The seller’s viewpoint: Part 2

Now, before I continue, I just want to point out a couple of interesting statistics.

How many M&A deals do you think take place in the US every year? Thousands. How many thousands, do you think? 15. Well, around 15,000. And as you know, most of them are small. And in the world, how many do you think take place? Every year in the globe, around the world. 15,000. So non-US– you’re probably at around 20,000. So that’s a lot of transactions, right? So you’re feeding armies of lawyers and bankers and accountants and consultants with all these deals. How many IPOs do you think are in the United States every year? It changes, but on average, it’s only 300. That’s nothing. How many international, outside-of-the-US IPOs do you think there are? 500. Yeah, about 500.

So if you’re starting a company, if you’re an entrepreneur, and your company is thriving, the chances of that entrepreneur doing an IPO are slim to none. You’re much more likely to do an M&A deal to get out.

And that goes for all the sellers, family, entrepreneurs, private equity owners, big companies. The M&A exit is the best way of getting out because it’s going to be the one with the most likelihood of success. IPOs are very tough. And the principal reason is, one, the IPO, at least in America, has to have a market value of around 250 before anybody does– will help you out. So that eliminates most companies right away. And then it’s very cyclical.

It’s very cyclical that it has these huge dips and ups, and then it’s also very industry-specific, like you saw a lot of energy-oriented IPOs, say, before the oil crash. And now you’re seeing, of course, a lot of tech IPOs. And a few years ago, there was a lot of biotech IPOs. So it’s a very fashion-oriented line of work, the IPO business. So the best time to sell is when, of course, the buyer does– I mean, sorry, the seller does not have to sell. So the seller is not under any financial pressure. The seller is not very old and is being forced to sell for other reasons.

If possible, the seller should sell when the stock market is high in the respective country. That’s because M&A valuations track stock market valuations pretty closely, as I said yesterday. So if you look at these two points, the third one, of course, is if you’re in a cyclical business– let’s say cars. Cars are at the top of the cycle right now. It’d be nice to sell a car business right around now, because we’ve got a cyclical business that’s on the upswing. So you want to try to sell at the top of your cycle.

If you’re in a business like jewellery, which is jewellery retailing– I used to do a lot of M&A business in the retailing industry– jewellery retailing is cyclical as well. It tends to follow the economy a lot. So you want to sell at the top of the jewellery cycle. If you’re selling an agricultural business, the farm and agricultural industry has separate cycles, which are a little different than the general economy, depending on where farm prices are. So try to sell at the top of the cycle. These are three good rules to follow if you’re selling a business. That’s the mindset of when do you sell, who are the sellers. Any thoughts or questions before we move on?

All right, well, one thing that’s a good piece of advice for a seller is to get a valuation before you enter the process. Again, I’m going to use the same analogy, even though you may be getting tired of it. It’s like, if you’re selling a house or an apartment, what do you usually get before you try and hire a broker to sell it? Appraisal. An appraisal, yeah. Sometimes a broker will give you an appraisal for free, though I guess that appraisal may have a little element of bias in it. But you should get an appraisal so you at least have some idea of what the property is worth.

Why go out and try to sell your house, an apartment, if the market isn’t going to deliver what you think the place is worth? You might as well wait. Well, it’s the same thing in the M&A business. Sellers should get some kind of value before they go and enter the market, because as you’ll see in a few minutes, it’s a tremendous amount of work to set up a company for sale and then to actually go into the process, which is a fairly involved one. So the good idea is to get a valuation first. I’ve worked with big companies and I’ve worked with a lot of small companies. So let me tell you something about the big companies.

The big companies are not emotional about their assets. They’ll get an assessment of what it’s worth before they decide to sell it. And then they’re very realistic. You got people like yourselves who are getting paid a salary and bonus, maybe some stock options. And so there’s not much emotion involved. But if you go to a family or an entrepreneur who owns a business and they built it up over years and they got all this sweat and blood involved, I mean, sometimes they take an unscientific view of what it’s worth. So before they get into the market, I think they need an appraisal, a formal appraisal of what it’s worth by an expert.

Otherwise, they might be talking to people at the golf course or people at industry seminars and just getting these wild numbers that are just completely crazy. So there are many valuation firms that supply pseudo valuation reports. And they’ll give sellers a somewhat unbiased notion of what they can expect in the M&A market. And some investment banks do it. They might throw it in as part of their fee to take the assignment. I think a more practical alternative is to get a valuation firm to do it, because they’ll be more objective. They won’t have a transaction in mind. But many sellers don’t want to pay the fee of the appraisal firm.

It’s about $20,000 to get an appraisal done of a sizable business. And the appraisal firms look just like we talked about in the valuation section. The appraisal firm will do some investigation. They’ll do a discounted cash flow of your business. Then they’ll look at the comparable public companies, look at comparable acquisitions. If you’re a buyout candidate, they’ll look at buyout. If you’re in the natural resource business, they’ll look at natural resource reserve costs or pricing. If you’re in one of these businesses that’s losing money, they’ll do all the discounts and adjustments. So they will give you a number that’s probably 15% or 20% from what reality is one way or another, but pretty close.

And then the seller knows what to expect. Just like when you’re selling an apartment or house, you know pretty much what you’re going to get.