As Qualus continues to expand organically and inorganically and as part of my many tasks to meet our objectives, I’m privileged to sit with owners in our industry to discuss the possibility of being acquired by our firm. I have noticed a pattern within these conversations where most founders, CEOs, company presidents, and other leaders of privately held businesses have the same three primary concerns and questions. As a former business owner who sold to private equity, I recall having these same thoughts and feelings.
Typically, owners thinking of selling their company have three common questions. First, what will happen to my employees? Second, what is my company worth? Finally, what happens to me, the owner? Of course, specific answers are distinct to each acquisition and depend on a combination of factors. But here are some basic answers to get them thinking about what happens next.
In an acquisition, people are a top consideration. Acquiring companies are often interested in holding on to key employees and growth producers and thus their retention can affect the value of the company. Losing these employees can be a setback for the acquiring company. Company owners have several options available to show their key growth producers continued support through any changes. When appropriate, they can emphasize to their employees that they will continue to have a job after a sale and in fact, new opportunities for growth and career development that come from being associated with a larger organization. Owners can also show their gratitude to their employees for their part in the company’s success and encourage them to stay put by agreeing to share a percentage of their sale proceeds or offer other forms of compensation. Doing so improves their financial status and it demonstrates the gratitude an owner has towards their employees.
For an owner, it can be hard to hear a monetary value assigned to their personal sacrifice and sweat equity, especially if their asking price is not in alignment with their internal value. Many owners make the mistake of entering into acquisition talks with an unrealistic number in mind. Of course, their success has brought them to the attention of an acquiring company, but any agreement needs to benefit both sides. Acquiring companies are looking at specific financial and non-financial indicators of a company’s health in factoring a value. Each one of these components plays a role. YOY revenue and EBITDA growth are favorable indicators for the acquiring entity. Another indicator is the level of diversification of both clients and related services a company offers. More diversification is going to equal more value. Other factors that can increase value are the company’s culture, employee retention rate built on fairness and trust, and an effective leadership team. A company that fosters a working environment where their employees feel appreciated, understand their purpose, and see a path for their career development, employees tend to stick around which in turn, creates more value.
What Happens to Me, The Owner?
One of the most nuanced aspects of any company acquisition includes whether or not an owner stays for the transition. In my experience, certain owners, and those in leadership positions, are key players in maintaining the culture and success of the company. As such, acquiring companies may ask the owner to stay for a specified period. Just like the growth-producing employees, the owner is an integral part of the company culture, the one who constructed value for the company which makes their company desirable for any acquiring company as well. Agreements can span a wide spectrum of opportunities, including staying right where you are, leadership roles within the larger organization, or a more specialized individual contributor role. More than likely, the owner may be offered a financial opportunity to reinvest their proceeds into the larger organization, allowing their financial equity to grow favorably over time.
While every business has similar concerns that can be answered generally, each sale and acquisition is a different opportunity and as such, requires specific attention to leadership needs. Part of my initial conversation is to give a potential seller enough information about what happens next so they can gauge their readiness to proceed through an acquisition conversation.
If you are a business owner or an acquiring entity, I encourage you to reflect on the top three questions you have when considering selling your company. Your insights and perspectives are valuable, so I invite you to share your thoughts and comments below.
