Today we begin a series that covers issues that can slow M&A transactions down. Although the causes are many, according to our deal makers who I polled for this series, there are three that seem to create the biggest headaches for buyers, especially professional buyers that look for optimal deals.
Bottom feeders, buyers who are out to buy your company at a discount, are not so concerned about these issues because typically they are looking for assets to acquire that they can turn around and spin off.
If you want to sell your company at a significant discount to a buyer that is out to steal it as cheaply as possible, read no further. However, if you are interested in finding an optimal buyer, one who will reward you for your efforts over the years, you should read this piece and the two ensuing articles to get a good idea about how to effectively position your business for buyer interest.
Today we cover one of the more common issues that impacts deal closings and also valuations: excessive owner dependence.
Now, many entrepreneurs do not recognize this for the issue that it is. Many are justifiably proud of the important role that they individually play in the ongoing success of their business. They look at their contributions and say, “Look at what I have accomplished and achieved and see how involved I am in the daily operations of my business!”
From a personal satisfaction standpoint, that is all well and good. However, buyers view this quite differently.
Unless you are planning on staying with the company indefinitely post acquisition (and if you plan on this, you need to be sure you can take orders from the new owners), the business’s dependence upon you can be viewed as an unfavorable issue from a buyer’s perspective.
Again, quite a few of the business owners we meet find this to be tough to fathom. By their very definition, entrepreneurs are a strong lot, being type “A” personalities in many cases, and they can have a tough time delegating decisions to those that report to them. In many smaller businesses this is completely understandable, as instant daily decisions often need to be made on the fly by the business owner.
However, once your company reaches a certain critical mass in revenue, profits, and number of employees and customers, it becomes important to begin delegating key decisions by hiring a team of middle managers who can focus on the day-to-day decisions and leave the rest, the more strategic ones, in your hands.
It is quite refreshing when we come across entrepreneurs who have created a buyer-ready business from day one. Unfortunately this is far too rare.
How can you determine if the business is excessively dependent on you? Pretty easily actually, take a step back and analyze how many decisions you allow your key people to make. If your middle managers have to run everything by you before moving forward, you may have a business that is overly dependent on you.
Another area to examine is your relationship with the business’s clients. How many of those connections and contracts are dependent upon you? How often do you personally have to meet with key clients to ensure long-term work? These are important questions that any professional buyer will ask.
In addition, do you have or have you begun to groom an individual to replace you? If you have someone in mind that is in-house right now, how did you determine that he/she was a good fit? How do you know that they have the skill, temperament, and aptitude to fill your shoes? Again, all critical questions that buyers will ask.
Another test (and I used to do this with clients all the time): If you are asked to create bios and key person descriptions for your management team, would you be able to do so? It never ceases to amaze me to see clients respond to our questions regarding the existing org chart and key employees. Far too often the bios will be only 2-3 sentences long for each key employee. However, the business owner, the person not planning on staying, will have 3-4 paragraphs on his/her skills and background. If you fall into this same trap, you may have an excessive dependence problem.
Remember one thing: In most cases, the buyer is not buying you and your skills. They are acquiring your business and its people. No matter what industry, it all boils down to the skills and abilities of your employees.
Do some self-analysis on this topic. Be honest about your role in the business and how integral you are to its performance. It is OK to be proud of what you have built and how important you were in its creation. However, what about five years from now? Who will be important once you are gone? Who in the organization has the skills needed to take the company to the next level? Remember the sage saying penned by Marshall Goldsmith: “What got you here, won’t get you there.” This means that you may have the skills to start and build a company to $10 million, but who resides in-house to take it to the $20 million dollar level and beyond?
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. 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.Terry D. Wickman, President, Keytroller
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
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.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).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.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
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.
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
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
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
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