E29: Inside the M&A Process: Best Practices for Positioning Your Company for Acquisition, with Joe Van Voorhis

Are you an entrepreneur considering an exit from your small business? In this episode, host Eric Scovill is joined by Joe Van Voorhis of Generational Equity to provide a step-by-step guide on navigating a business sale. From establishing fair market value to negotiating the optimal deal terms, Joe draws on his extensive M&A experience to offer best practices. Don't wait until the last minute - start planning your exit strategy now!

Here are some topics from today’s discussion:

• The importance of multiple buyers in selling your business
• Evaluating and enhancing business value for potential buyers
• What buyers are looking for
• The concept of owner dependence
• The different types of payouts
• Tax implications to selling your business and the importance of financial planning
• Identifying your real worth
• How to know if your CPA is up to par

Episode Highlights:

[04:21] The Importance of Multiple Buyers in Selling Your Business

• As a business owner, you've likely received inquiries from potential buyers or marketing companies interested in your business. It's important to be cautious, especially if they are not actual business owners but rather seeking warm leads. These individuals may aim to source a deal and purchase your business at a lower price. Limiting yourself to just one buyer reduces the market pressures that can increase the value of your business. Instead, start with a larger pool of potential buyers, narrow it down to 15-20 strong contenders, and create competition and leverage. This strategy puts pressure on buyers to make better offers, maximizing your business's value. Having only one buyer severely limits your bargaining power, potentially reducing the value by up to 50%.

[13:15] Evaluating and Enhancing Business Value for Potential Buyers

Generational Equity conducts an in-depth pre due diligence process to measure the company across quantitative and qualitative metrics. They compare the business to industry benchmarks on over 30 data points like financial ratios, operational KPIs, growth metrics, and more. This identifies areas where the business is below average from what buyers expect to see. They then work with the seller to create a "roadmap to enhancing value" over the next few months. They set targets for improving weaker data points to a more desirable level by the time of sale. Examples include reducing owner dependence, improving debt-to-equity ratios, and demonstrating growth potential.

Achieving these enhanced metrics assures buyers the business meets their standards and qualifies their offer. It also gives sellers more negotiating power. By properly evaluating the business value proposition and taking steps to strengthen it, sellers can maximize the price they receive from strategic buyers.

[16:36] What Buyers Look For

Diversification. Buyers want to see how a target business can help diversify or expand their existing operations. For example, acquiring a company with complementary product lines or a stronger geographic footprint. This reduces risk.

Management team. Buyers need to know the existing management team will remain post-acquisition to ensure a smooth transition. Low owner-dependence is also important. This refers to how reliant a business is on its owner's involvement and expertise. Buyers view high owner dependence as a risk factor that can negatively impact business value. Buyers want to see systems, procedures,, and redundancies in place so the business is not solely dependent on the owner working long hours. If the owner is highly involved in day-to-day operations and administration, it shows a lack of scalability.

Resources:

Generational Equity