In the recent webinar, “The Decide Gate: Exit Strategies and Deal Dynamics in Action,” hosted by EPI (Exit Planning Institute), REAG’s Jaclyn Ring and Todd Torquato shared insights on exit strategies and deal dynamics. This session focused on the sell option within the Decide Gate of the Value Acceleration Methodology, bringing theory to life through real-world case studies.
Understanding REAG and Its Role Supporting CEPAs
REAG specializes in the lower middle market, focusing on companies with profitability and growth potential that serve regional, national, and global markets, have $2M+ EBITDA, and possess scalable business models.
While technically industry agnostic, REAG’s industrial roots in Pittsburgh have given them particular expertise and the opportunity to specialize in mergers and acquisitions activity in chemicals, electronic manufacturing services, manufacturing and fabrication, specialty plastics industries – as well other scalable, related industries.
What sets REAG apart is their unique position as the only lower middle market investment bank built for CEPAs (Certified Exit Planning Advisors) in the EPI community.
The Decision to Sell: A Delicate Balance
The optimal time to sell a business is when economic, business, and personal conditions align. However, this alignment is often challenging to achieve. Business owners might hesitate to sell when things are going well, despite it potentially being the best time from a market perspective.
As Jaclyn Ring aptly notes, “selling a business is often an emotional decision. As an advisor, our role is crucial in guiding business owners through this decision-making process. It’s important to remember that while you can provide information and support, the final decision rests with the business owner.”
This insight underscores the complexity of the selling process. Advisors must balance market conditions with the personal readiness of the business owner, recognizing that the emotional aspect of selling can sometimes override purely financial considerations. The key is to provide comprehensive support and information, enabling business owners to make informed decisions that align with both their personal goals and market opportunities.
REAG’s Sell-Side Process
Once a business owner decides to exit, REAG’s process begins with understanding the seller’s goals, preferences, and any existing exit plans. Key points in their process include:
- Aligning seller expectations with market realities
- Confidentially creating a market for the business
- Conducting a structured auction to maximize value
- Transforming an illiquid asset into cash and investable capital
Common Deal Killers and How to Avoid Them
One of the most valuable aspects of the webinar was the discussion on common deal killers and strategies to mitigate them. Here are some key takeaways:
- Lack of Preparation
Inadequate preparation of records is becoming increasingly common and can severely hinder the sale process. To avoid this:
- Ensure financial statements are compiled, reviewed, or audited
- Gather all due diligence documents in advance
- Consider conducting a sell-side quality of earnings report
Being prepared not only streamlines the process but also instills confidence in potential buyers and allows the business owner to maintain focus on running the business during the sale process.
Jaclyn shared that in a recent transaction, the due diligence request list from a buyer contained around 900 items across eight different categories, including tax, HR, commercial, insurance, and legal. This underscores the extensive preparation required for a smooth sale process.
- Quality of Earnings Reports
Quality of earnings reports are becoming standard practice, especially with financial buyers. These reports can be conducted by the seller (sell-side) or the buyer (buy-side), and sometimes both. Key considerations:
- Sell-side reports allow sellers to address any issues proactively
- Buy-side reports can sometimes be used as a tool to renegotiate deals
- Having a sell-side report can shorten the due diligence process and add confidence to the transaction
Jaclyn Ring also noted that sell-side quality of earnings reports, while potentially expensive, often prove invaluable in maintaining deal momentum and preventing last-minute surprises that could derail the transaction.
- Deal Fatigue
The selling process can be emotionally draining for business owners. Buyers naturally scrutinize the business, which can wear on sellers who are proud of their accomplishments. Proper preparation and potentially conducting a sell-side quality of earnings report can help mitigate this fatigue.
Deal fatigue is “100% real,” according to Jaclyn. The constant scrutiny from buyers, which can last 60-90 days during due diligence alone, can be particularly challenging for business owners who have successfully run their companies for years.
The Importance of Early Collaboration
REAG emphasizes the value of early collaboration between CEPAs and investment bankers. This collaboration can help:
- Clarify the business owner’s goals and expectations
- Identify potential obstacles early in the process
- Provide market intelligence and industry insights
- Determine whether selling is truly the best option for the client
Todd encouraged CEPAs to reach out to REAG even in the early stages of exit planning. He mentioned that sometimes, these early conversations might reveal that growth through acquisition, rather than selling, might be the best path forward for a client.
Key Takeaways for Advisors
- Encourage clients to prepare well in advance of a potential sale
- Discuss the possibility of conducting a sell-side quality of earnings report
- Set realistic expectations about the length and intensity of the sale process
- Collaborate early with investment bankers to provide comprehensive guidance
- Remember that every deal is unique, and flexibility is key
By understanding these deal dynamics and potential pitfalls, exit planning advisors can better guide their clients through the complex process of selling a business. The goal is not just to close a deal, but to ensure that the outcome aligns with the business owner’s personal, financial, and legacy goals.
Remember, selling a business is a process not an event. By preparing thoroughly and collaborating effectively, advisors can help ensure that this process leads to a successful and satisfying outcome for their clients.
REAG helps you focus on key priorities, leverage strengths, and allocate resources strategically. We partner closely with clients to achieve objectives and maximize business value. Ready to reach your goals? Schedule a discovery call today.
