We have all taken stock of our professional mortality at one point or another. We’re not going to be in this business forever, and while we don’t have expiration dates stamped on our hind quarters, it is only logical to set the stage for a succession plan. After all, the professional careers of your employees, and the welfare of clients, are at stake.
Often, that moving-forward plan entails seeking out another organization to carry out the journey you embarked on many moons ago. Your goals are clear: find a buyer who can take care of your employees, serve your clients at the highest level, and to maximize your return on investment. Don’t regard that third element as being less than noble: you’ve spent a career building equity (both sweat and financial) into the organization, and while you may not need to pry away every dollar it’s worth, you owe it to yourself to command (and receive) a fair price.
We wrap up this month’s State of the Industry report on M&A with some advice from the nation’s leading office dealer buyers on maximizing ROI, which is of particular interest to sellers who are projecting to hit the market within the next couple of years. That would presumably provide enough time to effect meaningful changes within your organization.
Recurring revenue has long been a crowd pleaser, and it quickly catches the attention of Jim Sheffield, CEO of UBEO Business Services of Austin, Texas. High revenues are great, but so are consistent ones insulated by contract bases.
By the same token, a business that is well-executed is difficult to top. “There’s nothing quite like a well-run company with great employees—it makes them all that more valuable,” he said. “It makes you feel more comfortable to do business with them.”
Many would-be sellers often grapple with the realities of post-sale life, including whether to remain with the organization and accept a subordinate position after years of calling the shots. It helps to be committed either to moving forward with the buyer or completely exiting, says AJ Baggott, president of RJ Young in Nashville, Tennessee.
“I think sellers with a clear plan and exit strategy tend to make a more seamless transaction and results in fewer buyer concerns,” Baggott notes. “Further, having a well-organized and thoroughly vetted set of financials for the past three years gives a buyer more peace of mind and tends to result in a willingness to lean toward the higher end of the valuation range.”
Map Quest
Ensuring financial documents are thorough and in order can say as much about the seller as the numbers on them. According to Dan Cooper, CEO of Nashville, Tennessee-based Novatech, a seller who practices due diligence and has a vision for success sets the stage for a smoother process.
“Have a well-documented P&L and be able to clearly articulate your company’s business plan and roadmap to success,” Cooper said.
Patrick Flesch, president and CEO of Madison, Wisconsin-based Gordon Flesch Company, believes that if a seller can solidly address the basics—proof of sustained profitability and a strong balance sheet—it’s a solid step forward for attaining your price. But it goes beyond the mere numbers.
“Add to that a strong internal culture and a happy customer base, and you will see a high premium as the seller,” Flesch noted.
While it may seem elementary or M&A 101, there are still situations where sellers do not have all of their financials in order, and it’s quite prevalent and frustrating for anyone who’s ever sat at a negotiating table. For Joe Dellaposta, COO of Doing Better Business in Altoona, Pennsylvania, having key performance indicators readily available will go a long way toward justifying an asking price.
“Whether you’re running at 3% net profit or 20%, that I can figure out,” Dellaposta said. “But if everything else is off—the accounts receivable, the employee payroll numbers—that’s where it becomes an issue.
“There’s no shortage of information out there about what our industry’s KPIs are. Anyone who’s not looking at those KPIs and working toward enhancing them is really missing the boat.”
For Dan Ruhl, a partner with Oval Partners, the private-equity arm behind Flex Technology Group (FTG), it’s a bit of a different situation. FTG is primarily (with some exceptions) looking for engagements where the owner will be staying on and having a say in the future trajectory of the company. In a sense, enthusiasm is a great asset to bring to the table.
“For us, it’s all about how the company has performed and how it’s set up to perform in the future,” Ruhl said. “We can see how they performed during the pandemic and after it, which tells us about their decision-making. It’s growth and profitability. We’re less interested in [owner] exit situations. We’re looking for excitement about the future of the business.”
