Tom Zucker is the president and founder of EdgePoint Capital Advisors. Tom grew up in a multi-generation family business, which drives his passion for serving the family-held business market. He has advised thousands of businesses during his career.
Russ Alan Prince: Please describe EdgePoint Capital Advisors.
Tom Zucker: EdgePoint is a boutique M&A advisory firm focused on guiding privately held businesses through ownership transition. EdgePoint’s two dozen professionals are primarily focused on sell-side advisory services within the industrial, business services, and healthcare sectors. Their unique combination of technical M&A expertise, vertical experience, and an unwavering commitment to client-centric service is a key differentiator of the firm.
Prince: What are the biggest mistakes that business owners make when selling their company?
Zucker: Thousands of M&A transactions occur annually in the United States, and every deal has a unique and interesting story attached. According to a recent industry survey, almost 40% of these transactions go unrepresented, and even more shockingly, these same owners admit, in hindsight, to not being properly prepared in advance of the sale. The implications of this decision cost business owners millions of dollars and countless hours of wasted time post-sale.
We often tell our business owner friends, “You think it is hard to start a business. It is even more complex and difficult to exit your business properly.” Business owners are experienced operators and skilled businesspeople, but most have never sold a business. The complexity of the technical tax, transaction, and operational matters pales compared to the emotional and complex people issues.
These softer matters require great thoughtfulness and purposeful communication. We recommend owners begin their ownership journey several years in advance of the expected sale date. EdgePoint deploys a proprietary “Private Equity Playbook” process to prepare the company and owner for the sale process. The disciplined preparation and proven value creation process enable owners to exit on their terms and for maximum value.
Unfortunately, not all owners are properly prepared. After decades of serving clients, we have seen a few common issues during the selling process. The three most common mistakes that owners make when selling their business can be put into three categories:
• Miscommunication with stakeholders
• Going it alone
• Failing to maximize attractiveness
First, miscommunication with stakeholders. The event of transitioning a company impacts many varied stakeholders, including customers, family, suppliers, management and even the new buyer. Understanding and addressing the perspective of each stakeholder group is essential for a successful ownership transition.
Recently, an industrial service business owner attempted to sell his business without notifying his key leadership. The company and business were high-performing and attractive to numerous buyers. The deal was struck, LOI signed and the closing was imminent. What could go wrong? Their key leadership and employees were a critical part of the company’s success and future value. The seller diverted the buyer’s numerous attempts to meet the key leaders prior to the sale. Two days prior to the funding, the buyer demanded that they meet key leadership. The leaders were furious that they were not involved earlier and notified of the owner’s intentions to sell. The management team believed that they were promised a chance to own the business. Unfortunately, several of these key employees resigned and set up a competitive business. The seller did consummate the sale to the buyer but at a fraction of the initial valuation.
Next, going it alone. The ability to connect a buyer and seller together appears to be simple and effortless. Unlike a real estate transaction, the M&A sale process for a privately held business is infinitely more complex.
A key risk that owners face with their decision to “go it alone” is that they forget the effort and time that is required to sell the business. One of the primary reasons for a failed M&A process is that the company failed to perform during the marketing and diligence process. If you are brave enough to traverse the road of not leveraging a skilled investment banker, the owner will quickly realize that this is a full-time job and requires not only great technical skills but also an enormous amount of time. The additional purchase price, better deal terms and increased deal closing certainty are just a few of the many reasons to leverage a professional M&A guide. The ability to assemble a comprehensive team to support your transition is also critical to a successful transition, including financial advisors, lawyers, accountants and investment banking partners.
The third category is failing to maximize attractiveness. The ability to get a premium valuation depends on your ability to differentiate your business and create market interest. Businesses that get a premium valuation have five core elements:
• Strong management
• Differentiated products or services
• Strong market position
• Recurring demand and customer diversification
• Scalable and growing business
The presence of these characteristics is important, but the ability to articulate what the business will become is even more important. A skilled “storyteller” is essential to drive the buyer’s interest and to enable them to see the compelling future of the market and business.
Prince: What do you see happening in the M&A market in the next 5 years?
Zucker: The M&A environment is poised to experience significant growth in the next five years given the underlying demographics and business trends. The primary driver of the growth of transactions is the unprecedented level of capital behind M&A.
Private equity has a record level of undeployed committed capital, and corporate balance sheets are flush with cash. The markets continue to reward growth, and organic growth has been more difficult to achieve in recent years. The corporate development departments aggressively pursue acquisitions for regional coverage and product expansion. Additionally, M&A is likely to continue to be used to secure innovative and capable talent.
We see the largest sector of M&A growth to be expected in the sub $100 million revenue market. This segment of the market benefits from aging business owner demographics and the continuing trend toward supplier consolidation. This area of the market is also less competitive from a buyer perspective, and pricing for these businesses is perceived as more reasonable and represents a less risky avenue toward M&A.
Russ Alan Prince is a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.