In the intricate world of business exits, an incredible offer can sometimes be a missed opportunity. In their eagerness to secure a deal, it’s a scenario that’s all too common – entrepreneurs might overlook the strategic angles and possibilities that could elevate their business’s valuation even further. Occasionally, owners can enter an exit without a strategic plan, driven by a self-fulfilling prophecy where clients have a specific buyer in mind. In this realm, knowledge wields immense power. Too often, companies are quickly flipped after being acquired; this doesn’t have to be the destiny of every business. You can augment your business’s value before the sale or, better yet, find a strategic buyer who recognizes your business’s true potential. Navigating this path can be complex, which is where the guidance of a sell-side partner comes into play. This post highlights the vital aspects of avoiding leaving money on the table when selling your business. Your journey to an Extraordinary Exit begins here.
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Case Study: Maximizing Business Valuation Through Strategic Planning
In 2012, Sleepy’s, the largest independently owned mattress retailer in the U.S., took steps toward a business exit, having previously gained experience within the market by acquiring dozens of companies. The Sleepy’s family initially sold a 30% stake to a private equity (PE) firm, which provided support, board seats, and real estate analysis. However, the family later acknowledged they could have maximized their exit strategy by engaging more closely with the PE firm, leveraging the invaluable M&A insights they had acquired over years of expansion.
Mattress Firm and Sleepy’s have been in talks since 2000 about one of them acquiring the other. When Sleepy’s finally went to market in a sale, Mattress Firm expressed interest in acquiring Sleepy’s; the family opted not to oppose it, viewing it as an organic progression, culminating in a significant $780 million acquisition facilitated by a major U.S. financial institution. Despite a positive outcome, reflection on the process underscored missed opportunities for Sleepy’s to utilize a more strategic stance and skillful negotiation, potentially achieving a higher valuation and better terms during the negotiations. Mattress Firm’s rapid 180-day turnaround sale of their/Sleepy’s business further highlighted the potential advantages left unexplored by Sleepy’s during the deal.
“In the end, we were myopic. Instinctively, I knew who I was selling to for the last decade, and it worked out great for me, but it doesn’t mean I didn’t leave money on the table. In reflection, while successful, our previous sales strategy was somewhat shortsighted and potentially left unrealized financial gains. While the private equity firm did not inhibit our profitability, incorporating diverse strategies and additional market information could have further increased our valuation, possibly reaching the $1 billion+ mark.” David Acker, CEO, Sleepy’s.
In consideration of how to maximize a potential exit, there are three strategies we recommend considering to make sure money is not left on the table and to achieve the maximum financial value possible.
Keep a Broad Focus When Selling
Opting for an industry-agnostic approach means extending beyond the boundaries of your sector or geographical location. In the case of Sleepy’s, due to the lack of global outreach, only utilizing PE firms and looking to their competitors, the overlooked landscapes resulted in a missed opportunity for their exit. During their exit, the market was witnessing a downfall where margins and profits began to alter, and the need to bridge industries and provide more offerings for larger corporations saw retailers such as furniture, appliance, and electronic stores expanding into the space. Opportunities like this would expand the list of potential buyers outside the normal scope of the mattress industry, increasing the potential for a higher valuation and maximum results. Less than one year after Sleepy’s sold their company to Mattress Firm, Mattress Firm flipped the company, selling to Steinhoff Holdings, doubling the $780 mllion investment they paid for Sleepy’s.
At STS Capital Partners, we use a unique approach to ensure a broad focus is taken, adopting a comprehensive mind-mapping process that identifies and articulates your business’s intrinsic value to find global strategic buyers outside of your industry. This methodology considers your business’s financials and intangible assets, such as brand equity, customer relationships, and intellectual properties. This holistic understanding of your business helps STS to effectively negotiate a deal that genuinely reflects the worth of your business, ensuring that no money is left behind.
By questioning the possibilities and considering who could be interested in your business, you leverage the potential to drive up your company’s value and, consequently, the selling price. This broad focus can create a competitive bidding environment, ensuring you don’t leave money on the table at the time of exit.
Understand the Market to Understand Buyers
In business, understanding your market – including potential acquirers’ intentions, like flipping your business – can provide a noteworthy edge by possibly flipping the business yourself, assessing growth potential, and enhancing profitability.
Employing an industry-agnostic sell-side M&A firm allows for full comprehension of your market and potential buyers through a global outreach process, assisting in pinpointing your business’s intrinsic value and presenting its unique appeal to potential buyers. While negotiating, maintaining a firm yet tactful stance is essential, highlighting your awareness of your business’s value without distancing buyers, showcasing an in-depth understanding of your business and its potential, and ensuring the best possible deal is acquired.
Partner with the Right People
Consider the scenario of Sleepy’s. The involved PE firm failed to offer the strategic guidance that could have enhanced Sleepy’s valuation, a disparity likely emerging from myopic and misaligned objectives between the firm and the business owners. Notably, numerous brokers, driven by financial gain from the buy side as well as your business’s sale, can sometimes hinder you from achieving maximum valuation. Consequently, aligning with individuals who align with your goals and place your interests at the forefront is vital. Establishing a transparent, mutual understanding of goals ensures concerted efforts toward a common objective, paving the way for a favorable outcome.
Find an Advisor Aligned with Your Goals
STS Managing Director Michael Smith emphasizes, “The key to deeply comprehending the current market landscape and strategically positioning oneself is vital to higher potential gains during a business exit.” Acquiring pertinent resources and working with a sell-side advisor, who ensures understanding and effectively articulating your business’s value to each unique potential buyer, is crucial to preventing financial “opportunity” loss during the transaction. We consider the enterprise value to the buyer beyond the normal scope of revenue vs. cost calculations; we look to define the accretive value created through the unique synergies for the buyer, such as expanding their product portfolio, leveraging acquired technologies or tapping into a new market. The sell-side advisor you work with is responsible for uncovering these strategies and making these calculations for each buyer, depending on the opportunity.
In conclusion, it is essential to have a comprehensive exit strategy that considers various aspects, market dynamics, and the global marketplace of potential buyers. Collaborating with a knowledgeable advisor such as STS Capital Partners, who shares your goals, will help you secure a deal that accurately reflects the value of your business. Remember, a well-rounded plan is key to making an Extraordinary Exit possible.