While preparing for a sale is important, Peter Mangal, former owner and president of The Flag Company says better than that is running the business every day as if you’re going to sell it tomorrow.
“When I acquired the business, I knew that I had to transform the business, not thinking about selling it and just transforming it, make it a profitable business — not that it was not before I bought it, but make it a lot more profitable than it was,” Mangal said at last year’s Atlanta Smart Business Dealmakers Conference.
The reason for selling his business, he says, is his family dynamic change. He had two grandkids and he wanted to spend more time with them as well as his wife. So, he put a management team in place so he would need to spend less time in the business. But as the CEO, he found he still had to answer a lot of questions, which didn’t give him the freedom and the time he wanted.
“I knew my kids weren't interested in The Flag Company,” Mangal says. “They had careers of their own. So, I decided, might as well just sell it. I did not do any planning or go out and get any advice. I just went to Sarah [Burden, principal of Walden Businesses Inc.] and said, ‘Let's sell this business.’ I had known where I wanted to exit out. The EBITDA was triple what I had when I acquired it. So, it was a good position for me, that I was comfortable selling it.”
When he first got into the business, its top line growth was not great, but bottom line growth and EBITDA was terrific — he says he tripled what the EBITDA was. But to get there, he had to transform the business. He put in a new ERP system to make sure he could support any number produced in a report. But even with all that, getting into the selling process, depending on the buyer and their motivation, buyers might have doubts that a business with solid numbers is as good as the owner presents it.
“[The potential buyer] hired a consulting firm to do the QofE,” he says. “I gave them all the numbers, I opened my books to them, and they couldn't find anything wrong with the amount of EBITDA that I was reflecting. They wanted to fire their consultant. They said, ‘If you want to keep your job, go back and find something.’ So, it becomes nitpicking of well, we got to find something. They picked on inventory. Again, once you select a buyer to go to the next step, make sure they understand your business and what makes your business the business it is and successful, because if they don't have an understanding, then your due diligence is even longer because they're going to question things that you explained to them.”
In his business model, the customer prepaid, so they don't have a receivable per se, he says. The buyer running the diligence took a while to understand why this business is so cash rich.
“When I explained the concept that my order book is fully paid for, so all that cash I already have, so when this transaction goes through, I write you a check for that. They couldn't grasp that,” he says. “It took a while to grasp the concept. When it eventually hit them in the middle of the head then they said, ‘Oh, wow, we're in a better position than we thought we were.’ But yet they were looking every which way to do a clawback. So, the experience going through the selling process is to make sure you have your business in such a way that you can support the data — you can give anybody a report and be able to explain it to them.”
The other thing that the experience taught him is to put a management team in place and make sure they understand what their goals and focus should be so when it comes time to go through a process, they know the end goal in terms of having a viable company.
“What I learned is run your business every day as if you were selling it tomorrow,” Mangal says. “And if somebody wants to come in and look at it, everything you have, they don't have questions.”
