As many of you know, HRmarketer.com recently sponsored a webcast titled The Changing Value of Your Company: How to Value and Sell Your HR Business. The webcast was a tremendous success with nearly 100 HR suppliers participating. I'd like to thank our friends Rod Robertson and Ellen Steinlauf from Briggs Capital who generously gave up their time to discuss this important topic. You two did an excellent job. We all learned a lot.
If you missed the event please take the time to listen to the archived webcast at HRmarketer.com. You may also download a related white paper on the subject by visiting Briggs Capital.
And for those of you in a hurry, here are some talking points from the webcast (paraphrased).
- Buyers of HR businesses want profitability. They are no longer interested in buying futures. They are buying your last 12 months of cash flow.
- The IPO market is dormant. Companies with cash flow (profitability) of less than $3 million should not be a public company. It will likely cost you about a million per year just to stay public with compliance and other administrative requirements. This is why we are currently seeing three companies going private for every one going public in the mid market.
- The current credit market is impacting deals. In a $10m deal, a few years ago the buyer could borrow $7m but now they will likely only be able to borrow $4m.
- When selling your HR business, you will likely look at three types of buyers (or investors): Venture Capital (VC), Private Equity (PE) or Strategic Buyers. Unlike Venture Capital firms, Private Equity does not typically want to get inside your business operations or day-to-day management. PE prefers an arms length relationship in exchange for a significant ownership (30%+ ).
- Unlike VC or PE, Strategic Buyers are not a "financial buyer" and usually come from within your industry and will likely pay more because of potential revenue synergy (1+1=3) or cost synergy (eliminating duplicate expenses). Briggs sees strategic buyers pulling ahead of PE in 2009 in terms of number of deals done in HR.
- The more money you raise, the less control you (the owner) will have. By round three your voice is "no longer the law".
- Valuations. There are many ways to value a business (multiple of revenue, multiple of cash-flow, DCF, etc.) and many companies/consultants you can hire to help you value the business. Don't get hoodwinked into paying thousands of dollars on complex valuations. Direct comparables are best. But if you are doing $10 million in sales don't compare yourself to a publicly traded company in your space doing $100 million. Not realistic.
- The role of a good investment banking firm is to provide you with a credible valuation, identify the right buyers, create a marketing package and work closely with you to help close deal.
- The "best deal" is not always the firm that gives you the best valuation but the firm that brings you expertise and opportunities to grow your business such as introductions to partners, marketing and sales support or strategy advice.
- How to select the right investment banker? Select one that knows your industry, will not complete a transaction at any cost, understand how to value a business, and whose upside success fee is the greatest part of their compensation - e.g. very small retainer to value business and build memorandum and bigger payout when deal closes.
- The more cash you take from selling your business the lower the sales price. You should try and get at least 50% cash - especially with PE. If taking stock look closely at restrictions like how long you must hold the stock for.
- At a minimum you need "reviewed" financial statements to begin a deal but will eventually require audited statements to close the deal.
Now listen to the webcast - there is so much more.
- When do you involve lawyers? When close to a transaction. Make sure you have a lawyer with experience in doing transactions.
Labels: investment banking, M A, private equity, sellling your business