- Selling a business is a (second) full-time job. Many business owners are surprised by the amount of work involved in selling a business. This is especially true of smaller businesses where the owner/operator is a full-time employee and has a limited staff in the top management and accounting functions. First, if an investment banker or M&A professional is involved, there is a substantial amount of information to pull together prior to any buyer discussions. Then, as buyers become interested, there are conference calls and plant visits. Many buyers will then request follow-up information before making an offer. Negotiations over price and terms can also take time. But most importantly, once a buyer is selected and the deal framework is set, the due diligence process can be time consuming and overwhelming to sellers, who still need to run the business day-to-day. Finally, purchase agreements often involve the compilation of disclosure schedules, which can be painstaking. Many sellers look back at the process and describe it as a second full-time job.
- Confidentiality and key customer discussions. Most owners are concerned with confidentiality when they sell their business. One concern is the perceived risk to the business if key employees hear rumors that the company is for sale and “jump ship” due to uncertainty. Many business owners also worry about customers learning of a sale and viewing it as a sign of instability, which could impact sourcing decisions on both existing and future projects. The truth is that these are valid concerns. But in our experience, when communicated properly, both concerns are very manageable and can easily and truthfully be spun in a positive way. Buyers often require discussions with key customers as part of the due diligence process. This is especially true when high customer concentration exists or when additional customer risks or concerns pop up in the diligence process. These customer discussions typically occur near the very end of the due diligence period and most of the time the seller conducts the call/visit in conjunction with the buyer.
- Post-sale transition. Many owner/operators of plastics businesses are an integral part of the company. Perhaps they are the key technical resource, or maybe they hold the key customer relationships. When this is the case, buyers always want to retain this know-how and expertise post-transaction. Sellers are often surprised when they are asked to stay on board after the sale for 1, 2, or even 5 years as a closing condition. If a business owner is not interested in this scenario, then sound exit planning, including the development of a strong management team, is mission critical in advance of initiating a sale process.
- Valuation. Most owners of small businesses are great operators, but many do not have a lot of M&A experience. Emotional elements can come in to play when determining enterprise value and sellers may have a preconceived valuation expectation that is simply not aligned with the market. Again, planning is the best practice. Well in advance of a sale process, obtaining a valuation analysis/opinion from an industry expert can help owners gain a realistic understanding of market valuation multiples and their potential effect on transaction price. A valuation opinion can also help identify certain value drivers (positive and negative) and allow owners to make adjustments that will maximize the ultimate sale price.
- Treatment of receivables, inventory, equipment, and retained earnings. Although many different deal structures are available to a seller and buyer, most offers that utilize an “EBITDA multiple valuation” assume that a transaction will be on a cash-free, debt-free basis. This means that a seller can expect to keep the cash in the company but will also need to pay off all interest-bearing debt at closing (including capital lease balances). An EBITDA multiple approach also assumes the buyer gets all of the income producing assets in conjunction with a deal. These include all accounts receivable, inventory, and fixed M&E (these asset classes are rarely sold separately and if they are, the price is probably based on a “below market” multiple). On the other side of the balance sheet, accounts payable are almost always assumed by a buyer. Another common misconception involves sellers thinking they should get paid separately for their retained earnings. The retained earnings represent shareholder reinvestment in the business. This reinvestment over the years is what drives a market-based valuation in the first place. In other words, no double dipping!
MBS Advisors has been representing owners of privately-owned plastics companies for over 20 years. We have advised on over 100 successful M&A transactions involving injection molders and other plastics processors – more than any advisory or investment banking firm. Our dealmakers have real-world experience owning and operating plastic injection molding companies. Please contact us if you are considering a sale of your business or if you want to start planning for your exit.
by Jonathan Soucy