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How to Prepare Your Company for a Risk-Free M&A Exit

By Generational Equity

Risk Mitigation

I recently read an interesting article published on Axial’s site entitled “Three Things to Consider Before Selling Your Business.” All three items were great to consider if you are planning your exit but in reality, one was (and is) the most important of all:

Deal with the things that scare buyers away!

So simple, yet so profound.

One of the most important aspects of our service as M&A advisors is helping our clients think about their companies the way buyers do. You see, buyer’s loathe risk. And they look at hundreds of opportunities every year and generally go with the ones that have the least risk associated with them.

What are the Risks that Scare Buyers Away During an M&A Exit?

  • Owner dependence
  • Customer concentration
  • Lack of financial controls/reporting

There certainly are others, but these are the big three. If you can improve your company’s position in any of these areas prior to opening discussions with a buyer, you will be in much better shape when negotiating the sale of your company.

The wonderful news is that none of these are rocket science. Simply focusing on them and applying good solid fundamental business practices can improve most of these areas.

Enhancing the Value of Your Business by Eliminating Risk

1 – Reduce Owner Dependence

First, most of our readers would agree that if they are making 100% of all key decisions for their businesses, this would be considered a risk by buyers. Because if you exit your company, who is left to make these decisions? The answer is no one, and the buyer would be incredibly concerned about business continuity post-transaction.

The solution is to hire, train and mentor a middle-management team. We understand that this is one of the biggest challenges facing middle market entrepreneurs, but it is also one of the most important. No matter how talented you are, make this about your team – not yourself – so that you can exit cleanly.

2 – Expand Your Customer Base

Second, customer concentration is one of the least understood buyer risks by business owners preparing for exit. For many, the fact that customer X is 40% of revenue is seen as a positive. Indeed, it most likely took you years to build the trust in that relationship for the client to represent that much of your business.

However, at the same time, many buyers, especially those outside of your industry, will be very concerned that customer X may change his/her buying habits once you depart. This is particularly the case if you are the primary contact with customer X.

To minimize the risk, do as much as you can to diversify your customer base long before you start to negotiate with buyers.

3 – Keep Financial Controls and Reports Up-To-Date

Finally, one of the biggest M&A deal breakers we face is the lack of financial controls and reporting. Far too often our clients don’t understand why we ask them to produce such detailed financials for the past three years. We only ask for them as part of our evaluation process because buyers will certainly ask for them.

Being able to produce them for us will only help you down the road when dealing with buyers during your exit, who will often produce 200-300 due diligence questions for you to answer, many relating to your historical financials.

The Takeaway – Start Your Journey to a Risk-Free M&A Exit

Starting today, deal with the major issues that scare buyers away. Trust us, even marginal improvement in each of these areas will dramatically enhance your company’s valuation to many buyers. You don’t need perfection prior to chatting with buyers, what you need is progress to the goals you have set. The Bill Murray movie “What About Bob” is instructive in these areas (baby steps).

If you would like to learn more about how you can improve and enhance your company’s value, you should attend a Generational Equity exit planning conference. These highly educational, complimentary meetings will help you learn more about positioning a business for sale and reducing the risks that scare buyers. Your time will be well spent learning how to think like buyers and giving you the knowledge to exit your company for maximum value.

For more information, please call us at 972-232-1121 or visit our website, provide us with your contact info and we will be in touch.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
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JoAnn Ellis, Owner of Fondren 5 Star Kennels
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We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Andy Graham, Vice President, Modern Heating & Plumbing
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
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Bil MacLeslie, CEO, ipHouse
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
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Betty L. Brennan, President, Taylor Studios
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