Seeking Acquisition? What You Can Learn From Time Warner's Sale to AT&T
Entrepreneur's New Year’s Guide
Yesterday, Time Warner shareholders voted to sell the company to AT&T for more than $85 billion, to help secure its future.
As the parent company to outlets such as HBO and CNN, Time Warner offers AT&T access to the type of high-quality content that the telecom giant company needs to stay competitive. Indeed, AT&T has massive distribution power and with the merger it will control some of the nation’s most sought-after entertainment and news programs.
There's a lesson for the small business owner here: When it comes to selling a business, value, like beauty, is in the eyes of the beholder: in this case, the potential buyer.
Business owners looking to make lucrative deals must get into that same buyer headspace AT&T exhibited.
Finding your blind spot
Buyers are going to value a business, in part, by the impact the acquisition will have on the value of their own businesses. Multiple buyers looking to acquire your company will view it differently -- depending on whether they're looking at your customers, your brand, your intellectual property, etc. By understanding what your potential buyer is after, you’ll be able to take action, not only to capture the existing value, but also to increase the returns at that transaction.
At one point, my company worked with a company that was developing a small, lightweight computer. Although the deal was funded by $15 million from a leading venture capital firm, the commercial release of the Netbook squelched its opportunity for growth.
So, we took action: After researching the markets with the highest multiples for a possible exit, we found a unique mobile app opportunity in the bring-your-own-device market. With our help, the company created a product to serve this emerging market and engaged successfully with large strategic distribution partners.
Our client’s valuation soared by 400 percent, and it was acquired by a virtual desktop company looking for peripheral add-on software and management capabilities in line with its new product offering.
Nailing the sale
After determining what drives your value, you must anticipate potential buyers’ questions ahead of their negotiations. By doing so, you’ll be able to present your company in a way that makes buyers eager to close the deal. Here’s how:
1. Get all your ducks in a row.
Potential buyers Won’t evaluate the organization alone. They'll also look to your character and competence. You must reassure potential buyers by demonstrating deep knowledge of your financials, products and competitive landscape.
You’d be surprised by the number of business owners who don’t know their businesses. Forty-eight percent of small business owners in one survey acknowledged that they didn't track their inventory, and 55 percent didn't track their assets. One survey gauging “financial literacy” in 700 small business owners reported that about 15 percent actually struggled to pinpoint the business cost with the biggest impact on their companies, and only a little over half could identify the fact that cash flow is key to business success.
One knowledge gap we typically see is add-backs. As a small business owner, you likely include business trips and other expenses that impact your bottom line when you file your taxes. It's important to track these expenses and add them back in to your financial projections, because the buyer will likely not incur those same expenses. Adding these back increases earnings, which contributes to maximizing the value of your business.
Salary is another area in which you might find add-backs. Let’s say you pull a $340,000 salary out of the business. The company can afford it, but that amount is out of sync with typical CEO compensation in your market. The new owner will be able to fill your role and pay your replacement considerably less. The remainder effectively gets added back to your earnings, which is then multiplied by the valuation multiple and significantly increases the value of your business.
2. Ditch the DIY mindset.
Inexperienced sellers in the small-to-medium market are prone to missing opportunities or being exploited by buyers. What’s more, according to Capital Business Solutions co-founder and VP Michelle Seiler Tucker, a quarter of the 30 million businesses in the United States are up for sale at any given time. However, 80 percent of those won’t sell.
My No. 1 recommendation is to hire a company that specializes in mergers and acquisitions. An experienced M&A specialist can help you unlock business value drivers you weren’t aware of, guarantee anonymity until you’re ready to move forward with a sale and vet buyers to make sure your hard work is justified when you begin the due diligence phase.
Look for specialists who know how to organize your finances and your operational procedures as well as put the bells and whistles on your business to position it in the best light possible. Vet candidates on the basis of their networks of prospective buyers, too.
3. Get down to brass tacks.
Meet with your M&A consultants and explain how you’ve prepared the company for sale. You want them to present your business in a way that aligns with your branding, so they need to know about any changes and repositioning, as well as your goals for the sale.
Do you want to turn over control immediately after the sale? Do you expect to be involved in some capacity for the foreseeable future? Are you willing to assist during a transitionary period? If so, for how long? Know the answers to these questions and communicate them to your M&A specialist before meeting with buyers.
If buyers hear one thing from your specialist and another from you, they’ll see the company as too risky and abandon the sale. Four out of five small businesses are reportedly never sold because the involved parties can’t get on the same page. The best approach is to strategize with your specialist and let him do most of the talking.
The key to a successful sale is understanding where buyers are coming from and what they want. They expect to make money off an acquisition, and most are risk-averse. The higher-risk a proposition appears, the less they’re willing to pay. So before you even think about selling your business, widen your perspective and put yourself in the buyer’s shoes.