In a recent post, I talked about asking your favorite managers or leaders about their interest in having ownership in your company.
Have you followed up on that?
Your current management leaders are definitely legitimate future buyers of your company, so don’t leave them out of your planning.
Who else should you be looking at and where are you going to find them? Are you dressed appropriately to “go to the dance?”
What’s It Worth?
Well let’s back up (again) and let’s start with the question of, “What’s it worth?”
We’re not going to launch into a long treatise about valuations and market analysis. This is going to be far more simple. It’s all based on a simple truth: your company is only worth what a buyer is willing to pay for it.
Overly simplistic, I know, but let’s peel this apart before you discount such a simple basis.
You can do all the research about EBITDA and multiples you want. However, if you don’t have a qualified buyer with a high interest in your company, nothing matters. It doesn’t matter that your bank loves you. It doesn’t matter that your industry typically sells for 3 or 4 or 10 times multiple. You’ve got to find a buyer who has the money and the interest to stay engaged with you all the way to signing an agreement and giving you a check.
What About Your Formation Agreements?
Now before you think this is way too simple and obvious, let me ask you a question: When was the last time you took a look at your formation documents? Your Buy Sell Agreement? Last year? Five years ago? Maybe not even since you formed the company? You might want to pull that out and look at it.
In two cases recently, we’ve observed owners shocked at the glaring hole in their desired transition plan caused by the limits set forth in their formation agreement. In one case with two owners, the retiring owner would receive nothing upon retirement except his pro-rata share of any projects that were invoiced as of the date of his retirement. In the other case, it was assumed that the owner who was remaining in the business would simply either write a personal check for a percentage of a recent official valuation or he would finance it either personally or through the company. Nothing in the formation documents required this. And in both cases, the hard discussion with both groups started with, “No one owes anyone anything.”
Be Sure and Value the Relationship
In both cases, there are long-term, very close and meaningful relationships that would be ruined if this was really the end result. But, it drives home the point, that your expected buyer may not be under any obligation to pay you what you think you deserve. So, what do you do?
Are You Ready to Start the Buyout Process?
First, begin working on your buyout as early as possible. If you’re thinking of retiring or your partner is going to retire in the next five or so years, now is the time to pull out all of your documentation and find out what, if any, legal obligation everyone has. If it’s like the first case above: you’ll have time to write up an exit plan or buyout for everyone that is equitable and doable over the coming years. This also sets up the remaining partner to understand what he or she is going to want to explain and demand of any future owner he brings on board.
Do You Need to Look Outside the Organization?
Second, if you’re looking outside of your organization for a buyer, you’ve got to get a haircut, shave, take a shower, shine your shoes, buy a new suit and really dress yourself up so you will be the best looking person at the dance. The dance called “the acquisition dance.” What do I mean by that? I bet you already know. If you don’t, well, you at least know you can call us and we’ll help you do that. It’s going to take a lot of effort and a good deal of time. But if you want to be the winner at the acquisition dance, you can’t go looking like you have for the last several years. It’s time to make some changes.
Even if you’re more than five or ten years away from transitioning to your third act, by getting ready now, you’ll be making more money in the interim period and you’ll be worth far more in the end.
Call us. Let us help get you dressed up.
First thing to do to make sure you’re dressed for the dance, take a look in the mirror: Click here to see what you look like.