When selling doesn’t mean the end. Don’t let your business hit rock bottom
The business isn’t growing as it should, it’s losing that initial drive and market position, maybe it’s even already stuck in seemingly unresolvable problems. It’s over. Finito. Are we closing up shop?
That is not necessary. The properly timed sale of a business can be a win–win strategy, with the owners receiving a decent return and the business a healing cure. How to sell as well and painlessly as possible?
The sale of a business should not be based on a hasty decision but rather on a careful assessment of the situation. If the owner has been thinking about selling already for a while, then the time has probably come. In the Czech Republic, the economy is cooling down after the fat years and businesses in good condition can logically bring better value than ones that are suffering.
"There probably will be a slowdown in the economy, maybe even a slight decline. It won't be a downturn like 10 years ago, but even a slowdown can be a problem for some industries," explains Igor Fait, the financier and founding partner of Jet Investment.
Through its funds, Fait’s investment firm acquires companies at various stages of development. It has experience with profitable businesses but also with those needing new impulses and sometimes even total restructuring.
When Jet Investment, together with other partners, bought Kordárna from Velká nad Veličkou in 2010, the manufacturer of technical fabrics for tires was insolvent. The business with a history of more than 70 years was unable during the crisis to repay debts related to investments into its Slovak branch at Senica. "Our goal was to stabilize, rejuvenate, and then restart the company," describes Jet Investment partner Marek Malík.
Over the next eight years, Jet Investment proceeded to shut down inefficient parts of the business, finalize investments, and even expand production to include new high-tech textiles. Kordárna was one of the first large Czech companies to survive insolvency. Its sales tripled, earnings before interest and taxes rose from CZK 56 million to nearly CZK 280 million, and another 250 employees were added to the original 500.
Fear of layoffs
Employees are often the ones about whom business owners who consider selling are worried. Nevertheless, if they choose the right buyer, they can significantly reduce the risk of massive layoffs. That is why they should inform themselves in advance about the future investor’s history and its behaviour on the market.
“We’re usually trying to retain current employees and utilize their experience. At the same time, we are appropriately supplementing them so that the management and the organization as a whole function effectively,” Malík explains.
“Before concluding a transaction, we meet with key employees to explain to them our vision and unveil our plans. Both sides should know what to expect from each other,” adds the partner from the Brno investment company.
For how much?
Of course, the company’s condition is decisive when determining the price an investor is willing to pay. As a general rule, the price is calculated as a multiple of current earnings. Valuation is not that simple, however, and it is usually preceded by a thorough examination from the investor’s side. The seller definitely should not keep anything secret, as any skeleton found in the closet can jeopardize the whole transaction.
“Establishing a price is a tough discipline. It’s necessary to consider comprehensively the company’s strategy in the context of the market’s development, determine the revenue and cost sides of the business while not forgetting about investments that will ensure the business’s long-term, sustainable competitiveness in the future. Simply put, it’s about meaningfully establishing a number of variables that influence the business,” Marek Malík points out.
Sometimes, the expectations of the owner are different from what the investor can offer. “Then it’s time for negotiations. It depends on how big the difference is. Sometimes, it is so big that the transaction cannot be concluded,” remarks Malík.
“We try to set the price realistically already when making the first non-binding offer. If we later don’t confirm the price as part of a binding offer, it is usually due to some serious finding during the due diligence process. This is a costly thing in terms of time and money, so it is not in our interest to speculate and not to confirm the price.”
The whole process of selling a business takes several months and it is not a low-cost affair. But it pays to invest into lawyers, auditors and consultants, as they may contribute significantly to the success of the whole transaction.
Due diligence, valuation, and final negotiations take about two-thirds of the time, and the remaining one-third is for the lawyers to prepare documentation for signing.
If a regulator’s approval is not needed, then everything may be ready within four months, a half year at most. Waiting for an opinion of the anti-monopoly office, however, may cause the sale to take twice as much time. Concluding the most demanding international deals may take more than two years.
Jet Investment has bought about 30 mostly industrial businesses since 1997, such as Strojírny Poldi and PBS Industry or the rail-car maker MSV Metal Studénka. The investment company groups these into platforms depending upon their focus so that they can complement each other, help one another in the market, and possibly save on production costs. Often, in order to create the right synergies, it purposefully buys additional companies into individual portfolios.
The goal is to sell a healthy company with a profit that is then divided among the Jet funds’ investors. “We don’t buy only in order to increase the value of our funds but also to develop the businesses further. Whenever we feel that our role is played out, we sell the businesses in order not to slow their development,” Malík explains.
In October 2018, Jet Investment sold Kordárna from Velká nad Veličkou to a Thai petrochemical giant, Indorama Ventures, receiving nearly six times the value of the original investment. From a company on the verge of bankruptcy it became one of the most important manufacturers of technical textiles in Europe.
The business isn’t growing as it should, it’s losing that initial drive and market position, maybe it’s even already stuck in seemingly unresolvable problems. The properly timed sale of a business can be a win–win strategy, with the owners receiving a decent return and the business a healing cure.
A strategic partner can help at a time when businesses need new energy or capital for further growth, when they are unable to fulfil their potential and move to bigger markets on their own, or they lack capable people or contacts.
They have built up their businesses from nothing and achieved billions in sales, but as owners they start to think about selling their companies only when they get into trouble. And that is wrong, say the experts.