Think Like an Owner: Breaking Down the Pre-Sale Process

Every advisor knows that his role is critical in the pre-sale and sale process. It can be a more difficult undertaking to convince business owners of this fact. But the slog isn’t over after you’ve successfully countered their familiar excuses<. Once you’ve partnered with a mid-market business owner, it’s important to look at the sale process from their perspective. Many of the CEOs you work with will have founded the business they’re preparing to sell. Some of them heard bedtime stories about their grandparents or great-grandparents or great-great grandparents founding the business they’re preparing to sell. Others took over from another owner and turned a struggling enterprise into a success story. For all these people, much of their sense of purpose and self-worth is likely wrapped up in their work. As you prepare to pre-market their business to potential buyers, it’s important to think of the process from their perspective.

1) Educate and align.

The first step isn’t creating marketing materials or arriving at valuation expectations — it’s talking the business owner through the sale process. The CEO has hired you for your expertise and guidance; it’s your job to make sure that you’re both on the same page. Throughout the pitch and early discussions, you’ve likely given the business owner a glimpse of what the sale process will look like. Now is the time to add more color and provide a step-by-step guide to the coming months.

Transparency is key. Discuss the range of possible transaction options, and the key points and potential ramifications of each decision. By this point, you should have a clear sense of the CEO’s desired exit plan and any non-negotiables (e.g., would he consider staying on to run the business? Or is he planning to pick up and move to Timbuktu as soon as pen meets paper?). Walk the business owner through a) who might be interested in buying their company and b) what might happen if they do. What would be the likely endgame in the case of a leveraged buyout? An ESOP? A strategic M&A sale? Think through desired sale timing and make sure you’ve discussed post-sale brass tacks (e.g., potential tax complications, etc.).

2) Talk valuation. Then talk valuation again.

Now’s your time to crunch numbers. However you determine the valuation range for a company, it’s important that the owner’s expectations are aligned with the realities of the market — and the subjectivity of the M&A process as a whole. Help your client understand the potential variance of valuation ranges, and the degree to which they may or may not be controlled. Providing specific examples of the valuations of similar companies in their industry — and explaining the factors which likely led to these figures — might help assuage concerns.

After providing the owner with a valuation range, ask again how this lines up with his best-case-scenario figure and I’ll-take-it concession figure. If there are clear discrepancies, don’t be afraid to have a hard conversation. It’s always better to break off a relationship now than to have one turn sour further down the funnel. Regardless, this is the time to draw on your industry and market expertise in order to provide the owner context for these numbers.

Involving business owners in the valuation process is not only reassuring to them, it can also be helpful to you. Axial CEO Peter Lehrman identifies two factors as fundamental to determining valuation: the company’s future, and competition among buyers. CEOs, he says, should focus on “how to crisply and credibly articulate the future of your business in the most predictable and expansive way possible.” Accordingly, every good investment banker should be able to articulate this future potential just as well — if not better — than the business owner. Time spent discussing the business’s value and the owner’s expectations and desires (see step 1 above) will only help you in this regard.

3) Prepare a diverse buyer list.

Client satisfaction is the ultimate measure of success for almost all intermediaries. Building a diverse buyer list increases these chances of success.

It’s like ordering at a restaurant. You may think you want the pizza — may be sure you want the pizza — until your server sets a steaming plate of lasagna in front of your dinner companion. The same is true when it comes to selling a business. No matter how many conversations you have with the owner about potentials scenarios, buyers, exit plans, and deals, there’s nothing quite like seeing proposed terms laid out in real life.

As Walter Bailey, managing director at Academy Securities, an Axial member, explains in a previous article, “Before showing the [buyer] list to the client, we will intentionally incorporate some outliers to help the client consider some less obvious alternatives. We like to present the client with new ideas and new perspectives.”

As always, be sure to message this appropriately to your client. After all, you just spent significant time listening to their concerns and expectations. Be transparent about your strategy, and communicate the benefits of entertaining diverse buyers while maintaining a clear vision of the desired outcome — and continuing to work toward that goal.