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Advisors, Private Equity

Convincing a CEO to Sell

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You’ve sourced a prospective client. You’ve spent months, even years, courting them over dinner, meeting at industry conferences, and visiting their headquarters. Refining your pitch over the years, you’ve worked hard to prove you are the best fit advisor when the time should come for them to sell. That day finally comes and you’re the business owner’s first call. Everything is good to go, right?

Not so fast. The majority of CEOs you’ll work with are on a maiden voyage into uncharted waters when it comes to the sale of their business. Just because you’ve signed the client, does not mean there isn’t some work to do before bringing the business to market. Perhaps your toughest hurdle to come is not preparing the company for sale, but preparing the owner for sale.

Readying a CEO to sell his company is not always easy for an advisor. From working to boost company valuation to preparing the business to be scrutinized by potential buyers, the long and sometimes tedious process can become complex and emotional to a first-time seller and therefore increasingly challenging for his advisor. After all of your hard work, the last thing you want is a CEO who decides he is not ready to sell. As you engage with new clients, three key areas of focus will help you stay on track and confidently convince a business owner that he is ready to sell his company.

Related Reading: M&A Advisors: The Overlooked Value Maximizer

Educating a CEO

In sitting down with Darin Phillips of CRI Transaction Advisors, an Alabama-based M&A firm, we surfaced a few best practices for preparing a company owner for sale. “A lot of people don’t understand that over 50% of our work process is done before we actually engage the client,” said Phillips. “The most critical element to the sell-side engagement is educating the client. The second most critical point is making sure that the business is ready for a transaction.” Half the time an advisor may discover a company is not at it’s peak maturity, or the optimal time to sell, and half the time it ends up being that the owner is not ready. It is a very delicate process that needs to be navigated pre-engagement.

So how do you train a rookie boxer to step toe-to-toe in a title fight? Client education is the cornerstone to the entire sell-side process. 95% of the business owners going through this process are doing it for the first time. Alternatively, almost every single one of the investors you are approaching have considered several different companies in the same space and are constantly sourcing deals that look similar to this one. The result — trying to connect an uneducated, inexperienced seller on one side, and a highly-educated, hyper-experienced buyer on the other. As one who has seen many deals before this and dealt with the dynamics of such a mismatch, it is important to educate a business owner as best possible, helping him see a deal through the counterparty’s eyes as you ready the company for market.

Setting Expectations

In most cases, your first job as the signed advisor will be to help the seller decide the best way, and the right time, to bring his company to market. Most advisors will start by categorizing a business by where it is in its company lifecycle — is it just getting started? Taking initial investment? In an acceleration phase? Or has it reached maturity (stable, profitable yet still growthy). Where is the best stage for any one particular company to maximize their value capture?

What does it mean for a company to be at it’s “peak maturity”? This is a combination of both the state of the company and the industry. For a company riding an industry tailwind, it is beneficial to advise that the client takes advantage of the positive influences in the market. Price can be maximized by looking at the point where value creation and value capture meet.

Take a client who is ready for a transaction and in a high growth phase, for example. An advisor might suggest he considers a majority recap. This involves a business owner cashing in a majority of his share of the company, obtaining some smart capital while retaining equity in a growing company. In the case of a mature company, an owner might prefer to sell the company in whole for as much as possible. But what route do you take when a company is not in a good state for acquisition?

It may seem counterintuitive for a sell-side intermediary to push back on an owner on the timeline for a sale. In some cases, however, it’s a matter of opting to forgo a quicker, easier sale that may not meet a business owner’s goals (and likely results in a smaller commission) in favor of a longer process where adjustments are made to bring the company’s ideal value into line. While resetting the timeline can be an indication that a client’s expectations are not calibrated correctly, there is a way to fix this.

At this point, a feasibility analysis should be conducted and the company owner brought through the valuation process. An advisor should make every effort to help a company owner understand the reasons his company is valued at X. In order to reach optimal value, an advisor helps a CEO identify the adjustments that need to be made, how long those changes will take and re-evaluates the company twice a year until it reaches the optimal point of value. Only then should an advisor recommend engaging with potential buyers.

Establishing Trust

For an advisor, the biggest challenge and ultimate goal is to get your client to trust that you will bring the best deal, at the best time, for the best value.

Often, the most common pushback is that the company is not valued as high as the CEO wants it to be (or more likely, they’ve seen other companies sell for more than they are getting). An M&A advisor needs to establish trust early on in the relationship with a company owner so that their recommendation is heeded whether that means selling now or waiting to achieve a higher price. Putting a price tag on a company, even if it’s what the CEO wants, is not the best way to create a limited process with several competitive bidders at the table.

The business owner-advisor relationship can be a tricky one, particularly for CEOs who have never sold a company before. In order to have the highest success rate, close more deals, and sign new clients, taking time to convince a business owner that it is or is not the right time to sell is crucial. Working to impart the knowledge gained throughout years of advice and books of closed deals, setting expectations from the get go, and laying the groundwork of a trustful relationship can help ensure you not only bring the best value to a selling company, but become a highly valued partner to every CEO you work with.

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