Steer clear of these 6 business-busting M&A myths
Diesel business owners: There’s no question that you will one day exit your diesel business. How you exit is up to you.
It’s never too early to start thinking about succession planning, experts say. As a business owner, you should aim to prepare yourself for it so that your exit is best for you, the company, and your employees. If you plan to sell, you need time to prepare your businesses to maximize the value, SEMA 2019 presenter Gene Marks, CPA told attendees. Bonus: What you do to prepare to sell your business is good for growth and profit anyway.
As you prepare your diesel business for a future exit, don’t fall prey to these common mergers and acquisitions myths, warned Dave Heymann, an adviser at Generational Equity who spoke at a gathering of business owners in central North Carolina.
MYTH #1: Big companies buy only big companies.
REALITY: Your diesel business is potentially attractive to buyers even if it isn’t a behemoth. Thirty percent of M&A transactions involve companies doing 10 million or below annual sales, Heymann said. Seventeen percent involve companies doing $10 to $20 million annual revenue. Companies with annual revenue under $25 million account for 47% of transactions in the US and Canada.
Famous M&A types like Berkshire Hathaway’s Warren Buffet talk publicly about big, “elephant gun” acquisitions. In reality, even elephant hunters sometimes buy smaller businesses, sometimes as bolt-ons to larger deals, Heymann pointed out.
MYTH #2: My diesel business has a specific value.
REALITY: You hear lots of M&A talk about multiples and formulas, said Heymann. Buyers develop formulas to develop low expectations among sellers.
Don’t let all that M&A noise obscure a fundamental truth: “The optimal buyer isn’t buying your business for what you were able to do with it,” said Heymann. All a buyer is ever really buying is what they want to do in the future and how your company positions them to do that.
MYTH #3: My diesel business has a specific value and it’s on the P&L.
REALITY: Some buyers will want to dig down into the business’s past, and they’ll ask you to do things like graph free cash flow against time. None of that has anything to do with your business’s value, said Heymann.
Again, optimal buyers ignore what’s not relevant in the business’s past to focus on the future. They shouldn’t care about your actual P&L at all. They may ask for a P&L recast because it helps them see what a P&L at your business might look like were they to take out all the costs that are particular to you—the cell phones that are for family members who don’t really conduct any business, company vehicles, or anything non-essential to the business that, for tax reasons, you’re paying for as a “business expense.”
A seller’s goal is to explain the past, and sell the future, Heymann said.
MYTH #4: My diesel business has a specific value and it’s on the balance sheet.
REALITY: Don’t forget intangible assets, Heymann stressed. Your diesel business’s intangible assets might include:
- Experienced staff
- Loyal customer base
- Supplying base
- Trade Secrets
- Training procedures
- Trained sales force
Many sellers wrongly believe that most of their company’s value is tied up in equipment and other “hard assets,” said Haymann. That’s a myth. Brokers sometimes focus on dilapidated hard assets in due diligence to get the selling price down.
We are a service economy, so more often than equipment and other hard assets, we are selling skilled labor, customer relationships, relationships with vendors, and other intangibles when we are selling a business.
MYTH #5: The only buyers who will buy my diesel business are in the diesel industry.
REALITY: Why would a seller in your space pay you for something they already have? The top prices for the business you want to sell may come from private equity groups. In fact, 60 percent of generational deals involve PE groups.
MYTH #6: The best way to sell my diesel business is to give up all ownership immediately.
REALITY: Cashing out 100 percent to become a liquid multi-millionaire with nothing to do may sound attractive to business owners who have worked hard all their lives, but it’s not what’s best for the business. Increasingly, smart buyers are betting on jockeys, not horses, Heymann said.
Buyers are structuring deals that allow them to retain what made the business successful in the first place—its leadership. Many buyers, particularly PE investors, prefer to buy management teams and infuse them with resources that will help the company turn more of a profit. These resources include capital, technology, sales infrastructure, distribution channels, and farther reach.
EYES OPEN: If you’re thinking about selling, it’s time to seize the day. Right now, we’re in a seller’s market, Heymann said. “Five years from now, it’s going to be a buyer’s market.”
Even if you don’t plan to sell any time soon, “it’s dead wrong” to start an exit strategy when you are ready to sell, Heymann said. “The right time to put an exit strategy in place is before you even open the doors of the business.” If you didn’t do that when you opened, do it now so you can maximize the business’s value. “Selling is a process, not an event.”