During his successful, six-year run with Goldman Sachs when he routinely negotiated multi-billion-dollar deals, Jay Jung took note of how Fortune 500 companies loaded with experienced CEOs and CFOs always made it a practice of hiring investment bankers to conduct their M&As and sales.
Conversely, Jung was surprised and bewildered when he would so often see entrepreneurs who were selling their businesses failing to bring on advisors who could offer important advice.
“For most entrepreneurs, selling their business is not the areas where their expertise and experience lies,” Jung said. “Usually, this is one of the most important decisions for the company’s lifetime, and they need assistance in the sale.”
Jung certainly has the credentials to back up his claims. During his time as a former Goldman Sachs Investment Banking Vice President and McKinsey & Company Engagement Manager, Jung completed more than $50 billion in transactions, including marquee transactions such as the sale of Yahoo, the sale of MuleSoft and the sale of SanDisk.
These days, Jung is offering high high-level financial consultations — advice usually reserved for Fortune 500 companies — to startups and small-to-medium-sized businesses. Following his six-year run with Goldman Sachs, Jung founded Southern California-based Embarc Advisors so that he could help small businesses avoid many of the pitfalls that often determine success or failure.
“Our advisory services have resulted in higher valuations, more favorable transaction structures and terms and a smoother process throughout the sales,” Jung said.
Conversely, I also have worked with buyers that have acquired smaller businesses, and each time I quietly lament when the seller does not have an advisor and tries to go at it alone. What is even more disheartening than them simply getting a bad deal is that they don’t even know that they are making a bad deal.
With that thought in mind, Jung offered up 10 things that all small businesses should keep in mind and consider before engaging in a M&A or attempting to sell itself:
- You’re an expert at managing, operating and growing your business; most executives are not experts at selling their business.
- Most people hire a real estate agent to sell (or buy) a home. A corporate transaction is much more complex. Even experienced executives hire seasoned advisors when they sell their businesses.
- Continuing the real estate analogy: You get more value if you clean up your home and stage it with nice furniture and design pieces first. You are selling the dream and showing the buyer the vast potential of your business. It’s the same thing when you sell your company; You have to stage your company and dress it up before trying to sell it. That often means crafting a compelling presentation that tells the story of your company. Your financial analyses will go to support that story (not just your P&L output).
- Stress that the headline price is only a small part of the deal. Don’t get too excited and let your guard down just because you locked in a high headline price. There are many other LOI and purchase agreements terms that can greatly impact your value.
- The LOI is only the beginning. The LOI will state a 60-90-day exclusivity period where the buyer will conduct due diligence. If you are dealing with a private equity firm or a seasoned buyer, those 60 to 90 days will often be so painful and taxing that you will likely vow to never do it again. Even if the purchase price declines, you’ll likely still want to do the transaction because you will be so fatigued from the process.
- Know your BATNA (Best Alternative To a Negotiated Agreement). Most people are aware that they need to have a BATNA in a negotiation. However, few actually assess and have a firm perspective on what their BATNA is. This is an important exercise before you commit to an LOI and exclusivity. It allows you to negotiate with a strong hand and make firm decisions without regret.
- Bluffing — and, for that matter, lying — is not a negotiation strategy.
- It’s going to take a significant portion of time to do it right. The buyer, for example a private equity buyer, is in the business of acquiring companies. They do this all day long. But you, the entrepreneur, likely has to spend the majority of your time running the business. Executing an M&A deal is not going to be an easy process. There is a reason why investment bankers usually work 80-hour weeks. (See: this link for more about this.) It often requires superhuman powers to run your day-to-day business and still execute an M&A process. If you manage to do so, you’ll still most likely be too exhausted to effectively negotiate the best deal possible.
- You can’t get effective advice by getting over-the-shoulder advice from an acquaintance who previously worked in finance or even an investment bank. Expertise very much matters in this instance. Of the 100,000 employees at Goldman Sachs, only a few thousand are investment bankers. Of that exclusive group, only a few hundred (at most) have meaningful M&A experience. You also need to hire proper M&A counsel — not your general counsel.
- Selling your company is almost like selling your baby. It’s going to be an emotional roller coaster. A good advisor will offer great transaction execution advice and they will also be your therapist through this emotionally tumultuous journey.
As Jung stressed, selling a business or going through the M&A process is not an easy process — even for experienced M&A bankers. One example that Jung pointed to was this: When he was negotiating the key terms of a deal, often several senior Goldman Sachs investment bankers would pool their ideas, brainstorm and strategize, meaning there was sometimes 50 years of combined M&A expertise working on on project.
“That’s why it’s vital that you engage a mortgage bank if you are planning to sell your business or entertain the thoughts of a M&A,” Jung stressed. “Getting assistance will be an investment that pays off in the long run.”