When the day arrives for a business
owner to transition his or her life’s
work on to the next custodian, many complex issues must be addressed
to realize maximum value at closing.
Entrepreneurs with a significant emotional stake in their business often are
tempted to tackle the sale process. They
know the business inside and out and
believe they are best suited to bring it to
market. But owners who want to maximize
value should turn to an intermediary to
develop and implement their exit strategy.
“An intermediary is skilled at negotiating
and — more importantly — understanding
all the ways to extract value and put a price
tag on that value,” says R. Todd Lazenby,
managing partner of WP Capital Partners
LP. “Nine times out of 10, the intermediary
can garner a much higher total result than
if the client did it on his or her own.”
Smart Business spoke with Lazenby
about exit strategies, adding value to a sale
and what separates brokers and investment bankers.
What is the difference between a broker and
investment banker?
Brokers are highly qualified to deal with
smaller, fairly simple businesses up to
approximately $12 million that don’t have
the corporate governance issues and capitalization issues like multiple levels of
debt and equity, a large number of shareholders, dissenting shareholder transactions, different classes of shareholders
and other concerns.
Investment banks add value to larger
transactions with their ability to bring a
much broader scope of potential investors
or buyers to the table, and their ability to
structure transactions that create higher
yields for more complex companies.
Sellers should be aware of this difference.
What categories are analyzed before a business is brought to market?
An in-depth evaluation of the company’s
business model, its core competencies, the
quality of books and records, the level of
automation and types of technologies that are employed, its supply-chain, its organizational structure, and the scalability of the
company are critical up front.
Typically, the depth and breadth of management should be a key concern. Who are
the people? What kind of culture has been
engendered? Does the company revolve
concentrically around the entrepreneur, or
is a team executing on all cylinders?
Prospective buyers have to be able to evaluate post-closing execution risk.
One of the most important factors for
positioning the company and maximizing
its value is identifying competitive and
comparative advantages that the company
has relative to competitors. What is its pricing model — is it leaving money on the
table? Does it understand its point price
elasticity of demand; if it raises or lowers
its price, how will a change affect the
demand function?
Finally, the company’s costs and margins
must be scrutinized. Buyers will want a
guarantee of future acceptable margins,
especially if the purchase is highly leveraged. Another crucial area reviewed is the
delivery channel used to get products or
services into the market. Does a heavy customer concentration issue exist, or is there
a diverse array of clients? These are critical
items that drive ultimate value.
How and when are problems with these
areas addressed?
Some categories should be addressed
before going to market while others can be
adjusted during the process. An experienced intermediary can play a critical role
in assisting companies to shift their business models, before and during the marketing phase. I’ve advised companies on
radical moves such as changing their entire
revenue model, focusing on recurring revenue, switching from a P.O. (purchase
order) basis to a contract basis, or switching from sole sourcing to competitive bids.
Can the previous owner remain involved with
the company?
Owners frequently misconceive that they
will be obfuscated after spending their life
building the company. Actually, there are
methods that create liquidity for the seller
but allow him or her to stay on board
longer-term. Sellers can become owners in
the new enterprise. We will typically negotiate operating covenants or blocking
rights, so they have a strong voice in how
the company functions thereafter.
What should a seller look for in retaining an
investment banker?
The broker or investment banker hired
should be sophisticated in his or her
approach to valuing a company and
demonstrate a track record of performance in this regard. Analysis of all components is crucial.
Many times, splitting the company into
pieces and having the parts individually
valued maximizes aggregate value. One
entity may generate strong recurring revenue or maintain critical operations and
relationships, while another controls intellectual property or holds new products
that haven’t yet been patented or brought
to market. Identifying and quantifying
these value drivers is the key.
R. TODD LAZENBY is managing partner of WP Capital Partners
LP, a division of Whitley Penn LLP. Reach him at (972) 392-6697
or [email protected].