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April 27, 2020

Selling or Raising Capital? It’s a Process, Not An Event

How Preparation and Momentum Create Value

Key Takeaways

  • Customization is required – there is no such thing as a cookie cutter approach.
  • Comprehensive preparation is essential.
  • Auctions of private companies can do more harm than good. Yes, really!

Previous articles discussed ways to build enterprise value and noted the importance of succession planning. When the time comes to monetize some or all of the value created – whether for personal diversification, estate planning or to fund retirement – there are definitive steps to take for ensuring success and maximizing proceeds.

Customized Approach – One Size Does Not Fit All

There are multiple ways to generate liquidity for shareholders – from debt-funded dividends, to private equity recapitalizations or a complete sale of the business. The path that makes the most sense depends on the specific situation and objectives of each business owner. Defining desired outcomes – such as management continuity, retained independence, a target dollar amount in the bank – is the ideal starting point. Design the process around those goals rather than simply posting a “for sale” sign and waiting to see how the market responds.

Although few financial advisors will admit it, widespread auctions, while appropriate for public companies, are ill advised for privately held businesses. Why? They can actually cause considerable harm. Auctions are built on the notion of generating broad market knowledge of a planned sale, which can be used against a company by its competitors. Customers and vendors may also be reluctant to expand their relationships with companies undergoing sale transactions. And, rumors can spread discord and fear among employees who, in the worst case, may opt to leave for a competitor.

Here, the Hippocratic Oath – Do No Harm – provides great guidance. There is always a chance a transaction won’t close, whether due to unforeseen external factors, a lack of buyer interest or simply because the owner wakes up and changes her mind. If there is no deal, an owner may well be left with damaged goods as a result. Instead, running both the process and the business from the perspective of continued ownership is the best way to preserve the company’s value.

When it comes to running an effectively managed process, the hunt should be targeted, using a rifle-shot – rather than shotgun – approach to engage with potential investors or buyers. Approach only those where there is good probability of interest. No matter the attractiveness of the business, there are unlikely to be 50, 60 or 100 viable and interested suitors. Corporate buyers and private equity groups have their own product or service biases, geographic footprint and culture, not to mention financial capacity or interest in making strategic investments. Rather than leaking the news to and sharing confidential information with unlikely prospects, doing the homework and identifying those groups where there is a clear fit – where the transaction can add real value to both organizations – yields the optimal outcome.

The universe of buyers and capital providers is diverse and the message that resonates most will differ by group. Knowing the audience, and tailoring the pitch accordingly enhances credibility and generates competition even with a smaller number of participants. A horse race among a group of qualified suitors that recognize the fit and believe their time will be well spent, is a direct path to maximizing value while at the same time protecting the entity’s value.

Preparation Creates Value

A successful capital transaction is not executed overnight; wiring funds to an owner’s bank account is merely the culmination of a months-long process. Comprehensive preparation serves as the foundation for an efficient and effective process. Once a company is in the market communicating with potential suitors and capital sources, momentum is critical. Controlling timing, maintaining third-party enthusiasm, and avoiding negative due diligence surprises (surprises are rarely positive in a process) all enhance negotiating leverage and minimize the risk of unforeseen factors (internal or external) derailing the deal.

Additionally, companies in the preparation phase develop the materials and data that will support their value proposition and form a compelling market message. Investing in a third-party quality of earnings report (QoE) to validate normalized earnings and assembling the documents and files that will be requested in diligence pay dividends in the form of a smoother process and a strong impression.

Comprehensive preparation can also uncover bad news or vulnerabilities. The company that identifies these matters up front avoids risking a shift in transaction leverage if the buyer is the one who makes the discovery later in the process.

Good M&A advisors support their clients from start to finish. From facilitating the discussion around strategic and financial objectives, articulating a compelling growth story for the intended audience and ensuring the company is prepared for diligence, to controlling information flow, negotiating the best available deal terms, and coordinating multiple parties through diligence and documentation, the right advisor unlocks value at every stage of the process.

A recapitalization or sale typically represents the most significant capital event in an owner’s life. It deserves careful thought and preparation, and a process customized to the specific circumstances and objectives of the individual or family. The goal is to remain in the driver’s seat and maintain viable alternatives, be empowered by having a choice, and be in a position to execute efficiently when the best path forward is determined.

For more insights from the series, The Path to Private Company Liquidity: A practical guide to M&A for business owners, click here.