Rules Of Engagement For Independents Considering A Sale

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There are two big picture components to the overall equation of selling or capitalizing the value of your firm. The first is economics and the second is the emotions involved with completing the transaction.

The yin-yang in achieving harmony between them is not easy. For example, if you lose your entrepreneurship but achieve a good economic result (which is ultimately unlikely), I would not consider that a successful transaction–unless your objective was really to exit.

Between the two parts, it is more difficult to maintain your entrepreneurship than it is to secure a reasonably acceptable economic result. The reason is simple and intuitive. There is a sense that institutions will, by their very nature, encroach on the entrepreneurs turf and create a “death-by-razor-cuts” scenario.

This comes in two pieces. First, it comes in the form of “integration” that they want to achieve even if they say they dont. They want to mess with your compensation, staff compensation, bonuses, etc. Second, it comes in the form of management changes. The people you did the deal with are gone or have moved on, and new people are in their place. Also, the organization or division you are in may have been sold, merged or reassigned. OK, that sounds pretty negative but it has to be a genuine concern.

But there are solutions! Those solutions also can be real and worthwhile because, in the end, enterprise value can be substantially greater than compensatory value. Dont think for a moment that multiples of EBITDA, tax arbitrage, earn-outs and stock/cash plays dont have tremendous value. With the right structure, many good things–both economic and otherwise–can occur from a combination with an institution.

Lets get started by creating the right set of questions and criteria you should have to evaluate buyers, and by preparing for the questions that buyers will have about you. I think the latter is easier so well begin there.

Buyers are interested in growth, whether it is in a new segment of their business or an existing segment. Acquiring your firm creates instant growth. It may provide market share or market presence, and it provides something faster than if they had to create it themselves. After that, they want to minimize their risk in acquiring you. Its that simple.

They will want to see your history, feel comfortable and confident about the business and the people and–most of all–they want recurring revenue. Recurring revenue creates stability and reduces risk. Therefore, recurring revenue also creates greater value. An institution will pay more if they have less risk.

There may be substitutes for recurring revenue, such as the percentage of new sales each year that come from existing customers. If thats 70% and the firm is growing rapidly, thats a good proxy for recurring revenue. My point is that your firm may have attributes that legitimately increase value and decrease risk for the institution.

There are other important factors. Size can create a premium. Operating margins and the quality of the staff are also valuable. Will they believe in you and your organization? They will do their due diligence so its all important.