For Dr. John Binkley and the professionals at Generational Equity, the past few years have witnessed one of the strongest seller’s markets in recent M&A history. Buyers and investors have been actively scouring the market for viable businesses, particularly in the lower middle market. This has driven valuations up, and presented ideal conditions for sellers to pursue the maximum value when they decide to exit.
But, are middle market business owners truly achieving the optimal value in this dynamic M&A market? Do they truly grasp the challenge it presents, and are they approaching it in a way that helps them sell for the highest possible value?
Well, according to research by The National Center for the Middle Market, there are indications that many could be missing out on the maximum return on their investment. In their recent key findings report, they presented several important statistics:
- 60% of middle market companies that participate in M&A say it’s vital to their growth
- 90% of companies that sold/merged in the past 3 years had little/no previous experience
- 43% of sellers have found it difficult to assess the value of their business
- 44% of sellers say integration post-acquisition is a major challenge
- Most companies continue to rely on themselves to find targets or buyers
The report also presents a significant piece of advice that Dr. Binkley and Generational Equity’s advisors have shared with many business owners considering an exit:
“Most deals take less than a year; but becoming “buyer-ready” could take- years. Companies that are well prepared will be more successful in getting optimal value for their businesses.”
Here, Dr. Binkley expands on some of the main statistics from this report, and offers advice for middle market business owners to manage these challenges and achieve an exit for maximum value.
Lack of M&A Experience/Support
First, Dr. Binkley would like to focus on the revelation that the vast majority of middle market business owners have little to no experience of the process, yet often choose to go through it alone.
On the surface, this can seem a tempting option – why take the added expense of hiring an M&A advisor when you have considerable experience in negotiations? The fact is that, while business owners are true experts in their field and understand their company better than anyone, that does not prepare you for the process of exiting it one day and negotiating with savvy, professional buyers.
Wading through the M&A process alone creates many hurdles in achieving the optimal exit. Sellers with no experience could fall into easily avoidable traps, such as not knowing the true value of your company or collecting the wrong financial information, and could place more focus on completing a deal quickly rather than for the best possible value.
On the other hand, the support of an experienced M&A advisor in your corner presents a range of benefits, beyond just the fact that they manage transactions every day and have a firm grasp of the required process:
- Buyers recognize that a seller supported by an M&A firm is more committed to their exit
- The correct due diligence will be completed before going to market, reassuring the buyer before they conduct their own and preparing business owners for that stage
- An M&A advisor can provide creative solutions to any problems that arise during transactions
As Dr. John Binkley mentioned previously, this M&A landscape presents an incredible opportunity for business owners in the middle market and beyond to sell for maximum value, and gain the resources to embrace life after it.
But, without professional guidance from M&A advisors, you risk wasting this opportunity and leaving money on the table in favor of a quick, initial saving.
Establishing Your Business Valuation
Next, it is important to address the significant number of middle market sellers who have difficulty assessing the value of their business before entering the M&A market. At times like this, Dr. Binkley and the team at Generational Equity like to highlight a quote from Jack Welch:
“I will gladly pay you the value of your business if you know what it’s worth. If not, I will steal it from you, because it is both legal and ethically right.”
Simply put, entering the M&A market without a firm idea of your company’s worth puts you on the path to giving it away for less than it’s worth. Many skip this step because it can be tedious, time-consuming, and they don’t have the expertise in-house to work out their value.
But this represents the starting point of your M&A journey. Without a clear idea of your company’s value, you will simply have to run with a rough estimate of what you think it is, which risks either pricing you out of the market or leaving money on the table from buyers who won’t hesitate to secure a bargain when it presents itself.
That’s why at Generational Equity, Dr. Binkley has always placed an emphasis on determining the true value of a company. A thorough business valuation should include techniques like recasting, a roadmap to enhancing this value where possible, and an accurate estimate of Business Enterprise Value.
However, it is important to note the difference between Business Enterprise Value and the ultimate selling price. While valuations are important so you can identify a low-ball offer when you see one, the final say on value is with the market and is what an informed buyer will pay for your company’s future earning potential, based on a variety of factors.
Integrating a Business Post-Acquisition
Finally, it is important to remember that while exiting a business is the end of a chapter, it represents the beginning of another. A substantial number of owners on the buying and selling side of a deal have indicated issues with integrating a company post-transaction, which can result in troubling times for both parties.
Ultimately, for Dr. John Binkley the solution to this problem comes in the effectiveness of your due diligence and sourcing of interested buyers. Rather than choosing a buyer based on close proximity, being in the same industry or price alone, you should ensure that their culture, operations and technical capacity relate to your own.
Without this comprehensive assessment of your buyers and use of a limited auction process to distinguish the right choice, you risk a deal breaking down at the eleventh hour or the legacy you leave your company being tarnished due to a cultural or technical disagreement.
M&A activity in the lower middle market is exceptional right now, but it is crucial to consider the future of your company beyond your leadership. This is an emotional and financial transaction, and taking care in finding the right buyer will help secure the maximum value AND leave the business you’ve built in the best possible hands.
Overcome the Challenges of Middle Market M&A
Dr. John Binkley hopes this has been an informative look into how middle market business owners can better ensure they achieve the maximum value from their exit. Many thanks to the National Center for the Middle Market for conducting this valuable research, and reinforcing the important lesson that the more ‘deal-ready’ a company is, the more likely they are to be successful.
If you are contemplating exiting your business or exploring options in this exciting time for middle market M&A, Generational Equity hosts weekly conferences designed to give you valuable information for when you decide to exit. Thousands attend each year to gain this knowledge that will one day help them achieve maximum value for their business.
If you’d like to read more from Dr. John Binkley, visit his regularly-updated blog at http://johnbinkleyjr.com for insights into the M&A landscape and more.
Or, if you’d like to contact John regarding business matters or the options for selling your business, visit John Binkley’s profile at Generational Equity.
