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WHAT destroys your EXIT Value but you CANNOT control it?

23 May

When Should I SELL?


By:  Huxley Nixon

 

                                                                                                                                                                                                

“It” universally affects a buyer’s willingness to invest, a lender’s willingness to lend and a seller’s to sell. Unfortunately, NONE of these constituencies have the power to change its momentum! It is a cancer no form of government or geographic region is immune from and it paralyses our financial markets.  WHAT IS IT?

Hint:  It is related to RISK.

BUYERS:

If you are a successful company but not sure customers will continue to buy your product or service it keeps you from investing in new inventory, plant or equipment and frequently prompts management to lay off employees.  It affects your decision to acquire others that in normal times would be logical actions and accretive to your bottom line.

LENDERS:

This group makes loans to others based on the expectation they will be repaid their principal and interest based on the Five C’s of Credit –

Capacity/Collateral/Capital/Conditions/Character

How did the near collapse of the financial system in late 2008 affect the ability of new borrowers to get a loan today?  Lenders have more availability of FUNDS to lend but few loans are being made and borrowers are hesitant to borrow.  WHY?

SELLERS:

Business Owners remember the heady valuations being offered prior to the Great Recession but few pulled the trigger and sold.  Family business owners were hit especially hard because selling is also an EMOTIONAL decision, NOT just a financial one.  Many founders ask themselves – “What will I do after I sell? Unfortunately, in many instances their company has become their identity and they cannot envision not being part of it.  Financial Gain is NOT the key motivation driving them in most cases so they elect to do nothing and do not plan well for this eventuality.  We all know someone whose business was flying high in 2007 but if they were in the building supply arena Chapter 7 liquidation was the outcome for many when ALL construction came to an abrupt halt in 2009.  Not a GOOD outcome.

Fast forward three and half years and the majority of owners who survived the worst, have stabilized their companies and are growing again but may not have reached their pre-recession high water mark.  The almost universal response when asked about selling part or all of their company today is:

Why not wait five years until things settle down and valuations return to normal?

WHAT THREE FACTORS DETERMINE VALUE?  

1)      INTERNAL:         (You control creating these value drivers)

  • Strong Management TEAM and Company Culture
  • Excellent Financial/Management controls and Operating systems
  • Diversified Customer Base
  • Investing in new technology advances and capital improvements
  • Strong Sales and Cash Flow
  • Recurring Revenue business model
  • Three Year rolling Strategic Plan positioning Company for GROWTH – reviewed annually

 

2)      EXTERNAL:   Unfortunately, you do NOT control these.  

·         MARKET Influence

  • Supply & Demand
  • Governmental Regulation and Policy
  • Tax Rates and Rules 
  • US and Global Economy
  •  Money Supply
  • Inflation and Interest Rates
  • Access to Capital
  • Investor Confidence about the future
  • Political INSTABILITY, UNREST & WAR
  • Terrorism
  • Natural Disasters

·         DEMOGRAPHICS

·         GLOBALIZATION

·         TECHNOLOGY ADVANCES

 

3)      SALES PROCESS:          (You can control this)

  • Hire the BEST professionals possible who are expert in dealing with Succession/EXIT Planning issues and develop a PLAN
  • Execute the PLAN
  • When ready, select a Transaction process that creates a COMPETITIVE TENSION!

CARDINAL RULE

NEVER DO A NEGOTIATED DEAL WITH ONLY ONE BUYER!

In my 35+ year business career, two things usually happen when there is NO competitive tension created:

  • LOWER Sale PRICE – 20% to 30+%
  • TERMS more favorable to the Buyer (they typically have greater resources and are more experienced in the Mergers and Acquisition process – an Owner sells only ONCE)

Lastly, the single MOST IMPORTANT thing affecting the THREE Factors mentioned above is –

UNCERTAINTY

We can deal with BAD News and GOOD News but UNCERTAINTY paralyses us and the Market!

All of the above factors have an influence on YOUR value.  In upcoming blogs, the author will examine in detail the IMPACT in 2012 and 2013 & beyond, of four KEY EXTERNAL forces potentiality creating dramatic UNCERTAINTY and lower exit value.  They are:

1.      Supply and Demand (Access to Capital & Demographics)

2.      Tax Environment

3.      Globalization

4.      Technology Advances

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com

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