Middle Market M&A -- Plato, Einstein And The Sale Of Your Company

By Todd Ganos on Jul 09, 2017
Businesses for Sale

(Originally published in Forbes, curated by MMA.)

The Greek philosopher Plato believed that there were right ways to do things and there were wrong ways to do things.  And, the only reason why people did things the wrong way was because they simply didn’t know the right ways from the wrong ways.  It was a matter of instruction and education.  If a person was taught the right ways to do something, the person would have an “a-ha moment” and begin doing things the right way.

Plato found that even when taught the right ways, people would still do things the same old ways they had always done things . . . the wrong ways.  And, during the course of his life, Plato’s writings changed from a bright, happy, idealistic tone to . . . well, let’s just say a dimmer view of things.

So, we jump forward in time a couple thousand years to Albert Einstein.  (This is a true story.)  A graduate student assistant who worked for the professor noticed he had cuts on his face and asked him about them. Professor Einstein said that he cut himself shaving.  The assistant asked him what type of shaving cream he used.  Professor Einstein said that he didn’t use any shaving cream.  So, the assistant said that he would give the professor some to try.

A couple weeks later, Professor Einstein’s facial cuts from shaving were gone.  The assistant asked him about the shaving cream.  The professor said that he loved it and couldn’t imagine how he could have done without it his whole life.  A couple weeks later, Professor Einstein’s facial cuts from shaving were back.  The assistant asked him about the shaving cream.  The professor said, “I ran out.”

It would seem that Plato was right.  Even when Albert Einstein was taught the right way to do something, he didn’t do it.  And, so it would seem to be the case with many professional advisors who assist business owners with the sale of their companies.  When I say “advisors,” I mean accountants, attorneys, exit planners, M&A advisors, etc.

Regular readers of this column know that I frequently go to (and speak at) conferences.  Some are pure merger & acquisition conferences.  Others are pure tax conferences.  Still others are more generalized accounting conferences.  Time and time again -- whether it is the result of a presentation or simply a conversation -- advisors I meet at these conferences uniformly have the same experience as Professor Einstein with the shaving cream.  

“Oh, my gosh.  This is incredible.  I didn’t know about this.  My clients need to know about this.  They can save a substantial amount of tax on the sale of their businesses.”  Then, upon returning home, they do nothing.  They return to doing the same old thing that they’ve always done.

Some readers will recall that I host a monthly gathering of M&A professionals in one large West Coast city.  Those who attend run the gamut of disciplines.  At a recent gathering, two of our members gave a presentation on their collaboration.  

One individual is a long-tenured specialist in post-acquisition integration.  He has decades of experience at large, publicly traded companies (whose names you’d know).  He and other integration specialists formed a software company whose product facilitates the entire M&A process . . . but, in particular, helps identify successful targets to acquire.

The other individual is a long-tenured M&A intermediary.  He, too, has decades of experience pairing business sellers with business buyers.  He currently represents a large company in acquiring a series of middle market companies.  And, he is a “beta tester” for the first person’s software.

Together, they gave a presentation about their experiences in the collaboration.  What worked.  What didn’t work.  Between these deals and other users of the software, there were findings as to what went into a successful deal.  This was contrasted with the well-documented statistic that roughly 75% of acquisitions are unsuccessful.

In discussion, it was noted if a buyer can identify a target company (think “your company”) that poses less risk of success -- that’s acquisition AND integration -- then that buyer might be willing to pay more for that company.

It was a learning experience for the two members who collaborated.  It was a learning experience for those listening.  It was also a learning experience for one attendee who is a business owner.  He was interested in growing his company via acquisition but is new to the world of M&A.  When he heard about the 75% unsuccessful rate of acquisitions, he became concerned.  During the question and answer time after the presentation, he began to ask questions.

Given the findings of the software, it was clear that there seemed to be a right way and a wrong way to acquire a company.  Let’s call them “best practices” in M&A.  As a business owner interested in acquiring, his natural question was how to find professional advisors who use any process based on demonstrable findings such as was presented.  He expressly asked whether one simply go to big, well-known accounting and law firms.

The practitioners in the room scoffed.  They uniformly painted a picture for this owner that I have repeatedly drawn in this column.  That is, the vast majority of practitioners -- no matter their specific discipline -- even when aware of such things, will settle back into their same old ways.  Most intermediaries -- whether investment banker or business broker -- will not go through the rigorous process that the above-mentioned intermediary did.  It is a rare find.  

The 75% unsuccessful rate suggests that most pairings are the result of simply finding a warm body and no advisor in the picture is doing anything to alter that outcome.  Their answers offered the business owner no comfort.

But, a room full of M&A advisors repeated what Plato came to learn.  That is, even when exposed to the right way -- or, let’s just say a better way -- of doing something, most individuals will keep doing things the same old way.

Now, let’s talk about you.

As a business owner who will ultimately sell a company, your default will be to run your company the same old way that you’ve been running it for the past 20 years.  If you were approached by a management consultant or exit planner or similar advisor offering to help prepare your company for sale, you will be tempted to ask, “What are you going to do for me that I haven’t figured out over the past 20 years?”  Admit it.  If you say the words, they’re in your mind.

But, consider this.  Let’s say that all the advisor does is bump your net margin by 1% . . . 1 rotten, stinking percent.  Big deal!  So, let’s see . . . 1% multiplied by $20 million in annual revenue translates to an extra $200,000 per year net income in your pocket.  That extra $200,000 per year net income multiplied by a 5X valuation multiple equates to $1 million higher firm value.  Ooh!  That’s some 1 rotten, stinking percent!

So, Professor Einstein, what are you going to do?

The first step is to see where your company stands.  The Middle Market Owners Forum is a non-profit organization that helps educate business owners about selling a company.  It has a self-assessment survey that you can help you get started.  Click here to take the survey.

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