Preparing Your Business for Sale: Lessons Learned on the Front Lines of a Deal
My father, Russell Frith, CFE, started his career with Lawn Doctor in 1978, selling franchises from a home office he converted from a laundry room. So when he and his partner, Bob Magda, decided last year to sell their majority interest in the company they built into the franchise leader in the category, we had much to learn.
When Franchising World magazine asked me to share some of the lessons learned for those that may find themselves in a similar position, I jumped at the opportunity in the hopes that some might benefit.
Lesson 1: Define Your Exit Horizon
If you own a privately held company, you are one of the elite, a true value creator, a visionary, and the very essence of our economy. You are also probably a procrastinator when it comes to deciding when you might sell your business. While the typical entrepreneur may view the notion of planning an exit time frame as akin to a newlywed planning for a divorce, if you don’t think about it, you won’t be in control when the time comes. In some cases, this lack of decisiveness may lead to a loss of value when circumstances or the market change.
Lesson 2: Prepare Your Business for Sale Before You Sell
Selling your business will be one of the most intense and time-consuming undertakings in your career. The more that can be done comfortably before formally starting the process, the smoother the process will go. Review and organize certain items that, while important, may not be considered regularly, such as your certificate of incorporation, stockholder certificates, insurance policies, environmental compliance, leases, intellectual property maintenance, litigation history, accounting practices and material contract retention. These items, and many others, will be part of a very extensive due diligence list.
The more that can be done comfortably before formally starting the process, the smoother the process will go.
Lesson 3: Know Your Company’s Weaknesses
Most entrepreneurs love their business. Understandably, some are known to turn a blind eye to a few of its weaknesses. Ask yourself the hard questions because at some point the buyer certainly will.
Are there franchise relations issues? Is there the right mix of franchisees to grow market share at the desired rate? Are there markets in which you’d exit if given the opportunity? Is there older technology that requires an upgrade? Are your reporting systems adequate to properly measure the key drivers of your business?
Whatever the challenges might be, take an honest look to determine what can be changed in a reasonable time frame and what needs to be communicated to the buyer.
Lesson 4: Hire a Financial Advisor Carefully
We all know our businesses. We don’t know the ins and outs of properly marketing and selling our business.
A good financial advisor or investment banker will clarify the key attributes of your business, educate you on the market, generate interest and bring you the best potential buyers. They will also reduce distraction from your day-to-day operations throughout the sale process, which is critical to maintain the operating performance upon which the transaction will be valued. While financial advisors are well paid, typically as a percentage of the deal, good ones are well worth it. They will create value well beyond their fees.
Key advisors should also include a transactional attorney, a franchise attorney, and an accounting firm, all of whom are extremely important in getting a good deal done.
Lesson 5: Become a Student of the Market
Meet with several advisors before selecting one. While it is not only good judgment to evaluate your options, your discussions will provide a broader perspective on the market as a whole. Each advisor should provide a detailed overview to include the general amount of private capital in the market, trends toward or away from certain sectors, an evaluation of recent multiples paid in similar industries and for comparable size companies (companies are valued based on a multiple of EBITDA), a preliminary list of firms that may be a good fit, and a lot of additional information to use to conduct further research.
While your advisor will be an excellent resource, study the information as if you are preparing for the most important test of your life (perhaps a bad example for some of us.)
Lesson 6: Clarify Your Goals
While all business owners want to maximize the consideration they receive for their risk and years of hard work, there are often several factors that go into evaluating what deal is ultimately the best one. These include whether you plan to stay involved in an operating capacity, if you plan to reinvest a portion of your proceeds in the new company, what the tax implications of various deal structures are, what opportunity will be offered to loyal employees, how franchisees will benefit, whether the brand you nurtured will remain largely intact or get folded into another are all worthy of some analysis?
If there are other considerations, which there usually are, write them down and rank each one. Use this list as a guide post when making difficult decisions through the process, including how broad or focused your initial marketing efforts might be.
Lesson 7: Choose Your Internal Deal Team Wisely
The road to a successful transaction is long and not without a few potholes. Select the key employees that will work on the transaction based on access to information, skill sets, ability to maintain confidentiality and willingness to put in a tremendous amount of additional time beyond their daily responsibilities. Throughout the six-to-nine-month process, there will be no shortage of conference calls, management meetings, diligence checklists, complex agreements, negotiations and interviews, many of which will be happening simultaneously with those with more experience and typically more resources available on the buyer side.
Lesson 8: Play Fair
While you need to negotiate a good deal based on your goals, there needs to be an upside for the buyer and the buyer after the current buyer. Negotiation is a natural part of the process. Aggregate merger consideration, working capital targets, post closing adjustment escrow, indemnity escrow, earn out consideration and more will all have to be negotiated. There is a give and take that will result in some wins and some losses. In the larger scheme, try to bear in mind that the right buyer will invest a lot of money acquiring and growing the company. A good deal is not measured by your ability to get every last drop out of the buyer, but rather should represent a win for all parties.
Lesson 9: Trust but Check References
You will have a lot of exposure to potential buyers under a range of circumstances, particularly as you narrow the field. Your gut will likely tell you if the partnership will work. Prior to signing a Letter of Intent, a potential buyer should provide a solid list of managers from companies they have acquired under circumstances similar to yours. Set aside the time to talk to all of them. This will serve to validate the decision you are making. Never underestimate fit, particularly if you plan to stay around and work with each other for a while.
Lesson 10: Have Fun
As my father and I sat in the lobby at the 2011 IFA Convention discussing the potential sale with a trusted friend, he looked at us both knowing how vested we were in the outcome and encouraged us to have fun. He couldn’t have been more right.
You may recall a time not too long ago when you couldn’t go to an IFA function without tripping over private-equity firms by the dozen. They had discovered what we in the franchise community have known for years, franchising works. With proven brands, risk diversification, low-capital expense, significant free cash flow, ability to consolidate industries, and inherent scalability, business-format franchising represents a great investment opportunity. In 2008, with the downturn in the economy, private-equity deals dried up and multiples took a dive. Now that they are back, you need to be prepared if you want to be in a position to benefit.
Scott D. Frith, CFE, is CEO of Lawn Doctor, Inc. He can be reached at 732-946-4300, Ext. 252 or email@example.com.
The buyer, Levine, Leichtman Capital Partners, is a Los Angeles, Calif.-based investment firm that manages approximately $5.0 billion of institutional investment capital.
Sperry, Mitchell, and Company, Inc. was the exclusive financial advisor to Lawn Doctor, Inc.
DLA Piper acted as franchise counsel for Lawn Doctor, Inc.
Giordano, Halleran and Ciesla acted as transactional counsel Lawn Doctor, Inc.