When it comes to the decision to sell, Michael McHugh, founder and managing partner at GMB Capital Partners says there are number of things sellers need to consider so they can prepare to maximize transaction value. One of them is an answer from founders and partners about why they want to sell.
"Do you want to sell and go sit on the beach? Exit the company? Or do you want to take some money off the table and roll and get that second big bite of the apple? Because your approach is going to be diametrically opposed to that," McHugh said at the Minneapolis Smart Business Dealmakers Conference.
Knowing why the seller is selling is usually the first question he asks.
"Someone told me a long time ago, they said, 'There's only one reason people sell their company and that's because of fear,'" he says. "And you got to figure out what they're afraid of. And now if there's bad fear — if I figure out their fear is because they afraid their leading customer is going to go to a competitor — that'd be a bad fear. Good fear is they're worried that they're not going to have enough time in their life to spend their time with their grandchildren or something like that. And so, you have to figure out why are they selling."
And if the CEO is going to leave, he says at least a couple years before that happens, they should bring in a new CEO.
"You're going to have to do all those things when potential buyers come in," he says. "And when you say, because your investment banker is going to tell you to say this, that I'm no longer involved, you better back that up with evidence. And so many times we hear that story and it's so obvious to tell that that's not really the case."
When selecting a new CEO in that circumstance, he says make sure it's not turned over to just anybody.
"We see it all the time: You give it to a COO, and he's a great COO, but you can tell instantly he's not a CEO," he says.
For those who plan to stick around for the second bite of the apple, he says make sure to pick the right partner and not just go for the highest valuation. It's also important to choose the right partner. Even for those who know that they're going to exit the business and who may just want the highest valuation, the decision is not always that straightforward.
"Because you usually have an emotional tie to your company, too — you want your employees to do well, you want your company to live in perpetuity," McHugh says. "So, that's also important to make sure you get the right partner and not just the highest bid."
It can be the case that when an owner is ready to sell, they've put a lot of effort into aspects of operations but have failed to keep their finance and accounting practices up to date, which means they have a weakness in that area. However, it's best that buyer prospects don't see a weakness because that will lead to discounts in price.
Buyers, he says, are going to do their own quality of earnings report, industry study and call the seller's customers and competitors, so sellers need to be ready for that because whatever is out there is going to come up and sellers shouldn't sit on their hands when tough questions are asked.
He also recommends bringing some key employees under the tent, for two reasons. One is to help with the due diligence. The other is when buyers do a management meeting, they'll want to see a depth of team and how they interact to see if they feel comfortable talking, even contradicting what the CEO said.
"If it's a whole team, and there's been a trust in the organization, and everyone feels comfortable to speak up, that really speaks volumes," McHugh says. "Also, if I do a plant tour, I don't understand the manufacturing processes half the time, but I really see how the CEO reacts to the people on the plant floor. Because some of them, the CEO, if he knows all their names, and they light up, and they say, 'Hey, Bob. How are you doing? How are the kids?' It's pretty cool. But there's some times I've been on a plant tour where the employees go by and they avoid eye contact with the CEO. That's not so good. I'm not going to base my decision completely on that, but it's pretty telling."
Those who have customer concentration are probably going to get a discount on their valuation, so they should try to diversify their customer base. But there are other parts of diversification and concentration that can affect valuation. One example would be having a diversified customer base, but a small sales force with one person responsible for customers that represent 80 percent of sales. That, he says, is as bad of a concentration as a customer concentration.
"And so, there's other types of concentration," he says. "So, don't just think of customer concentration when you're getting prepared. Think about other types of diversification versus concentration."
