Mark Ferrier decided to sell his marketing agency when a mentor shared a morsel of wisdom that stopped him cold. Given the chance to do it all again, Mark’s mentor would have sold his business 50% sooner for 25% less.
The sage went on to explain that no matter how much money Mark accumulated, he would not be able to turn back the clock. The mentor reminded Mark that his kids would only be young once, and if given the chance to do it again, most founders would take a little less if they could spend that time with their kids.
📣 Quote of the Week
“If I could do it all over again, I would sell my business 50% sooner for 25% less money so I could spend that chapter of time with more freedom with my kids to build that relationship. Because when they’re 16, 17, 18, 20, you can’t build that relationship as you can when they’re that age (younger).”
– Mark Ferrier’s mentor describing why he wished he’d sold sooner.
Selling Sooner May Narrow The Buyer Pool
If you’re going to sell early, a private equity group may be your most likely acquirer. As we wrote about recently, selling to private equity often means doing half an exit, where you sell the majority of your shares and roll a portion of your proceeds into a new company the private equity group sets up to hold your business.
A private equity group will often invest in a business at a much earlier stage than a strategic acquirer because they realize that once a business matures to the point of being attractive to a strategic acquirer, much of the increase in value has already happened. They are in the business of buying a company, improving its value, and selling it as a more valuable business down the road. To make bank, they need to acquire your business at an earlier stage.
The 96% Hair Cut
If you’re going to sell early to a private equity group and roll some of your proceeds, ask about the debt the private equity group plans to take on to fund the acquisition of your business. The debt will need to be repaid by your business, so the interest payments will be a drain on your company’s cash flow.
If your company goes through a bad patch, the equity you rolled could be diluted by lenders whose debt may convert to equity in the event your business can’t pay.
In Mark’s case, he sold to the private equity group Onex for eight figures and rolled 8% of his proceeds into a platform company Onex owned. The acquiring business had taken on a lot of debt, and when the balloon payments came due, they couldn’t pay. The ensuing restructuring left Mark with just four cents for every dollar he had rolled, a 96% haircut.
Does he regret selling early?
No.
He only rolled 8%, and in hindsight, Mark blames himself for not understanding the debt structure before agreeing to the acquisition.
In this video, Mark describes what he learned about rolling equity and what he would do differently if he could do it over again.
More important than the money, Mark got time to spend with his kids which he wouldn’t trade for anything now that they are a little older.
If you’re going to sell early to a private equity group, consider how much of your equity you want to put at risk and understand the debt they plan to use to attempt to hit their ROI hurdles.
You may ask why selling 50% sooner doesn’t lead to a 50% haircut rather than just 25%. It turns out most founders hang on too long. They blow right past the time when their business is most attractive and decide to sell when their energy–and results–have started to wane. Once a business starts to slow, even though it may be larger, it will attract a lower multiple. Smart sellers exit when their business is on the upswing, growth is humming, and they still have lots of energy for participating in a transition.
Curious to know what your company might be worth? Start by getting a Built to Sell Valuation for your company and we’ll show you what your business is worth and the potential value you could unlock.
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📈 Deals
- DataSolutions Holdings Limited, a leading IT distributor from Ireland serving resellers in both the UK and Ireland, has been acquired by Climb Global Solutions, Inc., a global IT firm known for its specialized sales and distribution services. The acquisition price was $16.3 million due at closing, with the possibility of more in the form of an earn-out. DataSolutions’ recent financials show an adjusted EBITDA of around $3.3 million, which means Climb Global paid nearly five times that amount for the business.
If you know someone who has successfully exited their business and has valuable insights to share, we encourage you to nominate them.
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