You’re an entrepreneur who has run the same company for 30 years, and one day you wake up with that great retirement epiphany: It’s time to sell the company.
It’s time to sell the company. That sudden realization sends you scrambling to put your company’s best face forward as you secretly launch your quest for a buyer. The results are disappointing.
Sound like an exaggeration? Not according to Mel Pirchesky, managing director of Eagle Ventures, an investment banking firm that acquires select manufacturing companies. He tells SBN in this recent interview that business owners more often than not find themselves in that selling position ill-prepared to maximize the return on the assets they’ve built and nurtured for years. The reason, in many situations: simply poor planning.
Here’s Pirchesky’s take on where these owners fall short — and what you can do to greatly improve the profitability of your exit strategy.
The company owners who turn to you typically are older, mature, aren’t growing but aren’t necessarily doing poorly. What is the typical shape of such a company when the owners come to you and say, “Hey, I’m interested in getting out?”
It’s not that they’re in trouble. Actually, the ones I see are mostly doing okay and they’re making money. But they’ve kind of plateaued out in the sense that the owner — these entrepreneurially owned situations, there’s only so much that the owners can — or even want to — handle in terms of the size of the business. Typically, an entrepreneur, having started the business, is a strong-willed individual, exercises lots of control and spreads himself fairly thin. There’s not necessarily anything wrong with that because they’re also making money. However, they become a self-limiting factor in the business because they need to have their fingers in all aspects of the business in order to keep it profitable.
It’s difficult. A fella told me a story about how he brought in somebody who could help him grow the business, somebody with real talent and who was creative, and that individual didn’t work out. When you got into it ,you could see in talking with this individual that it had to do with the fact that the owner probably didn’t give up much authority to this guy. That’s typically what you find.
What do they typically do wrong in that they want to talk to you in the first place about possibly buying them out?
They haven’t created an orderly transition situation. An orderly transition can be just as much with me as with employees within the organization. For instance, there may be a good middle manager whom he’d like to groom for the future, and he or she feels that individual can’t afford to buy the business from him. But instead of concluding that that is that, what that individual ought to include is that there are guys like Pirchesky out there. And if that’s the right middle manager in terms of talent and so forth, we’ll back that guy.
What other things should business owners be thinking about in approaching the sell-out stage — even five years prior to that point?
Well, they’re not thinking about investing in capital equipment, you can be sure of that. Their attitude is, if I put $50,000 into a piece of equipment, that’s $50,000 less that I’m going to get on the sale. In fact, if it’s a good investment to begin with, the profits which that additional piece of equipment would generate are such that the owner would get more than $50,000 in additional proceeds from that sale because they bought that piece of equipment. And that’s really typical. It’s almost an exception when you see somebody who keeps investing up toward the end, and I can understand that.
They also haven’t told anyone about their plans. In many cases, they haven’t even thought about it until one day they think, boom, I’ve got to do something, as opposed to thinking about it, planning for it, laying out a strategy — just the way you would do to build a business. Why don’t they do it? One, they love what they do so they don’t want to face the facts. They know the time will come, but until that time comes, they pretty much don’t do anything about it in terms of planning.
What would you say to those people?
If you spend 20 or 30 years building your business, you should spend more than a few weeks or a few months in planning for how you’re going to provide for a transition of ownership.
It used to be that people always said their businesses are nothing but their employees. Well, I say businesses are nothing but their employees — and the customer or client base that has been built over 20 or 30 years in quality service, and that’s a tremendous asset. And to not get full value if I was the seller, it’s just not a good thing to do. You’re not only not looking out for your employees, you’re also not looking out for the customers who have relied on you for so many years.
That’s not smart, because you can be sure that, especially as an individual is getting older, his employees start to become concerned about that, start to worry about that, start rumors about that. It’s bad because, if who you’re going to sell to is someone who’s going to take care of your business well — if that’s your intention and commitment — that someone’s going to grow it to the next level of success, making that commitment to your employees goes a long way to alleviate the concerns and fears and rumor-mongering and the distraction from what they’re supposed to be focused on.
In companies that I’ve come across, that fear is very debilitating. People don’t work as effectively — they’ll put in their hours — if they don’t know there’s a future other than tomorrow. If they can see that you’re going to sell this to someone who’s going to take it to the next level and really add on and build and so on, that’s a future for them.
What if they think you’re going to do nothing?
If they think you’re going to do nothing — or if they have no idea what you’re going to do, which is the same as nothing, what happens, in that void of nothing, rumors and suppositions will fill up that space. So if I was an entrepreneur, I would make sure I would provide leadership in how people were looking at my exit by telling them I may not know who I’m selling to but this is the kind of person I’m going to sell to.
If owners did have the right mindset in such a transition, where would they begin and at what point?
Probably a year in advance. The first step is that I would talk to my close advisers, whether accountants or attorneys or whomever to figure out the best way to skin the cat, so to speak. Should they use a broker or investment banker? Well, that depends. If he doesn’t have an adviser, he might. You don’t want to be penny wise and pound foolish.
What steps to you need to take put that sale package together, one that has legs?
This is not magic. Of course, the package is going to include traditional information such as historical financial statements and listing and description of the business. But that’s not really the important stuff. The important stuff is more like what could somebody do with this business? What is the market and, more importantly, the market opportunity for the business? If business is X, how would you get it to three times X over three years?
If they were 40 years younger and they were going to take it to the next level from where it is today, how would they do it and what makes them think they can do it that way? And what would it take in terms of money, resources, people? Lay it out for somebody.
All of a sudden, then, I’m coming in cold and I see y
our dream and I can get excited.
Daniel Bates ([email protected]) is editor of SBN.