Is Your Company Even Saleable? (at Reasonable Price and Terms)

Many owner-operators of small to mid-sized established companies take a “someday I’ll” approach to the idea of divesting their interest in the business, meanwhile contentedly dealing with the comfortable, day-to-day routines of running it. That “someday” intention gets pushed to the back of mind, stored somewhere in the darkest folds with end-of-life thoughts. Who wants to think about that now? Nobody but life insurance agents.

But, it’s a given that someday the business will either be owned by someone else or shuttered.  As a company needs a business plan to chart its path, its owners need a succession plan.  It’s crucial for wealth preservation, taking care of family, employees and potentially investors. That plan may be for immediate implementation or incrementally over years.

Waiting until there’s an urgent and compelling reason to transact a sale, merger, management or family succession is precisely the worst time to begin that process. Waiting too long to begin planning is a sure way to narrow owners’ options and reduce the proceeds from the sale.  Owners continuing to run it when weary and burned-out may lead to other value killers, rendering it unsaleable.

In fact, some private businesses are just not saleable and wind up being shut down — many unnecessarily so.  Often that outcome could be averted by working with a qualified advisor in advance of a planned sale to establish and implement a “Value Enhancement” program to identify opportunities for improvement to the company, then follow a proscribed path of implementing remedies. In effect, this becomes a strategic and operational review, then action plan, focused on the most important value drivers.

Advising on how to build the value of the owners’ equity in the business prior to a transaction – whether it’s immediate or planned for the future – is one of the core value elements we offer.

How Many Companies Brought to Market Don’t Sell?

Private business sale statistics differ on how many businesses that are brought to market fail to transact due to different bases of measurement, but statistics show that the larger the company, the more likely that a sale transaction will actually close. Obviously, other factors such as profitability are critical.

One company is quoting numbers as high at 70-80% transaction failure, and that’s probably correct, but only if including the smallest, shakiest, “Main Street” businesses, and non-employer firms. If you operate a middle market company, and someone approaches you quoting that number, disregard it — that glove won’t fit.

The general consensus among the Alliance of Merger & Acquisition Advisors (AM&AA) is that there’s a 35% – 40% transaction failure rate in the Middle Market (companies exceeding over $5 million~$10 million in revenue), and that number would drop the higher the revenue.

While even the best M&A advisors can’t solve all the problems leading to a breached transaction, our ability to influence the outcome is profound. Running controlled, proven, software-enhanced processes to prepare, manage, structure and close deals, along with fastidious negotiation preparation, predisposes success. 

To my knowledge, the most reliable information source tracking transaction failure shows a 27% rate for 2016.^1. The report reflects self-reported data from advisors on transactions typically valued between $0.5 million and $50 million. Note that 27% is measured in a strong economy. In a weaker economy, 35-40% is probably a good number.

Transactions That Did and Didn’t Close

To corroborate the stats shown above, almost fifteen years ago another source ^2. published statistics citing successful sale rates by size of private company:

• $2.5-10 M revenue, 20-100 employees ($5.2 M; 40 avg.) – 20% for sale at any point, only 1/3 would sell (66% failure rate!)
• $10-$50 M revenue; 100-500 employees ($27 M; 192 avg.) – 10% for sale at any point, only ½ would sell
• $50 M+ revenue – 10% for sale, all will sell

For businesses under $50 M revenue, these older stats appear dour, but in the fourteen years since their publication two things have happened that would now bring them closer into line with the preceding numbers:

1. Increasing professionalization and adoption of best practices and process methodologies among the various intermediaries (investment bankers, M&A brokers or business brokers), as driven by securities licensing requirements now testing investment banking knowledge, and professional associations establishing standards for all, whether securities-licensed or not
2. For businesses generating over $10 M annual revenue, the increasing prevalence of private equity investors has created exit options for some companies that would not have existed otherwise

The reasons why transactions fall through will be discussed in another article, though not surprisingly, disagreement on the value of the business is the most frequent one. Realistically, just about anything is saleable, just not necessarily at a price and terms agreeable to the seller.

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McGavock Dickinson (Dick) Bransford is a Managing Director in San Francisco with Mid-Market Securities, LLC, an investment bank headquartered at 11 East 44th Street, 19th Floor, New York, New York 10017. Member FINRA/SIPC. He can be contacted at (415) 294-0002 or mdb @ mid-marketsecurities.com.

Sources:
1. Everett, Craig R.,”2017 Private Capital Markets Report” (2017). Pepperdine University Graziadio School of Business and Management. http://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/10
2. Business Reference Guide, 2003

Disclaimer: This article provides general information, and is not intended to constitute, and should not be construed as, legal, tax, accounting or business advice, nor does it constitute an offer to sell or to purchase securities. Rather, it is summary compilation of timely issues confronting your industry and as such does not purport to be a full recitation of the matters presented. Prior to acting upon any information set forth in this article or related to this article, you should consult independent counsel and/or more detail contained in the Source Information. The article reflects the opinion of the writer, and does not necessarily reflect the opinions of Mid-Market Securities, LLC, or its affiliates. IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax discussion contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.