When the owners of a Georgia food processing company received an unsolicited bid for millions of dollars, they thought they had struck it big.
They had been so busy building the business for more than 25 years that they hadn't realized that they had created a company that was worth buying. So, they were willing to sell right away.
However, an accounting professor, the wife of an owner, interceded. She told her husband that the business really wasn’t ready to sell because a buyer would likely offer less for the company after doing due diligence on the company. The company could be worth more with time and effort, she argued.
So rather than selling immediately, the owners hired professional advisors, including advisors from SunTrust, to help them prepare for an eventual sale. With guidance from the transition team, the owners created and implemented business succession plans for the business and its owners.
The plan included installing an enterprise resource planning system to make it easier to manage the business, separating business expenses from personal expenses for the owners, and devising strategies to manage the financial windfall the owners would reap personally. Two years later, the company sold for 70% more than the owners had been offered initially.
“The buyers found that because of the professionalism of the business, they could leverage it to grow even more value,” said George Calfo, Managing Director of Investment Banking for SunTrust Robinson Humphrey, which was a sell-side advisor for the food processing company. “It shows that a little bit of patience and planning really can yield a much better outcome.”
Such patience can be scarce among today’s business owners. With capital flooding the mergers and acquisitions market, inquisitive buyers call upon companies unsolicited. The owners of the unsuspecting companies are often Baby Boomers at or near retirement age.
Many owners are cashing out now rather than working towards a bigger payoff in the future. But a lack of transition planning has left them wondering whether they could have done better, Calfo said. When a transition fails to maximize business value and personal satisfaction, it’s usually because it wasn’t properly planned or the company was sold by owners and advisors who weren’t experienced in selling a business.
Preparing for a transition
SunTrust helps owners prepare themselves and their businesses by following a business transition roadmap that covers three key phases.
- Phase 1: Laying the foundation for transition.
- Phase 2: Leaving the business.
- Phase 3: Managing post-transition.
Calfo and Russell Sanders, Managing Director, SunTrust Business Transition Advisory Group, offer these suggestions for ensuring a successful transition.
1) Start with the end in mind. Once they start considering a purchase offer, owners often focus on the transaction instead of the broader impacts, Calfo said.
But envisioning life after the business as a first step allows an owner to set goals for themselves and the business. The owner can use these goals to determine if an ensuing offer is right for them and their company.
A long-term strategy starts by answering open-ended questions like:
- Who do you want to run the business?
- What is your timing?
- What are the strengths and weaknesses of your business?
- If you will not be going to the office every day, what will you be doing?
- How much is that going to cost? And where is the money going to come from?
2) Think about M&A strategically. Most middle-market companies have little M&A experience, according to a report on what executives and advisors need to know to make the most of mergers and acquisitions from The National Center for the Middle Market: “Among sellers, 46% were selling for the first time and only one in 10 companies had significant previous experience with sales.” The NCMM also found that 45% of middle market company owners or largest shareholders are 65 or older.
In surveying 1,000 companies that sold over a period of 3.5 years, SunTrust found that 90% of sellers said they had little or no prior experience selling. Inexperienced sellers may have squandered time and money by pursuing deals that didn’t fulfill their goals in the end.
Self-made entrepreneurs are often surprised by how hard it is to sell a business, particularly the due diligence process, Sanders said. “By the time they are done with the process, all they want to do is to be done.”
3) Plan the steps required. Sanders likens business owners to racehorses. “They focus on the road ahead and charge as hard and as fast as they can to get to the finish line,” he said.
An owner may say that it is important to plan for a future transition, but they will quickly forget about it among the problems of the moment. “Taking time to plan for an evitable transition is an important exercise no matter what you do with the business,” Sanders said.
“Whether you sell it or keep it in the family, you want the business to be as strong as it can be — and you want your personal affairs to be in order. It’s not just contingent upon the sale of the business. It applies to all transitions.”
In talking with over 100 business owners that they helped transition within a year, SunTrust found that clients were most likely to state that they wished that they had spent more time planning personally, Calfo said.
4) Assemble an experienced deal team. “We encourage people to think about their accounting, legal and financial advisors,” Calfo said. “Aligning themselves with people who have done it before can give them the right advice to maximize the transition to reach their goals.”
Experienced advisors are essential when a business owner encounters a buyer such as a private equity firm, Calfo said. “When inexperienced business owners with inexperienced advisors deal with experienced buyers, a tremendous amount of value transfers from the seller to the buyer because of inexperience.”
5) Plan for life post-transaction. Whether it is spending more time with family, getting involved in the community, pursuing other interests, or even starting another business, having something to look forward to after leaving the business eases a transition for an owner.
When Sanders worked in the family office for SunTrust, clients who sold their businesses frequently asked, “Did I get enough?” This indicated that they did not have a good sense of what they wanted to do after the transition, Sanders said.
Though buyers may be eager, and retirement might be beckoning, even the most tempting offer may not fulfill an owner’s personal and professional goals for exiting their business without proper transition planning and experienced exit advisors. “When you know what you will do after the transaction and that you will have the money to do it, that’s a successful transition,” Sanders said.