We all know the common go-to phrase about business, "Time is money." Money keeps companies afloat. It keeps things moving. It's how employees get paid, how products stay in stock, and how the product goes from producers to consumers.
But there is another factor. Numbers and hard facts play a huge role in understanding a company's wealth. However, it also helps to look at another thing to gauge a company's success in the future, and that thing is a little less heavy on numbers, and more reliant on something we can't really see - predictions.
These kinds of predictions are based on something brokers in the business call "selling on the way up."
On today's episode of Deal Closers - A Tech & Internet M&A Discussion, I talk to Ron from Websiteclosers.com about the importance of selling on the way up, and what it looks like for buyers and sellers to assess a company's potential.
[02:27] Selling on the way up allows sellers to give buyers an idea of where the company is headed, and different companies have different potentials for growth:
- If a company has a lower profit this year than the previous one – everybody is looking at it as though something is wrong with it, and the multiple is not going to be that high;
- If a company has the same profit this year as the year before – everybody thinks of stability and the multiples will be according to a stable company, not a growing one;
- The third scenario is when a company has a bigger profit this year than the previous year – so based on the increase, people are going to offer more.
[10:50] Even though a company may not look like it’s on the way up in the numbers, it may have new products to launch and is going up overall. Do a lot of buyers seem open to looking beyond the numbers and hear the seller out?
- A lot of buyers don't have the ability to see a company for what it really is. They look at it only from a high level, they're looking from a view of, "What do I see that's obvious?" and they're not looking at the hidden intangible items that really do make a company;
- As brokers, it's important for us to create the narrative and we’re very focused on making sure that the problems are also recognized by the buyer upfront because there’s nothing worse than getting into due diligence and finding later on that there are problems, when you thought everything was perfect.
[13:07] What are some things that the seller might do to help the broker create the narrative that might be more attractive to a buyer?
- Many sellers come to us and they know it’s time to sell, and they’re afraid, so they’re not always as forthright as they should or could be.
- We, as brokers, have to find everything about the company and discuss it with the seller and get his input because what’s going to happen is you’re going to have a scenario where a buyer and a seller are going to jump on a call, and the buyer is going to ask questions. The seller is going to answer those questions in a way that’s going to be perceived as either positive, negative or indifferent – and we must know upfront what a seller is going to say;
- It’s really important for the seller to tell the truth and how he positions around the situation. Sometimes it’s just how you phrase it – it’s not a negative, but if you have a negative outlook or the way you’re presenting it is negative, it comes across to the buyer as something that becomes less attractive, and we want to avoid that.
[16:52] Selling on the way up in the tech and online sector is very common:
- We, as a society, have evolved and every generation that is replacing the older generation is more and more comfortable with buying on the internet;
- The future is bright, which is why we have so many buyers that are waiting for these deals because this sector is going to continue to grow.
[20:47] How does selling on the way up fit into the deal closing process?
- When you're selling a company, when you're buying the company, and when you're a bank, you’re going through a 90-day process;
- Two things happen simultaneously: you begin the due diligence and you begin to put the financing in play;
- As a buyer, you’re looking at certain gains that you’re used to seeing from this company; in those 2-3 months, the company is going to perform in a manner that is either better, the same or worse than expected.
- If you’re a bank, seeing a company grow in those months, gives you the comfort of knowing that you can write the check and you feel good about it;
- Sometimes, the problem could be with the sellers because if they see the company is growing faster than normal, they might feel like they’ve outgrown the sales price that they agreed to.
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