The overall timeline, mechanics, and typical strategies of a deal
- Understanding different types of buyers and what they prioritize
- Tactics you can implement immediately to make your company more valuable
- Strategies for emotionally and psychologically preparing yourself for the transaction
An essential roadmap to the complicated world of mid-market M&A transactions, Selling Your Business with Confidence is a must-have resource for business owners and the ecosystem of professionals who serve them.
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Seitenzahl: 418
Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
Introduction
CHAPTER 1: The Art and Science of Selling a Company
CONGRATULATIONS
I’M HERE TO HELP
LET’S LEVEL THE PLAYING FIELD
THE OLD “DATING GAME”
BEFORE WE START
CHAPTER 2: What’s My Business Worth?
JUST GIVE ME THE BOTTOM LINE
MULTIPLES FRAMEWORK
THREE FACTORS DRIVING MULTIPLES
SUPPLY–DEMAND FACTORS
TOP 3 TAKEAWAYS
CHAPTER 3: What Are We Multiplying By?
BUYERS BUY THE FUTURE
NONBUSINESS OR PERSONAL EXPENSES
NONRECURRING OR EXTRAORDINARY EXPENSES
ACCOUNTING ADJUSTMENTS
PRO FORMA ADJUSTMENTS
ADDBACKS ARE A TWO-WAY STREET
TOP 3 TAKEAWAYS
CHAPTER 4: Picking the Right Time to Sell
TIMING IS YOUR EDGE
COMPANY TRAJECTORY
INDUSTRY ENVIRONMENT
MARKET AND MACROECONOMIC ENVIRONMENT
PERSONAL FACTORS
AVOID FORCED SALES AT ALL COSTS
TOP 3 TAKEAWAYS
CHAPTER 5: No Learning on the Job
PENNY-WISE, POUND-FOOLISH, DO IT YOURSELF
THE VALUE OF EXPERTISE
WHAT AN INVESTMENT BANKER DOES
FACTORS TO CONSIDER WHEN SELECTING YOUR BANKER
THE TRUST CHECKLIST
EXPECTED FEES
ENGAGEMENT LETTER OVERVIEW AND NORMS
TOP 3 TAKEAWAYS
CHAPTER 6: M&A Is a Team Sport
THE M&A ATTORNEY
OTHER DEAL TEAM ROLES
EXPECTED FEES
TOP 3 TAKEAWAYS
CHAPTER 7: Who’s Going to Buy My Business?
STRATEGIC BUYERS
PRIVATE EQUITY FUNDS
INDEPENDENT SPONSORS
SEARCH FUNDS
FAMILY OFFICES (ULTRA-HIGH-NET-WORTH INDIVIDUALS)
MANAGEMENT BUYOUT
ESOP
TOP 3 TAKEAWAYS
CHAPTER 8: The Siren Call of the Unsolicited Offer
INTERESTED PROSPECTS AREN’T NECESSARILY SERIOUS
RISK OF TESTING THE WATERS
HOW TO HANDLE THE CALLS
TOP 3 TAKEAWAYS
CHAPTER 9: What Does a Buyer Want?
FEASTING ON BIDS OR STARVING FOR ATTENTION
WHAT CREATES VALUE FOR BUYERS
TYPICAL BUYER TEAM
BUYER REVIEW PROCESS
COMMON BUYER DEAL TACTICS
TOP 3 TAKEAWAYS
CHAPTER 10: Choosing the Right Transaction Type
TOTAL EXIT
CONTROL BUYOUT
MINORITY GROWTH PARTNER
DEBT RECAPITALIZATION
TOP 3 TAKEAWAYS
CHAPTER 11: Bad News
EXISTENTIAL RISKS
OTHER COMMON VALUE DETRACTORS
TOP 3 TAKEAWAYS
CHAPTER 12: Reverse Engineering Your Business
USING PRIVATE EQUITY AS A ROLE MODEL
SALE READINESS: SHORT-TERM TIME HORIZON
LUXURY OF TIME: MID- TO LONG-TERM TIME HORIZON
TOP 3 TAKEAWAYS
CHAPTER 13: The Art of Selling
PACING IS IMPORTANT
HANDLE OBVIOUS OBJECTIONS EARLY
FORWARD PROGRESS
BACK TO DATING
TAKING A BUYER’S PERSPECTIVE
TOP 3 TAKEAWAYS
CHAPTER 14: Negotiating Strategy
EVERY INTERACTION IS A NEGOTIATION
DON’T FORGET THE HUMAN ELEMENT
MANAGING RELATIONS WITH THE COUNTERPARTY
PREPARATION IS HALF THE BATTLE
LEVERAGE
THE DANGERS OF BLUFFING
STRIKING A BALANCE
YOU MAKE THE CALL
NO-REGRET MOVES
TOP 3 TAKEAWAYS
CHAPTER 15: Overcoming Inertia
BUILDING MOMENTUM
MINIMIZING FRICTION
SPEEDING UP BY SLOWING DOWN
MAKE IT EASY FOR THEM TO SAY
YES
MINIMIZE MISCOMMUNICATIONS
TOP 3 TAKEAWAYS
CHAPTER 16: Documents and Deal Process
TEASER
NONDISCLOSURE AGREEMENT (NDA)
CONFIDENTIAL INFORMATION MEMORANDUM (CIM)
HOW THE PROCESS UNFOLDS
PREPARATION
ENGAGING BUYERS
EXECUTION AND CLOSING
TOP 3 TAKEAWAYS
CHAPTER 17: Tailoring the Process
HOW WIDE SHOULD YOU GO?
WEIGHING THE VARIABLES
SELECTING THE RIGHT BUYERS TO APPROACH
CONTACTING THE RIGHT INDIVIDUALS
LUXURY OF BEING INTENTIONAL
TOP 3 TAKEAWAYS
CHAPTER 18: Keeping the Secret
PREVENTING LEAKS
CONSIDERATIONS FOR INTERESTED STRATEGIC BUYERS
HANDLING LEAKS
TELLING EMPLOYEES
ALIGNING INCENTIVES WITH CRITICAL TEAM MEMBERS
TOP 3 TAKEAWAYS
CHAPTER 19: It’s a Process
NAVIGATING THE NDA
INITIAL CONVERSATIONS
HOW TO FIELD QUESTIONS REGARDING YOUR MOTIVATION TO SELL
DEFLECTING QUESTIONS ABOUT YOUR ASKING PRICE
MANAGING FOLLOW-UP REQUESTS
HANDLING REJECTION
TOP 3 TAKEAWAYS
CHAPTER 20: Seeing Where You Stand
SELECTING WHO TO INVITE
MANAGEMENT MEETINGS
SITE VISITS
ADHERING TO THE PROCESS
TOP 3 TAKEAWAYS
CHAPTER 21: Purchase Price and Terms
ENTERPRISE VALUE
DIFFERENT FORMS OF PAYMENT
EARNOUTS
SELLER FINANCING
ROLLOVER EQUITY
NORMALIZING AND COMPARING OFFERS
TOP 3 TAKEAWAYS
CHAPTER 22: Negotiating and Signing the Letter of Intent
THE LEVERAGE SHIFTS WITH THE STROKE OF A PEN
KEY ELEMENTS OF AN LOI
PROCESS
FORCING CLARITY
LIKELIHOOD OF CLOSING
MAKING A FULLY INFORMED DECISION
MAKING THE FINAL CALL
KEEP LOSING BIDDERS WARM
TOP 3 TAKEAWAYS
CHAPTER 23: Playing Defense
PREPARE YOURSELF EMOTIONALLY AND PSYCHOLOGICALLY
CONFIRMATORY DUE DILIGENCE
GET READY FOR YOUR FINANCIAL AND LEGAL CLOSEUP
THIRD-PARTY ADVISORS JUMP IN THE MIX
TIMELINE MATTERS
FEND OFF RETRADING
NAVIGATE MISUNDERSTANDINGS
RESOLVE ANY OWNERSHIP ISSUES EARLY
TOP 3 TAKEAWAYS
CHAPTER 24: Legal Documentation and Critical Elements
PURCHASE AGREEMENT
HOW THE PROCESS UNFOLDS
MANAGING YOUR MINDSET AND STAMINA
YOU ARE THE ULTIMATE DECISION-MAKER
TOP 3 TAKEAWAYS
CHAPTER 25: Closing Craziness
POST-CLOSING TRANSITIONS
RELEASE OF ESCROWS
TOP 3 TAKEAWAYS
CHAPTER 26: Managing Your Emotions and Psychology
SELF-SABOTAGE IS REAL
PREPARE FOR LIFE POST-TRANSACTION
ARRIVAL PARADOX
NEXT TASK – YOUR PERSONAL TRANSFORMATION
DEALING WITH REGRET
DEVELOP A GAME PLAN
MANAGING YOUR NEW WEALTH
FIND THE RIGHT ADVISORS
BECOMING AN INVESTOR? TREAD CAUTIOUSLY
TOP 3 TAKEAWAYS
Postscript
Acknowledgments
About the Author
Glossary
Bibliography
Index
End User License Agreement
List of Illustrations
Chapter 2
FIGURE 2.1 EBITDA valuation multiples, by enterprise value range.
Chapter 3
FIGURE 3.1 Illustrative adjusted EBITDA reconciliation.
Chapter 4
FIGURE 4.1 Optimal timing framework.
FIGURE 4.2 Factors to consider when determining optimal exit timing.
Chapter 5
FIGURE 5.1 Relative advantages/disadvantages of specialist vs. generalist ba...
FIGURE 5.2 Typical investment banking success fee percentages, by total tran...
Chapter 7
FIGURE 7.1 Advantages and disadvantages by buyer type.
Chapter 10
FIGURE 10.1 Best exit options by
seller
characteristics.
Chapter 12
FIGURE 12.1 Illustrative opportunity prioritization of potential projects.
Chapter 16
FIGURE 16.1 Timetable for a typical sales transaction.
Chapter 19
FIGURE 19.1 Typical go-to-market process through final closing.
FIGURE 19.2 Illustrative questions behind the question.
Chapter 20
FIGURE 20.1 Illustrative side-by-side comparison of various presented offers...
Chapter 21
FIGURE 21.1 Relative value of different kinds of consideration.
FIGURE 21.2 Illustrative comparison of two competing offers.
Chapter 24
FIGURE 24.1 Typical seller and buyer positions for key elements of a purchas...
Chapter 26
FIGURE 26.1 Comparison of life pre- and post-exit.
FIGURE 26.2 Typical emotional arc of a selling founder owner.
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
Introduction
Begin Reading
Postscript
Acknowledgments
About the Author
Glossary
Bibliography
Index
End User License Agreement
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This book shines a much-needed light on the opaque world of the middle-market business sale process. Every page is packed with insider know-how, informing you on all the twists and turns that might occur, uncovering everything you didn’t realize you didn’t know.
—Adrian Cronje, Ph.D. CFA, CEO, Balentine
A must-read for any owner contemplating the sale of his or her business. You have one chance to get it right. This book will prepare you for what lies ahead. It is well organized, informative, succinct, practical, and easy to read and understand. Thanks to David for sharing his wisdom and experience.
—Timothy P. Brown, Founder and CEO, Sageworth
All business owners should read this book. It digests intricate concepts into simple, understandable terms. David’s expertise shines through in each chapter, providing practical advice that is both accessible and actionable.
—Kim Perell, bestselling author
David delivers a thorough guide to navigating the complexities of selling a mid-market business. Packed with practical advice, actionable tools, and valuable insights, this playbook is a must-read for any business owner exploring an exit. From valuation to negotiation to life post-transition, David explores and explains every step of the process with clarity and confidence. Whether you’re preparing to sell now or in the future, this book belongs on your shelf.
—Eric Levin, Chairman, Atlantic Tractor
Selling Your Business with Confidence
A Practical Playbook for Mid-Market Owners
DAVID W. MCCOMBIE III
Copyright © 2025 by MG Publishing, LLC. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.
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To my beautiful family,I love you!
Introduction
Racing heart. Sleepless nights. A sense of impending failure or doom. These are just a few of the feelings my clients have told me they experienced when selling their mid-sized business. (I remember one guy who got so anxious that he had to step outside and get some fresh air as we discussed the selling price. There are a few more who probably should have!)
I’m sure you can relate if you are an owner who has sold a mid-sized business. If you are an owner, especially on the cusp of retirement, odds are that you will be looking to sell in the next ten years and will soon relate.
The fact is that retiring Baby Boomers are creating a silver tsunami. The oldest boomers are approaching 80, while the youngest members of the generation have already reached their 60s. As this cohort of American entrepreneurs ages, more than 70% of the hundreds of thousands of middle-market businesses in the United States (those with sales between $10 million and $1 billion) are expected to sell in the coming decade. For most owners, this is the first and only time they will ever sell a business. Because the stakes are so high and there are so many “unknown unknowns,” the sale process becomes an emotional and psychological roller coaster. Here are just a few of the things you will undoubtedly experience:
It likely involves a sum of money that’s an order of magnitude larger than any other transaction you’ve been involved with.
It’s physically exhausting. You’re working two full-time jobs: running your business while managing the deal and all of its detailed requests and decisions.
Given the stress, you may not be eating properly or sleeping well, and you may even be drinking more than you should.
Due diligence focuses on the weakest aspects of your business, causing you to feel defensive.
You are keeping a secret in front of everyone you encounter.
Everything is new territory with no reference point, so you are dependent upon the judgment of your professionals.
You’re juggling hundreds of legal details in language you don’t fully understand – the purchase agreement, noncompete agreements, etc. –which have real implications, placing significant restrictions, obligations, and liabilities on you in a
personal
capacity.
The transaction may require you to personally have uncomfortable negotiations with employees, suppliers, and customers under time constraints.
You repeatedly perceive the deal to be on the verge of dying and then miraculously being revived.
YOU AREN’T ALONE!
“It was horrible. My wife was like my therapist. I don’t drink alcohol and I don’t do drugs but if I did I would be drunk the entire time. It is a very emotional period. It was awful.” – Sam Parr, founder of The Hustle.
“Nothing can prepare you psychologically for what you’re about to experience.” – Miles Faulkner, founder of Blended Perspectives.
“I got stressed to a point that I could only compare to when I started the business. And I hoped I’d never feel that level of stress again. And I said to my advisors at the end, I don’t know how you do this for a living… . We finished and I felt like I needed to sleep for a week… . felt like there was so much riding on every email and decision. There were just some really low points and it was purely just the stress level, it was incredible because I felt like if the deal didn’t happen it was going to be my fault.” – Mark Wright, founder of Climb Online
I’ve closed billions of dollars in middle-market deals as an M&A (mergers & acquisitions) banker. I also know what buyers are looking for because I’ve been a private equity investor myself. Perhaps most importantly, I’m also an entrepreneur. I’ve experienced the loneliness, the sleepless nights, and the anxiety associated with making payroll, managing challenging employees, and overcoming hurdles through sheer willpower.
Through trial and error (and some good mentors), I’ve been involved with hundreds of deals as both a seller and a buyer. Because I’ve made plenty of mistakes that taught me valuable lessons, I’ve figured out what makes a successful sale versus a stressful sale. That’s why I wrote this book. If you fully understand the process, what to expect, and the implications of the range of options, you can confidently make decisions. Unfortunately, most owners enter this process woefully unprepared, underestimating the time, money, effort, and complexity involved in selling their business.
One of the most important things I’ve learned is that middle-market deals are unique. It is its own world with different sets of processes, buyers, valuation methodologies, and tactics. At the other end of the spectrum, the smaller mom-and-pop businesses – representing around 80% of all US companies – involve an entirely different universe of buyers, typically individual buyers looking to buy a job. Publicly available transaction data is only available for either large public deals or transactions small enough that the Small Business Administration provides financing (generally deals under a few million). Surprisingly, there is little verifiable deal data for all of those companies in the middle.
For executives of large institutional or publicly traded companies, an M&A decision is just a business decision. But for a founder or entrepreneur, the sale process is a more fraught once-in-a-lifetime event. Your personal identity is inseparable from your business. That means the decision to sell often is emotionally charged. Those emotions can spill out at various points in the sale process. Because of the outsized importance of client education and psychology, success in middle-market investment banking is more of an art than a science.
Middle-market business owners have very high stakes in their businesses, and a successful sale is essential. Estimates indicate that between 80–90% of the average middle-market owner’s wealth is tied up in their business. If you’re typical, you hold an undiversified investment portfolio dominated by one asset – your company. That means this single transaction will have a dramatic impact on your financial future. Getting it wrong has huge implications. With the stakes so high, the angst is correspondingly intense. Doing it well will deliver a significantly higher financial outcome with greater cash up front and fewer contingencies and strings attached.
Now that you’re thinking about selling your company, you need to be fully aware of how the sales process works and – more importantly – what you don’t know about this complex undertaking. The phrase “unknown unknowns” is used to describe the dangerous blind spots that accompany uncertain situations. My goal is to prepare you ahead of time for what is likely going to occur during that sale and explain to you the why behind it in plain English. No jargon. No legalese. Just straightforward information that will help you through what is probably the biggest business decision of your life.
Here’s to a successful sale.
CHAPTER 1The Art and Science of Selling a Company
Jonathan (not his real name) came to me wanting to sell the business he founded in the early 1970s. I could tell he was nervous by the way he clenched his jaw. He had several people approach him over the years, but he wasn’t ready to sell until his wife pointed out they were well past retirement age. Now that he had made the decision, he realized he didn’t have any idea how to proceed. He told me he didn’t even know how to accurately price his business, much less how to handle all the paperwork that would go along with the sale. “It’s basically like selling a house, right?” he asked. I had to tell him that selling a business and selling a home were two very different things. But I assured him that I could help him with every step along the way.
CONGRATULATIONS
Before we get into the nitty-gritty of selling your business, let me first offer you congratulations: You’ve built a company that’s worth selling. As an entrepreneur, you understand how rare a feat that is. Many ventures fail or fizzle out, the victims of intense competition, economic forces, or lack of access to capital. Of course, plenty of business owners manage to build profitable little businesses that support their families and a few employees. What you’ve accomplished is far more difficult: You’ve constructed a viable middle-market business with loyal customers and a stable workforce. Over the years, you’ve refined systems for keeping the books, collecting revenues, training employees, and servicing customers. Perhaps most impressively, you’ve developed a company that can survive without you – the business won’t fall apart the moment you leave. That’s how real wealth is created. If you plan the exit properly, you’ll be financially secure and set for whatever you want to do next, whether that’s retirement or some other endeavor.
This book will help you understand and gain confidence in navigating the mergers and acquisitions (M&A) process. I’ll walk you through both the art and science of selling a middle-market company. Granted, some complex technical skills, such as building financial projections and structuring the deal terms, are important, but success in selling a company is just as much about psychology, relationships, timing, and instincts. You need to market the company in a way that creates excitement without overpromising. You also have to keep your employees in the dark – but do so in a way that maintains their respect and loyalty once the transaction is announced. You need to manage your own roller coaster of emotions throughout the process. And you need to come out of the deal knowing you got the best deal possible. That’s what this book is designed to do.
I’M HERE TO HELP
Doing it yourself is tempting, I know. After all, you know the company better than anyone. And you made it this far by relying on your own instincts, hard work, and an ability to figure things out. You’re an expert at running your business. However, you’re probably not an expert in selling it. The business world is a cutthroat place, and those who are unprepared or overmatched rarely come out on top.
So, why should you devote your scarce time to what I have to say? I began my career at a major Wall Street investment bank, and when I started doing middle-market deals, I quickly realized it’s an entirely different world with different sets of deal types, processes, valuation methodologies, and tactics. Given the smaller deal teams and the unique attributes of founder-owned businesses, middle-market transactions have a variety of multidisciplinary challenges. As an M&A advisor (to minimize repetitiveness, I will use the phrases M&A advisor, investment banker, and banker interchangeably), I specialize in selling middle-market businesses. This book focuses on the specific needs and challenges of the founders/owners of these companies.
LET’S LEVEL THE PLAYING FIELD
Do-it-yourself sellers put themselves at a severe disadvantage when transacting with seasoned repeat buyers. You can bet your buyer and their advisors have negotiated many deals. Any number of sports analogies apply – and they’re all variations on the theme of the enthusiastic amateur going up against a seasoned professional. If you occasionally play a round of golf, you wouldn’t expect to compete with a professional golfer and come out ahead. The pro will almost certainly win. He has top-shelf equipment. He practices his swing obsessively. The elite player employs a coach to analyze his mechanics and follows a strength-training program and flexibility regimen designed to maximize his innate talent. In addition, the professional plays in tournament after tournament, going up against elite competitors and performing well. He has learned to control his nerves at stressful moments and to master his emotions as the pressure mounts. Even if you shoot the round of your life, you’re still likely to finish well behind the pro. The pro will dominate you throughout the competition while quietly noting all the gaffes in your strategy and cataloging the many holes in your swing. Your flaws aren’t obvious to you, but they’re abundantly clear to the expert. The same applies to all sports – an amateur has essentially no chance against a professional, well-coached player.
You can level the playing field by arming yourself with information and surrounding yourself with a team that will give you competent professional advice. In fact, I’ll share the factors to prioritize when selecting the best advisors for your business.
So, exactly what will you learn by reading this book?
Context regarding the
why
behind important elements of the process.
Framework for selecting the optimal time to sell.
Respective roles and expectations of the various deal team members, expected fees, and factors to prioritize when selecting them.
Prioritized questions to ask yourself and your advisors to make informed decisions.
Understanding your counterparty’s (i.e. buyer’s) perspective and typical strategies.
Negotiation tactics and the underlying psychology behind many of them.
What to expect from yourself psychologically/emotionally and how to best prepare.
Things that can be done
today
to make your business more valuable/sellable.
Given the emotional excitement and pride that owners have in the businesses they built, many expect buyers to view their business as special and anticipate unrealistically high valuations. In his book Walk Away Wealthy, financial planner Mark Tepper aptly summed up the unrealistic hopes of middle-market sellers: “Many business owners stubbornly cling to fantasies about selling their businesses easily and for big money. They’re certain that they will (a) find multiple high-quality suitors for their company as soon as they put it on the market, (b) get several quick offers worth many times their company’s [earnings], and (c) walk away rich and happy without having done any serious exit planning in advance” (Tepper 2014, p. 3).
If only it were that easy. The truth is that selling a company is exceedingly hard. Most business owners I meet are woefully ignorant of what it’s going to take, how long it’s going to take, and the likelihood of success. Here are the harsh facts:
Just 20% of businesses of any size successfully sell to a third party. The success rate is probably more like 50% for middle-market businesses – but a 50% chance of victory doesn’t sound very good when your life’s work and net worth are on the line.
Private equity (PE) firms close on approximately 1% of all businesses that they review. Statistically, there’s a better chance of getting into any of the Ivy League universities.
Depending on the reported source, only 25–50% of signed letters of intent (LOIs) result in a closed transaction, with many of those at terms materially lower than the initial agreement (Beshore
2018
, p. 92). The absolute highest close rates I’ve encountered among professional buyers are around 80%.
FORGET WHAT YOU KNOW ABOUT SELLING PROPERTY
Many business owners mistakenly assume selling a business is similar to selling real estate. You’ve probably sold a few houses in your day and perhaps a commercial property or two. Yes, those are complicated transactions – but they’re child’s play relative to selling a business. There are a number of key differences:
While a property transaction can be completed in 30 days or less, the total timeline to sell a business is 5 months at a minimum, and frequently in excess of a year.
Real-estate sales require little of your time, and the process is all about the property, not about you. In an M&A transaction, seller owners and their staff commit significant time and resources to the process – typically more than 1000 hours.
Businesses are much more complex, involving processes, organizational structures, and human dynamics.
When a buyer purchases a business, they are buying its people, with a particular sensitivity to dependencies on you as an individual.
Given this complexity, the diligence process is more thorough and intense, involving multiple professional advisors reviewing thousands of pages of documents.
Middle-market business valuation is infinitely more complicated. Determining the value is difficult given the lack of publicly available data, especially involving truly comparable companies.
Confidentiality is critical in a business sale, given the associated risks. Real estate is intentionally listed as publicly as possible.
Given these factors, the market for businesses is inefficient. This is reflected in the wider dispersion in outcomes between highly effective versus mediocre advisors. This range is 5–10% in real estate but can be over 100% in business sales.
Unlike turning over the keys to a property and never returning, you probably won’t be able to quickly walk away from a business sale. Most transactions require the seller’s cooperation during a post-sale transition period of at least six months but likely for year(s).
Most middle-market deals delay a material portion of the purchase price, with ongoing financial and legal strings attached. Consequently, offers are frequently incomparable. Each will have a different mix of cash up-front relative to other forms of payment, along with extensive differences in the fine print (important!).
Transaction structures and documentation are customized and highly negotiated versus the standardized templates in real-estate deals.
Operating real estate requires nominal involvement and can be easily and efficiently outsourced to competent third-party management companies. A business is a delicate organism that only a few insiders can seamlessly jump in and manage. If you were to die or become incapacitated, the impact on its value would be huge relative to that of your investment property.
THE OLD “DATING GAME”
As odd as it might seem, a useful way to think about the dynamics of selling a business lies in terms of the subtle push and pull of a romantic courtship. Sellers and buyers engage in a unique mating dance when transacting. Here are some of the ways these two seemingly dissimilar processes are actually alike:
Playing hard to get has its advantages. You can’t force a buyer to actively pursue you, and overeagerness can make you look desperate. Generally, the person who cares, but not T-H-A-T much, will have the best outcome. This is best accomplished when you have a strong plan B of continuing to run your business and choosing
not
to sell.
Exuding confidence is critical. Your actions and nonverbal cues are constantly being analyzed to try and assess the strength of your position. In context, some actions may be perceived by the buyer to mean their offer is significantly higher than others, which causes them to worry about overpaying. Objectively assess your behavior and ensure your actions are consistent with a seller who has multiple strong(er) alternatives. Buyers respect assertive sellers.
Talk is cheap. You roll out your A-Game when trying to impress a romantic partner. You’re careful about what you say while taking pains to seem relaxed and spontaneous. Too much honesty – about your personal shortcomings, about your political beliefs – is risky, so you say what you think the other person wants to hear. The same is true for some buyers who say all the right things until the ink dries.
Lust can cloud your emotions. Your enthusiasm to do a deal can often create wishful thinking that blinds you to things that are obvious to everyone else around you.
Call me, maybe? Frequently, investors will not provide a clear no but instead keep things in an indefinite and vague
maybe
. It’s frustrating for the seller but great for the buyer – after all, it costs nothing not to commit. The dating scene leads to similarly vague interactions – maybe he or she is scared to say no, or maybe they’re interested but not ready to say yes. Who knows?
Money isn’t everything. In romance, money is an inevitable part of the equation, but it should never be the driving force behind a relationship. As Dr. Phil says, “People who marry for money earn every penny.” Selling for a great headline number to a jerk who you don’t trust to honor your post-deal earnout is likely not worth it. Life is too short, particularly when you’re going to reach financial security anyway.
Monogamy is expected. In most romantic relationships, both parties expect the other to be faithful to them. In the M&A process, that expectation is legally enforceable. Any LOI you sign will require exclusivity – and if you cheat on your suitor, you can expect to be slapped with a lawsuit.
There are no perfect options. Just like no spouse is perfect, no buyer will be perfect. You need to weigh all of the different pros and cons and select the best fit. And you’ll need to accept that imperfection is part of the game.
You only need to find one spouse. Maybe none of the other possible suitors like you. As long as one buyer does, that’s all you need. Of course, that’s not ideal in a business sale – multiple interested parties will bid up the price and provide you with greater negotiating leverage. But in the end, all that really matters is that you find a single buyer willing to meet your terms.
BEFORE WE START
First, if any of the words you encounter are unfamiliar, you can find a glossary at the end of the book.
Second, I’ve disguised the names and details of my past clients; in some cases, several people have been condensed into one to make a clearer point. My goal is to recount their struggles so that you can avoid them, while also changing the details enough that my clients won’t feel that I’ve violated their trust.
Finally, while I know it’s tempting to skip ahead and read just the chapters on selling and negotiating, I’d urge you to at least scan the earlier chapters. They help set up the psychology and reasoning behind the practical steps.
CHAPTER 2What’s My Business Worth?
She exuded confidence the moment she entered my office. “I know what my company is worth,” she said, carefully placing her designer bag on a chair. “And I expect to get at least that or more.” I asked her what she thought the company would sell for and she named a figure over $10 million above what I thought was reasonable. When I told her what similar companies had sold for, she got very huffy. “Mine is far better than any of those. I know it.” Needless to say, she was very disappointed when the one offer she got was nowhere near her dream valuation.
Contrary to the hopes of many business owners, your business’s value unfortunately has no relationship to your desires, expectations, or retirement needs. Ultimately, the value perceived by prospective buyers and the market is what counts.
JUST GIVE ME THE BOTTOM LINE
Like any business owner, you’re curious about what your business is worth. Formal valuation exercises are often necessary for legal and tax planning purposes, but they follow specific rules required by case law, which is informed by academic research, and rarely reflect the true market value that a business will command if it were to sell in the market. Given their subjectivity, formal valuations can easily be manipulated, and the results relative to market value or even between reputable firms can be significantly off for private businesses (as in a 10× difference in value). In fact, a study showed that approximately 60% of valuations are off by more than 15% in the actual sales process (Phillips 2016). In any other industry, this performance would result in getting fired.
Hundreds of academic textbooks cover the various technical valuation methodologies that I won’t bore you with. That said, all valuations fundamentally use some form of subjective analogy to determine value – i.e. another asset with slightly lower-quality characteristics recently sold for X; therefore, this is worth X+. For example, used car guides (e.g. Kelly Blue Book) can estimate used automobile values with a high degree of market accuracy given the substantial number of vehicles of the same year and model. Without large sets of accurate, comparable transactions, middle-market business valuations end up being theoretical and highly subjective. Valuation can be way off because the sample size of truly relevant comparative transactions is frequently one or even zero. Instead, the art is inferring based on limited untraditional data points.
LIMITATIONS OF COMPARISONS
Unlike real-estate transactions, where nearly everything is public, private market transaction information is extremely limited. It is difficult to value any private business because the evaluation and eventual sale of a business are significantly more complex than, say, selling a house, across multiple dimensions.
Here are a few reasons your business might sell for a dramatically different value than you might hope and expect.
Business size. This is likely the most important factor in variability because valuation multiples, which we will discuss later, typically increase as a company increases in size. Looking at public company disclosures is helpful, but only to a point.
Recency of transactions. Whether you’re selling in a good or bad economic environment can impact your sales price. As you know, market sentiment can change rapidly in just a few months, and recent transactions may not reflect current conditions.
Subindustry variances. Another challenge is selecting the right comparative subindustry. Most businesses operate across multiple verticals, and there is seldom a company with exactly the same customer makeup, business models, etc.
Business growth potential and profitability. Again, comparing past and expected future performance against other companies and time periods can be challenging, particularly if synergies are involved.
Risk measures. Factors such as customer concentration, dependency on a single individual, or ongoing litigation can vary among businesses.
Qualitative measures. Company culture or employee turnover can have a significant impact on how a prospective buyer views it.
How purchase price is paid. How much of the stated multiple is paid up front in cash versus contingent (like an earnout) or paid in installments?
Accounting methodologies. Businesses may track their numbers using different methods, making it difficult to compare EBITDA (earnings before interest, taxes, depreciation, and amortization) figures. Similarly, unadjusted versus aggressively adjusted earnings can result in drastically different outcomes.
Measurement period. The valuation multiple can be measured against different time periods (based upon last year’s, last 12 months’, or next year’s forecasted earnings).
MULTIPLES FRAMEWORK
In the context of real-world, middle-market transactions, nearly all valuations are discussed and negotiated on the basis of multiples. The industry standard is a multiple of EBITDA. As an example, if a business generates $5 million in EBITDA and it sells for an 8× EBITDA multiple, the total purchase price would be $40 million.
Other metrics, such as price per subscriber or a multiple of revenue, can be used, but EBITDA is the best available metric. That’s not to say it’s perfect, but EBITDA is the preferred measure for a variety of reasons:
EBITDA is a simple (albeit imperfect) proxy for cash flow, which is much more complex and time-consuming to calculate accurately.
EBITDA has the benefit of neutralizing the impact of ownership or financing decisions. Remember, buyers may choose to use a completely different financing structure post-transaction.
Given its near universal usage, EBITDA permits us to directionally discuss opportunities in different sectors on an apples-for-apples basis. That said, some industries, such as equipment rental or financial institutions, have a wide disconnect between EBITDA and cash flow due to the high amounts of capital expenditures or interest needed to run the businesses efficiently. We tend to see correspondingly lower multiples in those sectors to account for these distortions.
Buyers expect to earn a financial return on their acquisition, and an EBITDA multiple provides a rough estimate of an investor’s annual investment returns. Multiples are mathematically the inverse to an investor’s expected return on investment (equivalent to a cap rate in real estate). Put another way, the higher the multiple, the lower the expected returns, all other things equal. Analyzing nearly 5000 private equity (PE) investments over the past 20 years, GF Data reports an average EBITDA multiple of 6.8× (GF Data 2023, p. 2). That corresponds to an approximately 15% annualized return if the investment is entirely funded in cash. Accounting for average levels of inflation and using some debt to fund the purchase price, PE firms should be able to pay this multiple and still achieve their targeted investment returns of 25–30% annually. To pay multiples higher than this and continue achieving these desired returns, investors will need to improve growth, performance, or the multiple they achieve upon exit.
SMALL TRANSACTIONS
Small transactions are frequently valued based upon a multiple of the seller’s discretionary earnings (SDE), which also adds back the owner’s salary and benefits. Because these transactions are essentially buying a job, they also tend to be valued using much lower multiples (average 2–3× SDE).
THREE FACTORS DRIVING MULTIPLES
Regardless of these difficulties, multiples do provide us with directional guidance on what to expect. At the core, multiples are driven by three elements: Growth, risk, and supply and demand considerations. Let’s take a closer look at each.
Growth
The more growth and/or potential for growth, the higher the multiple. This is because rapid growth allows the investment to grow into a higher multiple, allowing the investor to achieve the same targeted returns. A rule of thumb shared by Dennis Roberts in his book Mergers & Acquisitions: “… If a middle-market business’s earnings are growing at a rate that will make the multiple paid today, whatever that multiple is, appear to have been a five times multiple when compared to the business’s earnings approximately 18 months to two years from now, then that multiple is probably justifiable” (Roberts 2009, p. 275).
Just like stock market investors look ahead, middle-market acquirers buy the future. You need to convince them of the future growth potential of your company. I often justify higher purchase prices by selling based on the next full year’s projected financials. For example, if we are in spring 2024, rather than sell on 2023 or March 2024 financials, I will try to sell on the 2024 projections. To successfully do that, I need to fully convince a buyer that those numbers are credible and will be achieved. A strong management team with a track record of consistently hitting or exceeding prior budgets provides a lot of comfort.
In order to get them feeling comfortable stretching on price, buyers need to be comfortable regarding the sustainability of growth. Market tailwinds or industry inflation that improve profits are easy sources of growth for some businesses. The market assigns more value to growing EBITDA through revenue increases versus improvements from cost-cutting measures. There’s even the potential to get some credit for purely theoretical opportunities if you can credibly articulate specific quantifiable opportunities and the action plans to execute.
Risk
If a business could guarantee its profits going forward, you would see businesses trade for sky-high multiples consistent with US government bonds. Uncertainty results in lower values. Conversely, eliminating or reducing uncertainties provides prospective buyers with the confidence to offer higher multiples. Some sellers believe that buyers prefer businesses with room for improvement so they can add value. This is true as long as the buyer can purchase it cheaply. Investors care about returns and almost always prefer high-performing businesses because it means a higher likelihood of success and lower downside risk. A GF Data analysis reveals that high-quality businesses with above-average characteristics command a 15–30% premium on their EBITDA multiples – and that’s on top of the higher EBITDA levels associated with better performance.
A variety of risks can spook buyers into considering an opportunity only at a low price. While many risks are external factors out of your control, others are qualitative and involve the buyer’s judgment and discretion (a bad first impression does cost you real money). Here are some areas that can help de-risk the investment from the buyer’s perspective:
Business is professionalized with systematic processes that reduce dependency on any specific employees.
Management team has a proven track record of execution.
Stability of the culture and ability to retain critical employees.
Strength of your relationships with your biggest customer(s).
History of customer retention with high satisfaction levels.
Products and services present a strong value proposition relative to competitors.
Top customer relationships are managed by a wide range of team members versus just one superstar salesperson.
Superior cost structure relative to your industry.
Ability to control expenses and/or to pass along price increases to customers.
Long-term contracts, patents, and other legal tools to shelter you from fierce competition.
SUPPLY–DEMAND FACTORS
Like everything else in a market economy, mergers and acquisitions (M&A) transactions are affected by the forces of supply and demand. From the supply side, value is all about scarcity. Just like a rarely available baseball card commands higher pricing, so will unique businesses. Conversely, values tend to go down if the market is inundated with similar businesses. On the demand side, valuation multiples are strongly correlated with size for a variety of reinforcing reasons (see Figure 2.1). First, valuations are directly related to the amount of financing lenders are willing to provide, and as size increases, they typically increase their lending as a percentage of the transaction value. Therefore, a bigger transaction is nearly always more competitive (both in terms of price and number of interested buyers) than smaller deals. Similarly, multibillion megafunds and large multinationals with the wherewithal to fund large transactions tend to have a lower cost of capital (i.e. lower investment return hurdles).
FIGURE 2.1 EBITDA valuation multiples, by enterprise value range.
Source: GF Data M&A Report Feb 2024, p. 2; Pepperdine Private Capital Markets Report 2023, p. 90; Team Analysis.
Larger companies can also command higher multiples because they tend to have greater sophistication and resources that can be leveraged to grow and scale. PE firms pursuing a buy-and-build strategy attempt to purchase a platform, which is a business with sufficient financial scale to support the systems, technology, and managerial talent necessary to successfully acquire and integrate lots of small acquisitions at scale. A platform can be acquired by virtually any PE firm, so it tends to receive tremendous buyer interest. Consequently, there’s a premium paid for the limited number of businesses that can serve this role.
Conversely, subscale businesses typically only attract interest from local competitors or strategic acquirers, who will consolidate your operations into their infrastructure. This is typically a fraction of the size of the broader PE universe so the valuations reflect this limited competition. In fact, investors often overpay for a platform, knowing they can acquire lots of smaller add-on acquisitions at lower valuations, resulting in a reasonable valuation multiple on a blended basis.
Similarly, businesses with revenues derived from vastly different business lines pursuing a conglomerate strategy are much less appealing. That’s because there’s a smaller universe of buyers that can capitalize upon its diverse strategy (“I like this part of the business, but we don’t do that part”). Most buyers will value it as the sum of its smaller EBITDA parts, with their correspondingly lower valuation multiples.
Limited Buyer Universe Some businesses have great financials, but the universe of interested buyers is limited, even at a substantially greater size. Let’s delve into a few of those reasons:
Situations where few buyers can structurally participate. The highest valuations occur in industries where PE acquirers are actively doing deals. But, in some cases, the buyer universe is limited because of structural considerations that exclude PE from owning the company. In one example, construction firms must carry bonds that require personal guarantees that funds can’t provide. In another example, franchisors and dealers often have total discretion over whether to approve or deny a buyer, and many dislike PE.
Conversely, this power of the franchisor also scares away a lot of otherwise interested buyers due to the potential chilling effect it could have when they choose to exit the business. A similar scenario is a business designated as minority- or woman-owned. Few buyers can purchase it without losing the designation and jeopardizing its revenues.
