“Fire your brother-in-law.”
Owners of privately held companies need to think about preparing their business for sale, even if a sale isn’t on the horizon. That means cleaning up the books and purging undesirable assets — such as unproductive family members on the payroll.
That was the consensus of a quartet of mergers-and-acquisitions professionals convened by the New Haven Manufacturers Association for a Thursday panel discussion at the Quinnipiack Club in New Haven. The group discussed strategies for maximizing value from selling companies, with a particular emphasis on privately held manufacturing companies.
When is the right time for a business owner to begin preparations for selling the company? According to panel moderator Steve Pappas, a partner with Enfield-based Touchstone Advisors and president of the Hartford-area chapter of the Exit Planning Exchange (XPX), the answer is “Now or yesterday.”
“It can take years to prepare a business for sale,” Pappas said, “and owners should always be prepared” for a smooth and profitable exit. Pappas said the deals he works on take an average of a year from start to finish, and advance planning and preparation is the key to whether the owner “will be exiting on your terms and maximizing the value” of the sale.
And speaking of value, valuation is one of the hardest calculations a prospective seller must undertake — especially insulating cold-eyed dollars-and-cents calculus from the emotional baggage of starting and building a business.
Business owners contemplating a sale must learn the difference between value and price, according to Roy Johnson, an M&A specialist with Touchstone Advisors. “Value is an opinion,” Johnson said; “price is a fact.”
The value of a business is a function of three principal factors, Johnson said: growth trajectory, profit margin and investment, especially with manufacturing companies that may have financed major capital improvements.
But not everything factored in the value equation is tangible, and Pappas noted that many non-financial considerations factor into the value of a company at the time of a sale.
According to Ramsey Goodrich, managing partner at the Southport investment bank Carter, Morse & Goodrich, this includes personal considerations such as the fate of family members and other valued employees on the payroll following a sale. An example is that brother-in-law who “doesn’t do anything, but you’re paying him $250,000,” said Goodrich. It’s better to get rid of that unproductive asset now than try to rationalize it to a prospective buyer — although, he acknowledged, “It can get a little awkward at Thanksgiving.”
Another non-financial factor in business sales: Many company principals at the time of their exit worry about the legacy they leave behind with the business they started and built. Even after they leave, “That’s still your name on the door,” Goodrich said.
The value of a company to a prospective acquirer is also closely linked to how active a role the owner plays in day-to-day operations — and how his exit will affect the business’ fortunes.
“The best owner we [encounter] is down in Florida six months of the year and has a really good management team running that business,” said Jeff Swiggett of VR Business Sales, a New Haven-based business broker. “It’s not a good thing [from the perspective of an acquirer] if the owner is the most important guy in the business.”
Overall, how is the market in 2019 for business sales in Connecticut?
Swiggett noted that the recession that began in 2007-08, from which Connecticut has been slower than other New England states to recover, caused many potential sellers to hold onto their companies until their value recovered sufficiently, delaying what he called the “baby-boomer transfer of assets. Now, there’s a pent-up demand” to sell, especially among aging baby-boomers who want to retire and have no heirs to take over the company.
The result, according to Swiggett? “Increasingly, it’s a buyer’s market.”
Contact Michael C. Bingham at mbingham@newhavenbiz.com
