Preparing Your Family-Owned Middle Market Business for a Sale

You may think that running your business and preparing it for sale require different skill sets, and for some companies that is true. However, the two are closely aligned. The most successful business owners establish a direction for sustainable growth, everyone in their company understands how they contribute to the success of the firm, and metrics are in place to measure progress. We call this a “culture of performance”—and by embracing this culture—you not only establish the foundation for sustainable growth but also make your family business an attractive investment for potential buyers.

When you first consider the option of selling your family business, in whole or in part, there are a few things to consider. The market for business buyers has expanded tremendously in the past 20 years, and this has brought new exit opportunities to business owners. However, you won’t know all the potential buyers (especially foreign and financial buyers), what they are willing to pay, how they will structure the deal, or how many will actually be interested in your company.

The best way to prepare for the sale of your family-owned business—and make it the most advantageous sale—is to understand the process, prepare your company for the scrutiny that is commonly performed by buyers, and be ready when the time comes. Thoughtful advance preparations pay large dividends when the time comes to sell.

Two important questions to consider when preparing for a sale are: what factors influence the value of your company, and how do you demonstrate to buyers that you understand and can control those factors? In order to do that, you need to adopt a buyer’s mentality. And that starts with identifying who your potential buyers are.

Know your potential buyers

In most cases, business investors are people who buy and invest in businesses for a living. They are skilled at identifying lucrative investments and know exactly what to look for when considering an acquisition. They include private equity (PE) investors, the acquisition arms of large companies, or family offices (wealthy families’ trusts). These three types of buyers account for the majority of private business sales.

The buyer most likely to show interest in your business may operate in the same or a related industry. They’re often looking to expand either geographically or by adding to their product line. They may also be interested in acquiring businesses that function as a part of their supply chain. However, many buyers are industry agnostic, and judge an acquisition on competitive strength in their market and the ability to continue growing revenue and profits. The good news is that all buyers, regardless of whether they’re a PE firm, large company, or family office, are interested in the same value drivers.

What buyers want to see in your company

There are four primary things buyers want to see when purchasing a middle market family-owned business: a vision for the future, a solid growth engine, measurement systems to track performance, and a predictable stream of earnings.

1) Your vision for the future

Your vision is a shared and believable story for the future of your business. It’s a simple, written strategic plan that has been circulated through your organization and includes the input and insights from key employees. It should include clear goals and a plan for how to achieve them.

Without a shared strategic plan, businesses often veer off track and leaders end up operating in reactive “firefighter mode,” being swayed by the winds of change, putting too much weight on the feedback of individual customers, or they continue to function in a “business as usual” mode even when their marketplace has changed. It’s essential to establish a written business strategy that details how you will compete in your market and use this strategy as the litmus test for business decisions as you work to pursue this strategy.

2) A solid growth engine

Not surprisingly, your growth engine should include established procedures for people, process, and technology. If your leadership team is essential to the success of your business, buyers want to know which leadership team members and key employees plan to remain with the business after the sale.

Investors are also interested in understanding your product or service delivery model, and how it can be expanded, along with the investment needed to grow. Any gaps or unnecessary costs in the supply chain may be interpreted as risks by investors. If you’re struggling with scaling your operations, it’s essential to get interim help and correct these issues before selling your business.

Most important, your growth engine needs sticky customers and a customer retention program. Without repeat customers, your sales numbers have an expiration date. Buyers need to see customers coming back and a sales team that’s actively managing that process. Build a sales funnel and train your employees to use it. Create measurable goals for your sales team and actively track the results.

3) Measurement systems to track KPIs

It has often been said: “if you can measure it, you can manage it.” KPIs, or key performance indicators, are measurable values that determine to what extent your company and staff are achieving the goals you set out to accomplish. Simply writing down your goals won’t be enough to sway buyers; they need to see the metrics that prove you’re working towards them. This means you need to set up measurement systems to manage growth and earnings.

In most cases, your financial or operations personnel will be responsible for calculating how the business is tracking against your KPIs, and they will create a flash report and “dashboard” that you can review on a consistent basis with your team. Leadership focus should be influenced heavily by the trends shown on this dashboard. These KPIs should also be tied to compensation for your sales staff.

4) A predictable stream of earnings

Most business buyers will view your past three years revenue and earnings, and they will place the most emphasis on what is known as TTM (trailing twelve months earnings). They will also view the trends over the past three years—looking for how revenue, margins, and capital spending have changed over that period. Buyers will want to understand what caused any year over year changes (positive or negative) in detail. The reason for this scrutiny is because they are basing their investment (and the price they are willing to offer you for your business) on the predictability of a future stream of earnings, and it is critical that they understand all the risk factors that could impact those earnings.

Most common challenges to sale

The four factors above are what buyers review in detail when considering a purchase, but they also closely align with the biggest issues we see in our work with middle market, family-owned businesses.

The four most common challenges middle market businesses face when preparing for sale are:

1. They don’t have a written strategic plan with goals that are shared throughout the company.

2. They need to improve top-line revenue and upgrade sales strategy and training.

3. They need to revamp business operations (including technology) and improve financial performance.

4. They lack a plan for growing their management team and reducing their personal work responsibilities inside the business.

Perhaps most importantly, many business owners we’ve worked with have had these same issues for more than 12 months. And ongoing problems are sure to be red flags to potential buyers.

How to adopt a “buyer’s mentality”

Much like running a business changes your thinking on the role of a business leader, selling a business changes your thinking on how to build value and prepare your business for sale. This raises an important question: if you have never sold a business, how do you ensure you have an equal playing field if potential buyers are professionals who do this for a living? The answer is simple: enlist outside help. If you’re thinking of selling your business and don’t know where to start—or if your broker advised that you make substantial improvements—it pays to enlist help addressing the issues that will make your business attractive to buyers.

How we can help

The good news is that all of the value drivers that buyers are looking for are within your control and can be corrected if required—even if it means hiring external help for specific projects. FortéOne has spent the last 23 years helping middle market, family-owned businesses prepare for sale by maximizing their value and implementing concrete, measurable, and long-lasting change. Our operating partners have decades of experience across many industries and can help your team make the improvements necessary to attract desirable buyers.

When working with middle market, family-owned businesses, we assess your business like a buyer would, and help you make the changes needed to ensure a successful sale at maximum value. This ensures that you address a buyer’s needs well before a sale is imminent.

In our experience, brokers often complain that there are few easily sellable businesses. So when you build one, there will be plenty of bidders.

Let us help you sell your family-owned, middle market business at the right price. Contact the experts who have assisted hundreds of private businesses at FortéOne today.

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