How to Improve Your Company’s Appeal to Sell
Before putting your business up for sale, here are ways to improve its appeal to draw in the right buyers.
Middle-market mergers and acquisitions (M&A) appear poised for a recovery thanks to a more resilient U.S. economy along with substantial amounts of capital from both private equity (PE) firms and corporate buyers, says Melina Audinelle, managing director and senior vice president of Fifth Third Investment Banking. With buyers eager to acquire mid-size companies, owners need to find ways to boost the curb appeal of their firms to avoid potential missteps in the M&A process or leaving value on the table.
However, many owners may not yet be prepared to capitalize on this promising momentum. Despite the favorable conditions of the market, a 2024 survey by Capstone Partners revealed 37.9% of CEO respondents have not yet begun formally preparing for a business exit. The survey also reveals a strong link between having a succession plan and confidence in the company’s future. In fact, only 47.7% of owners without a plan feel confident in their business’ long-term viability. This lack of preparation could ultimately undermine their ability to attract buyers and maximize valuation.
Value creation demands foresight, and effective planning takes time. To compete in today’s M&A landscape, preparation must begin early. Getting your company ready for a transition needs to begin long before the actual transfer so that you have time to make growth investments, put strong management in place, enhance financial reporting and assemble a team of trusted advisors.
What are buyers looking for?
Whether you ultimately sell your company to a PE firm or a strategic buyer, there are certain fundamentals that make a business universally attractive to any buyer. Think of it as knowing how to improve company curb appeal.
Among the most important is whether your company occupies a great market niche or has a unique capability that creates more value for customers and sets it apart from other companies in your industry. More specifically, has that differentiator translated into higher margins and higher rates of revenue growth relative to peer businesses?
"Higher margins build a bigger moat around the business and generally reflects a better value proposition to customers that differentiates them from the competition," Audinelle says.
Equally critical are your company’s current growth rate and future growth opportunities. "If GDP is growing at 3%, a business growing at a healthy 5% or 6% will be attractive, but a business growing at 10%+ will command a premium valuation," mentions Audinelle.
Likewise, buyers will pay more for a company that has developed a new technology or is in a hot industry, with the expectation that the company will have above-average future growth. A business in a mature industry, where margins and growth are harder to achieve, will have a more challenging time creating high investor demand and justifying a premium valuation. Potential buyers will also closely compare the performance of your business with others in the same market.
Consistent growth is also an extremely important attribute. "A potential buyer wants to see how your company performed in different economic conditions, especially during COVID-19 and the severe financial crisis of 2007 to 2009," says Audinelle. A company that has been managed very conservatively and doesn’t have impressive historical growth can, however, still be attractive to buyers who see an opportunity to take more risks and push the company to achieve greater growth. The key is communicating that there is a clear and actionable path for growth that can be achieved by the buyer.
Beyond impressive margins and growth, different types of buyers have specific objectives for the companies they want to add to their portfolios. The strategic buyer wants to acquire companies that will enhance their existing businesses and expects to hold acquisitions for the long term. Strategic buyers will also focus on opportunities for revenue and cost synergies, while direct competitors have the added consideration of using acquisitions to grow market share.
PE firms looking for platform or stand-alone acquisitions are looking for value in a business they believe they can augment over the next three to seven years before selling the company. Given the significant ongoing investment by PE across industries, there is also the "semi-strategic buyer," which is a PE-backed business that is looking to grow via acquisitions and is a hybrid of a strategic and purely financial buyer.
How to prepare your business for sale
How can I make my company more appealing before putting it on the market? Depending on the time horizon for selling your company, taking these steps can enhance your business' curb appeal.
Build a management team committed to business growth
- Optimize equipment, information systems and technology
- Make decisions for the long term
- Diversify your customer base
- Get your financials in order
- Develop a growth road map and track your KPIs
- Entertain multiple suitors
All buyers value a strong management team that can keep the business ramping up after the deal closes, although this is even more important to a financial buyer. While a strategic buyer can and may sometimes prefer to have their own team integrate and run the acquired business, PE firms are not looking to run the business. Instead, they want to leverage an existing strong management team that can execute a business plan. PE firms often provide incentives to senior managers to keep them economically aligned to growing the business after the sale. It can be valuable to show potential buyers that you’ve already instilled that leadership culture in your company by transferring equity ownership to senior managers, which can include stock options, warrants or phantom stock. Family business owners getting close to retirement should focus on recruiting younger management talent and prepare them to run the business after it’s sold—classic succession planning. Companies that have a younger management team with deep experience in an industry and are hungry to grow the business will be the most attractive to PE buyers.
Many PE buyers will have a ‘rollover investment’ requirement, which asks sellers to reinvest a minimum of 10% and as much as 49% in the equity of the business,"; says Audinelle. "If the company does well, not only does the seller receive the initial proceeds from the sale but also a second bite of the apple when the company is sold in three to seven years. It is not unusual for the value of the rollover equity investment to be higher than the proceeds from the initial sale, and when you combine the two, the deal from the private equity firm can sometimes be more lucrative to the seller than a ‘one-and-done’ transaction from a strategic buyer."
Your company’s potential for earnings becomes less compelling if a buyer has to make a significant investment in the business, such as updating an ERP system post-closing. You don’t have to spend millions to install or expand automation technology right before you intend to sell the company. But you should invest enough in your business to achieve the company’s goals for the next two to three years and be able to document the returns of that investment, including labor costs, improving margins, productivity and volume output,” advises Audinelle.
Too many business owners sabotage the value of their companies and their competitive edge by unnecessarily cutting costs before they intend to sell. "Don’t cut costs to inflate your profitability; buyers always see through that strategy," says Audinelle. "If investing in a piece of equipment or making a terrific hire is in the best interest of your business, then do it." Finding the right buyer for your company may take longer than you expect, and the short cuts you take today can ultimately diminish the value of your company when buyers come calling.
If most of your revenue comes from only a few customers, or if your customers constantly demand lower prices, it’s time to shore up your customer base. Buyers will discount a company that has customer concentration risk, given the negative impact if those customers leave or if they seek deep pricing discounts. Develop a strategy to achieve increased granularity in your customer base and end-market segments, and in doing so, the resilience and value of the business will increase.
Potential buyers will want to review at least three years of detailed financial records, including your company’s assets and liabilities, profit and loss statements and cash-flow statements. "Having your financial statements reviewed by a reputable third party accounting firm is not as strenuous or as costly as an audit, but it shows that there is a third party validating your financial reporting," says Audinelle.
In addition to organizing your business finances, it’s important to consider a personal wealth plan. Work with your advisor to develop tax-efficient strategies to transfer ownership interests to shareholders, your heirs or charitable organizations in advance of a sale. "While you are in the middle of a sale, you don’t want to be thinking about how you are going to transfer the proceeds and whether you have the right trusts and other estate-planning vehicles in place," mentions Audinelle. Also, the IRS will value a deal when it starts, so it's better to set up tax-efficient structures at least one year in advance of a sale. Fifth Third’s Business Transition Advisory Team specializes in preparing business owners financially and personally for business transitions.
A growth road map can demonstrate to a potential buyer that the goals you set for your company are strategic, actionable and obtainable—and that they will translate into realistic growth for the company they are considering buying. Elements of this plan may include opportunities to expand product lines, enter new geographies or even make add-on acquisitions to accelerate growth. In conjunction with this road map, you should have a system to track the key performance indicators (KPIs) that show how well your company is achieving its short- and long-term goals and be able to readily produce the data for potential buyers.
It’s not unusual for PE firms or other buyers to contact a business owner directly and make an offer. Some business owners may find it appealing to negotiate and accept that offer to save on advisor fees. However, dealing with a sole potential buyer is anything but a simple and quick transaction. When only one buyer is at the table, the business owner has much less leverage over the negotiation than when multiple firms are competing to acquire the business. In the absence of competing buyers, the due diligence process tends to drag on because there is no pressure to close the deal. Consequently, the owner and the management team are forced to devote too much time to the sale, causing the business to suffer. "If there are any blips in the business because the owner and management team are distracted, the buyer will use that opportunity to lower the purchase price," says Audinelle. "The biggest enemy of an M&A deal is the loss of the competitive tension that keeps buyers honest and moving quickly through the process."
However, broadcasting that a business is up for sale to drum up interest among multiple potential buyers may risk creating turmoil among customers and employees, while creating an opportunity to be exploited by competitors. "An advisor can help quietly and confidentially identify and vet potential buyers without tipping your hand to competitors who could hurt your business if they got wind of a possible sale," says Audinelle. "And while that offer from an initial buyer may appear fair, you may be leaving better offers on the table if you don’t carefully open the process to other interested buyers."
Selling a business is not something to go into lightly or without proper preparation. The owner is well advised not to try to go it alone and should instead build a team of advisors with expertise in wealth and estate planning, M&A, tax and legal. This team can augment the company’s internal resources and ensure a customized process focused on achieving the owner’s and management’s goals. The sooner an owner begins to tackle these considerations and engages a team of advisors, the higher the likelihood of a successful sale.
Ready to move forward with selling?
Fifth Third’s seasoned investment banking team specializes in M&A advisory services and execution, offering tailored solutions for middle market and mid-cap companies. With deep industry expertise, we help clients maximize business value and achieve the best possible valuation. Contact us to begin the conversation.