As I worked with hundreds of businesses as they look at preparing their firms for sale, I developed the acronym FEISTY. To succeed you want your firm to be:
- Financially stable
- Easy to understand
- Industry in favor
- Size is good
- Timing is right
- You can leave the business without blowing it up
Industry in favor
More than any other measure, having your industry in favor helps to sell.
In the Spring of 2020, oil prices were in the $40s, oilfield services companies—even very good ones—could not find an investor. And technology was on fire! The flood of COVID money driving up asset prices led to an increase in asset values so you could not make a bad tech investment through the middle of 2022.
Today, the failure of SVB has tech investors running away from the market for new investments, just hoping to keep their current deals afloat. Surging oil prices in the $70s mean that anything related to the energy complex gets a smile.
More than anything else, if you want to sell a company, or raise capital for a company, you want to do so when your industry is in favor. Why is this? When your industry is in favor you get:
- Better pricing
- Better terms
- Higher likelihood of close
Better pricing. Valuations of all businesses rise and fall with the business cycle, both with privately held businesses and public companies. It’s not at all uncommon to see a business that might sell for 6x EBITDA attracting a 7 or even 8x multiple when the industry is in favor and attracting a lot of buyer attention.
Better terms. Many sellers say they want the best price. Another thing that can be almost important is getting the best terms: the most cash up front, the least amount of contingent compensation (earnouts, holdbacks), the easiest reps & warranties, the smallest escrow to cover reps, the best non-compete or employment agreement. All of these things get easier when you have plenty of bidders competing for a company in a favored industry.
Higher likelihood of close. Bidders know when you have options and when you don’t. If you’re in an out-of-favor industry, they might draw out the closing process, use due diligence “discoveries” to seek terms more favorable to them, and perhaps retrade the terms of the deal altogether. This tension is always present in deals, and can sometimes lead to them blowing up altogether. When you go to market as a favored industry, bidders know you have a lot of options, it leads to quicker closings on terms that were agreed to in the LOI, and it sharply reduces the chance of a deal failing to close.
How do you know if your industry is in favor? Trust your instincts. If you’ve been in the business for a while, you’ll know from trade publications, your level of demand and ability to command pricing, and conversations with your peers, whether your industry is seen as bankable or not.
How long do you have? Once your industry is in favor, you likely have a two-year timeframe of positive industry perception to sell your business. Given that the sales process takes 6-9 months, it means you have plenty of time, once your industry is in favor, but you don’t have forever. You want to make your decision, get to work on selling, and ensure you adopt a process with a clear path to closing, clear milestones along the way, and clear understanding of who is responsible for each step.
What if your industry is not in favor? Wait if you possibly can until the industry comes back into favor (1-2 years). In the event you can’t wait, you want to adopt sales strategies that minimize your risk, and also be prepared to accept risk-sharing mechanisms like earnouts or seller notes to get to the price range you want.
After ensuring your industry is in favor, you want to see if your size is right. We’ll pick that up next week.