In some deals, roadblocks seem to crop up around every corner, and in some instances, it can take years to sell a business.
Kyle Barker, president of Aerospace Equities, an aerospace-only boutique M&A firm, recently told us about his experience serving as advisor during a transaction that took five years and a lot of work. Here’s the story of where the deal went wrong, how they finally got it back on track, and how it eventually closed at 5x the company’s original valuation.
A Disappointing Valuation
In 2009, both the CEO and his co-founder (who owned the company jointly) were ready to start thinking about potential exit plans, though they would come to realize later that they each had different time frames and objectives.
They hired a generalist M&A advisor, who helped them determine the market value of the business.
To the owners’ dismay, nobody valued the business at higher than one year’s revenue. At that price, a sale wasn’t worth their while.
The owners decided to hold off on a transaction for now and focus on growing the business.
Along the way, they met Kyle Barker, a specialist in the industry. He encouraged them to try marketing the company again with a more targeted approach.
Kyle and the team at Aerospace Equities marketed the deal to a handful of strategic and financial suitors with existing holdings in aerospace and defense. Soon thereafter, Barker and the CEO received a term sheet for more than 2.5X the generalist advisor’s appraisal.
This valuation was a big improvement from the last time, and the CEO was ready to go forward with the deal. But the co-founder felt differently, and the deal fell apart.
Rolling Up Their Sleeves
For any future deal to go through, Barker knew the CEO would need to buy out his co-founder. It took a year to secure the institutional debt to facilitate the buyout, but that time ended up being a blessing. “It allowed us to take a good hard look at the business without interruption,” says Barker.
Kyle and the CEO began renovations on the accounting systems, completed an overhaul of production floor, and brought in an accounting firm to clean up the accounting infrastructure and prepare for due diligence.
By 2014, the duo was ready to go to market again.
A More Thoughtful Approach
Since time and resources were tight, Kyle and the CEO agreed it would make more sense to limit the sale process to a very small number of potential buyers. The goal was to minimize distractions that might arise in a larger process.
Using his experience in the industry, Kyle first formed a big-picture list of 15 potential buyers whose existing criteria fit at a high level with the company. Then, he and the CEO whittled down those 15 highly targeted potential buyers to two.
One option was a strictly financial buyer, and the other was a hybrid (a financial player with a strategic vision and longer holding period). “I knew the hybrid group would understand the vision and potential of the company,” says Kyle. Both the buyer and the CEO had a can-do attitude and a strong customer-first orientation.
The CEO liked the hybrid buyer’s experience with other aerospace portfolio companies and the fact that they were already familiar with many of their customers as a result. He was also attracted to their “buy, build, and hold” approach, which was different than the quick turnaround approach of the strictly financial buyer on the list.
The Final Offer
With operations optimized, the cap table cleaned up, and the majority ownership in the hands of one owner, the hybrid buyer offered more than 5X the original valuation the company had received back in 2009 — the deal closed.
Kyle attributes this success to a few factors:
- Taking the time to make internal improvements: Kyle and the CEO implemented back-office and accounting processes and hired a transaction-oriented legal firm to help maximize valuation.
- Executing on the hard decisions: While buying out the inactive CEO was emotional, expensive, and difficult, it prevented any more unwelcome and unexpected hiccups in the sale process.
- Finding the right fit: Over the four years he worked with the CEO, Kyle became intimately aware of what was most important to the seller. He approached only buyers who met that criteria and were a good cultural match.
- Articulating the value-add of the company to the buyer: “The buyer knew exactly what value this business was providing to the aerospace industry and could bring to their portfolio as an add-on to their existing position,” says Barker. “Finding that buyer made the owner’s and his family’s dreams a reality. Seeing the owner begin to focus on the build of his coastal dream home was worth all of the bumps in the road.”