Selling the business you built from the ground up is a bittersweet experience. Many business owners focus their efforts on growing their business and push planning for their eventual exit aside until it can’t be ignored any longer. While this delay may only prove mildly detrimental to deal proceeds in other industries, in the investment management space, very few buyers will be interested in YOUR business without YOU (at least for a little while).
Long before your eventual exit, you should begin planning for the day you will leave the business you built. There are many considerations for investment managers contemplating a sale, but we suggest you start with these four:
1. Have a reasonable expectation of value
Taking an objective view of the value of your company is difficult. In many cases, it becomes a highly emotional issue, which is certainly understandable; Many investment managers have spent most of their adult lives nurturing client relationships, building their Rolodex, and developing talent at their firm. Nevertheless, developing reasonable pricing expectations is a vital starting point on the road to a successful transaction.
The development of pricing expectations for an external sale should consider how a potential acquirer would analyze your company. In developing offers, potential acquirers use various methods of developing a reasonable purchase price. Most commonly, an acquirer will utilize historical performance data and expectations for future cash flow to generate a reasonable estimate of run-rate EBITDA and an appropriate multiple that considers the subject company’s underlying risk and growth factors.
With so much fixation on headline EBITDA multiples, setting reasonable pricing expectations given your firm’s specific risks and opportunities is an increasingly important step in preparing for a transaction. We always caution against obsessing with headline multiples based on contingent payments that have recently fallen short with the market downturn and equity consideration from a buyer whose stock plummeted after the deal. When this happens, the actual multiple can be substantially lower, so calibrate your expectations accordingly.
Valuations and financial analysis for transactions encompass a refined and scenario-specific framework. The valuation process can enhance a seller’s understanding of how a buyer will perceive the cash flows and corresponding returns that result from purchasing or investing in a firm. Additionally, valuations and exit scenarios can be modeled to assist in the decision to sell now or later and to assess the adequacy of deal consideration. Setting expectations and/or defining deal limitations is critical to good transaction discipline.
2. Have a real reason to sell your business
Strategy is often discussed as something that belongs exclusively to buyers in a transaction, but this isn’t always the case.
Without a strategy, sellers often feel like all they are getting is an accelerated payout of what they would have earned anyway while giving up their ownership. In many cases, that’s true. Your company, and the cash flow that creates value, transfers from seller to buyer when the ink dries on the purchase agreement. Sellers give up something equally valuable in exchange for purchase consideration—that’s how it works.
As a consequence, sellers should have some non-financial rationale to sell. Maybe you are selling because you want or need to retire. Maybe you are selling because you want to consolidate with a larger organization to reduce the day-to-day headache of running a business or need to bring in a financial partner to diversify your own net worth and provide ownership transition to the next generation. Maybe you’re selling to a buyer that will grant you access to new prospects or markets that will enhance your ability to meet contingencies and bonus objectives. Whatever the case, it always helps to have a strategy or rationale for selling your firm.
3. Get your books in order today to maximize proceeds tomorrow
As we’ve noted before, the best time to address a potential buyer’s concerns about your firm is before you start the process.
In advance of transactions, sellers should consider an outsider’s perspective on their firm and take action to address the perceived risk factors that lower value. Many buyers in this industry are concerned about dependence on key managers, so focusing on staff development in client-facing roles, increasing the number of client contacts with the firm, and creating an internal pipeline of talent to manage the business will all serve to reduce this risk from the buyer’s perspective and enhance your firm’s value in the process.
4. Consider the tax implications
When considering the potential proceeds from a transaction, you should contemplate the tax implications. We recommend consulting with a tax attorney prior to a transaction on the tax implications of different deal structures. Before selling your business, you should also be aware of the pros and cons of a stock versus an asset sale as well as an all-cash transaction versus a combination of cash and stock consideration. These subtleties can make a huge difference in what you actually take home from the headline price.
About Mercer Capital
We are full-service business valuation and financial advisory firm offering a broad range of services, including corporate valuation, financial institution valuation, financial reporting valuation, gift and estate tax valuation, M&A advisory, fairness opinions, ESOP and ERISA valuation services, and litigation and expert testimony consulting.