As a sell side Investment Banker (I was one for 15 years in London) you will probably specialize in certain sectors after being a generalist. Over time you might have done five or six semiconductor supply chain deals or sold 10 recruitment businesses but to be competitive it is inevitable that you and your team have become specialists.
This will have given you tremendous insights into the trends of those specialist sectors. It will have allowed you to build a powerful database of the deals done and, if disclosed, the value achieved and the implied multiples. You will have garnered a good feel for the margins being achieved in the industry. You will understand the constraints of these sector, the legislative landscape, the breakthrough technologies and probably some of the high performing CEOs. You will also have a good strategic insight into likely buyers of private businesses.
However set against this deep knowledge is the reality that 90% of private companies are not ready for an exit process. I’m not talking about exit planning. I mean the business is not ready for a buyer to examine the business. At least 50% of sales mandates taken on by Investment Banks will relate to these unprepared companies. In other words the deal was dead on arrival!
The main factors that will have turned buyers off will be one or more items from this list:
Value Leakage
- Branding & Positioning – the story is weak and has not created any sizzle in the marketplace
- Profits are too low to attract significant interest, defined as <$2m EBITDA
- Revenue and profits growth is flat
- Business is dependent on the owner
- Business is dependent on legacy products
- Business is dependent on a few key customers
- Forecasts are never achieved
- Visibility of future earnings weak ( low recurring revenue model)
- Margins are below the industry average
- Management are weak (probably the owner is strong)
The problem lies in a simple fact. Throughout the lifecycle of the business, the owners/shareholders have never looked at their business through the lens of a buyer.
That simple act can reveal value leakage that needs to be addressed before the exit process can begin.
To fix value leakage is an operator problem not an Investment Banking problem.
The “job to be done” by every entrepreneur isn’t exit planning, it is scaling through operational excellence (it’s what PE backed businesses do every day).
If you are an investment banker with clients that failed to sell then we would like to have a conversation.
Download our one pager to discover how we work with clients on a fractional basis to deliver scaling through operational excellence.
The Portfolio Partnership is a fractional senior management team of operators. We help owners “build businesses buyers love to buy” by deploying our successful playbooks. We seamlessly join your team to work on the right stuff.
As always if you found these insights useful please share.
Ian@TPPBoston.com
