March 31, 2020
As a sell-side M&A advisory and brokerage firm, we meet business owners every week. It’s really a great profession as we get to sit down and talk shop with all kinds of people in all kinds of businesses.
However, it’s also a tough business because we get to know these women and men who’ve built companies - good companies that take care of their employees, good companies that take care of their customers, and good companies that even take care of their communities in ways like sponsoring kids’ sports leagues and donating to other worthy local causes.
Why do I say it’s tough to get to know these great folks? Because, for some reason, very few of these business owners plan their transition from business owner to business “afterlife.” They seem to think this process will take care of itself when the time comes to move on. Most think they can sell at any time. So it’s tough on us because we are often obligated to be the bearer of bad news.
Statistics show that a paltry 17-23% of businesses in the lower middle market (LMM) - we define the LMM as businesses with revenue between $5M and $50M - will actually sell when they are “listed.”
Why? We regularly see business transition challenges ranging from an overdependence on the owner(s) to cash flow problems, inventory tracking issues, customer concentration, key vendor overreliance, human resource violations, accounting irregularities/misstatements, contractual restrictions, sales tax inconsistencies, and numerous other transaction derailing complexities.
While none of these issues is a deal killer by itself, we find that business owners who have grown comfortable with the status quo rarely have the desire, stamina, and fortitude to confront these types of issues for the purpose of exit preparation. And we know all too well that it is specifically the willingness to tackle these issues to improve a company’s “sellability” that will make a difference in whether or not the business will be desirable, valuable, and likely “attractive enough” to sell.
With that in mind, I’ve decided to share a couple of the more common scenarios we see in hopes that some owners will recognize themselves and seek the help of professional advisors. We know you have the desire to monetize your life’s work, preserve jobs for your employees, and keep your communities strong!
YOUR SYSTEMS AND PROCEDURES ARE A MESS
I cannot stress how often we see makeshift and improper accounting, lack of a CRM or other pipeline-to-invoice software, sporadic safety practices, extreme product customization, and a general absence of standard processes and procedures. These small business proclivities are killer to a buyer’s ability to assess your business, to trust in those assessments, to stress test their hypotheses, and to forecast the impacts their processes and involvement will have if they purchase the company.
Exerting the effort and expense to document, test, and cross-train your staff on the processes critical to delivering your business results will pay for itself over and over by boosting the confidence a buyer will have in continuing to successfully operate the revenue- and profit-generating machine you sell them.
YOU’VE MADE YOURSELF INDISPENSABLE
I can’t tell you how many business owners have built companies that are unable to exist without them. They hold all the key client relationships, they personally negotiate with their strategic vendors, and they have developed a business culture where they’re the decision maker of record on all important matters. The business is really just an ecosystem designed to help them do all of these things.
Put yourself in a buyer’s shoes and imagine the angst associated with watching this person exit the company you’ve just bought. It’s the biggest risk most buyers of LMM companies face! Customers, employees, and vendors alike could all feel marginalized and be apt to look around for a more secure situation.
What an owner in this situation has to do is start to let go! It’s hard. Actually, it’s nearly impossible for some owners to fathom giving up this control. But developing key managers to create sustainable, distributed, and professional leadership is the only way to remove this risk. Once this type of leadership transition is in place and proven, an owner will be well on the way to having a business that buyers will fight to own.
Transitioning a business is a serious endeavor that takes intense situation-specific planning and execution. Resolving issues takes time, course correction along the way, and someone to hold you and your team accountable. Don’t wait until it’s too late! We’ve seen health issues, life issues, hurricanes, COVID-19, and other unexpected/unprecedented events ruin the final chapter for a number of business owners who should have enjoyed a lucrative exit. Stay tuned for updates on this subject!
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Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and small business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and small businesses – those businesses generally enjoying annual revenue of $5-$50 million – with the quality of M&A representation and value-enhancement services previously only available to middle, upper middle, and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and small business markets provides the quality of representation and transactional expertise that we do.