When It Comes To Selling, Some Are Too Ready
In our line of work, we often get inquiries from business owners who start the conversation this way: “Well,” (deep sigh of relief) “I’m finally ready to sell.”
But all too often, they are too ready to sell. That’s because the owner has decided not just to sell, but to fully retire as soon as possible, with no intentions to stay on to manage the business post-acquisition. That owner wants to hand over the keys, take his check to the bank, and maybe work on his golf handicap or his fly fishing.
Unfortunately, as attractive as it may be for an owner to dust off his hands and walk away, that quick exit is typically frowned upon by acquiring companies. Worse, it can cost the departing owner millions of dollars in lost valuation.
Here’s why: Most acquiring companies want leadership continuity. They want to keep the leader (indeed, the whole team) in place that made the company so successful. Most acquiring companies want at least a year of post-acquisition service from the departing owner, ideally more.
If the owner says he’s “out the door,” that can easily knock the price of a company down a “turn” (1X), if not more. In other words, if the company would have been purchased at a 6X multiple of EBITDA, the deal might sink to 5X EBITDA. If the EBITDA is $1,000,000, the company won’t sell for $6,000,000, but for $5,000,000 instead.
To think of this from another perspective: If the departing owner were told that he’d be given $1,000,000 to stay an additional year, he’d probably jump at the chance, because, well, that’s a lot of juice. Yet when that same departing owner insists on leaving the company immediately upon an acquisition, they may not have the perspective to see how much money they are leaving on the table with a lower valuation.
Prepare with Replacement Personnel
If you are an owner, and you want to leave as soon as your company is acquired, why not take the prudent step of replacing yourself a year in advance of the sale?
That takes some real patience and planning; make no mistake. But the intention to plan will stop an owner from making an impulse call to an investment banker to say: “I’m finally ready to sell.” Plus, as an added benefit to the valuation equation, the departing owner’s salary, benefits and related costs can often be credited to the EBITDA, since it is not going to be a recurring future cost.
Now, how do you install a replacement for yourself? No matter what your title—president, CEO, COO—if you can’t promote talent from within, bring in a top-notch executive search firm, and get your replacement installed at least 12 months before you pull the trigger on a sale.
When searching for your replacement, be completely transparent about your plans. Inform the incoming executive that he’s there to take over in a transition that includes a planned change of ownership. (Note that acquiring companies often put incentives and equity in place for senior execs as a retention strategy, which can be a bonus to the incoming talent.) An ambitious replacement executive will see a real chance to prove his worth, and he’ll have a year ramp-up to make his mark.
With the replacement in place, the outgoing owner can ease out of operations and serve as a senior advisor, a role he may want to continue to play in the year(s) after an acquisition as well. As for the acquiring company, they will not look at the departure of the owner as a high-impact loss, because so much preparation has been done to replace his talents and fill the roles he played.
Finally, this preparation “pays well.” With the right executive in place, and the outgoing owner’s transition so well managed, think of how much company value has been protected and preserved. It is surely far more than the all-in costs of the new hire, to say nothing of what this leadership continuity does to ensure a smooth transition of ownership for all of the employees.