Yes, you read the title of this piece correctly. I’ve analogized the process of selling a business to childbirth1. I went around and around to find any other metaphor but kept coming back to this one. Both happen relatively infrequently during a lifetime, are fraught with fear of the unknown, profoundly and forever affect the participants, and present a host of opportunities to say, “I thought we were friends, how come you never told me about that?!” Therefore, as a proud father of two with nearly 15 years of experience in the M&A industry, I thought I would share some candid reflections on things a business owner should expect in their journey to achieving liquidity. So, put your feet up, remember to breathe, stay hydrated, and we’ll get through this together2.
- You will learn new vocabulary words. You’ll begin to develop a fluency in two new groupings of words. The first are words with which you were previously only superficially familiar. You might have heard others in your network, perhaps other business owners who sold their companies, use certain terminology when describing the process. Without firsthand experience, these words lacked any visceral or practical meaning. Get ready to intimately understand what things like exclusivity, indemnity, and working capital adjustment mean. If you’re lucky, you’ll be surrounded by trusted advisors and working with an investor with a good bedside manner who can explain everything in English. The second group of words are the insider jargon used by accountants, lawyers and investment bankers that, even after the process, still won’t make any sense. Don’t waste any energy trying to figure out what things like synergy practically mean for your business.
- Strangers will demand access to private information. It would be perfectly normal to recoil the first time someone you don’t know very well asks you how much EBITDA you are generating and how much you paid yourself last year. However, you can expect more than a few questions from people you would have liked to have known a bit better before revealing the intimate details of your business. While these types of inquiries may feel a tad forward, understand that the people asking them are professionals who intend only to use the answers as one of many datapoints necessary to advance the deal towards a close.
- Uncomfortable procedures. I’m not going to sugarcoat this, the due diligence phase may smart a little bit. Business due diligence usually comes first and will be led by your new investor. It will typically entail someone that appears to be the same age as one of your kids (or grandchildren) asking a series of questions that makes you wonder if they grasp what your company does. In reality, they are simply making sure to build a strong foundation for their understanding of the business based on the information you’ve provided. Then, the accountants arrive. If you’ve been putting off an audit because you thought the process would be too painful, just wait until you experience a Quality of Earnings assessment. This exercise will include a near cellular look at the constituents of revenue and cost to assess the accuracy and sustainability of your company’s reported financial performance. You can also expect legal, environmental and insurance-related investigations into the business. Just know that while one or more of these exercises will feel like an exam, they are a part of nearly every deal that gets done to help an investor build conviction that they’re not buying a lemon. The good news is that, afterwards, the company will likely be better organized and more self-aware about its health than it has ever been.
- Tense moments with your partner. In this case, the partner to which I’m referring is the new investor in the business. It’s easy for emotion to take hold of a negotiation, but the key is to remain dispassionate and use the benefit of time and deep breathing before responding to sensitive deal points. This is especially important if you will be retaining some ownership in the business alongside the new partner going forward. Like many relationships, effective communication will protect against a lot of conflict that arises from misaligned expectations. Further, maintaining a strong working relationship will allow you to focus on constructively growing the business together once the deal has closed.
- You’ll be ready for it to be over. In most instances, the gestation period of a transaction with a private equity fund is 3-6 months from “hello” to the closing dinner. You will inevitably encounter deal fatigue and other frustrations regarding why things are not moving along more quickly. However, it’s important to remember that by the time you are saying, “I just want this to be over,” the investor will have likely incurred substantial legal, accounting, and other due diligences expenses to drive towards a close. This accumulating cost creates an incentive for the investor to close as quickly as possible. And, believe it or not, investors want to get the deal done too and move on to the important business of growing the company. Your interests are aligned in this way. Stay vigilant, though, to make sure that anyone getting paid by the hour isn’t dragging out the process to their benefit. Sometimes the most efficient solution is to speak directly to the new investor to fix any bottlenecks.
- New perspectives on the other side. Having experienced a transaction is binary – you’ve either gone through it, or you haven’t. If you have, you gain an array of memories that will forever affect your outlook on business and life. You’ll also be equipped with a ton of advice you can dispense for free and on an unsolicited basis to other business owners thinking about selling their companies. And, perhaps most importantly, you will have the transcendent satisfaction that you’ve lived the entirety of the circle of entrepreneurial life.
I know what you’re thinking, some of this sounds a little scary. Not to worry, just like with having kids, the less pleasant experiences tend to fade away while the positive aspects linger. If that wasn’t the case, then people wouldn’t strive to sell multiple businesses (or have multiple kids). And, don’t lose sight of the fact that a successful sale brings the liquidity and wealth diversification long pursued by many an entrepreneur. What’s more, a deal with a private equity fund can create an opportunity for a “second bite of the apple” whereby any ownership you retain in the business has the potential to appreciate in value before another future sale. In some cases, we’ve seen the second bite be worth more than the first.
If you’re considering an exit or taking on a partner, it’s a good idea to start doing your homework early. Part of the learning process might include informal conversations with investors to get their perspectives on your business and to begin to develop trust with possible suitors. Please get in touch with us any time if you want to learn more about our investment criteria, philosophy for creating value and/or stories about how we’ve helped other business owners navigate an exit
1Rest assured that this passed editorial review by my wife.
2For maximum effect, I recommend playing “The Circle of Life” from The Lion King in the background while you read this blog.
About ClearLight Partners
ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit clearlightdev.codesamurai.com.
Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.