In “8 Things to Consider Before Selling Your Water Treatment Company” in the March 2023 issue of Water Conditioning & Purification International, James Thompson, managing director at Alexander Hutton, shared that there are 7 million private companies in the U.S. with owners over age 55 and $2 trillion in investor capital available to purchase those companies. In the next 15 years, $16 trillion of assets will change hands as the baby boomer generation retires, marking an unprecedented wealth transfer.
The water-treatment industry is beginning to consolidate, as retiring owners sell their successful businesses to larger, strategic buyers looking to grow through acquisition. At the 2023 WQA Convention & Exposition held in April in Las Vegas, I spoke with many business owners who had recently sold their companies or were thinking about selling. I observed that many of these acquisitions were made by the same handful of companies. Often, the sellers had considered only one offer for their business, severely limiting their leverage. Only through a properly managed auction process with multiple bidders can sellers be sure they are getting the best possible price, structure, and cultural fit in a transaction.
Investment bankers and brokers are important advocates for business owners exploring their options. They will be the ones bringing in several potential buyers. These buyers will include strategic buyers in the industry, as well as private equity firms looking to diversify and expand their portfolios in growing industries.
When selecting an investment banker to represent your business, make sure you find someone you trust who has your best interests in mind and experience in your industry. Your life’s work will be more than just another transaction to the right investment banker.
Selling your business is a lengthy process that could take up to six months or more. While every transaction is different, a process managed by a trustworthy investment banker will follow similar steps:
- Preparation of company materials.
- Conduct financial modeling and analysis to develop a deep understanding of historical and projected financial statements.
- Understand owner add-backs and one-time expenses to come to an adjusted earnings figure.
- Develop a list of all the potential buyers of the company, both strategic and financial.
- Preparation of sales document materials.
- Prepare materials to market the company, including a “teaser” document and a confidential information memorandum.
- Marketing the business.
- Maintain a tight timeline to create competitive tension throughout the process.
- Manage indication-of-interest and letter-of-intent deadlines to demonstrate competition and maximize value.
- Update the seller throughout the process, and moderate meetings with potential buyers.
- Due diligence.
- Negotiate letters of intent on behalf of the client.
- Manage and facilitate data transfers and requests.
- Act as an intermediary between the seller and buyer.
- Transaction close.
- Continue to control the timeline and advise the client.
- Facilitate signing and closing of the transaction.
Now, a business owner would rightfully wonder if the fees paid to investment bankers are worth it. A banker is there to provide options for the seller to consider. Just as you market a house for sale and hopefully get multiple offers, the same is true for selling a company.
An acceptable offer is built on three principles: price, structure, and cultural fit. Your banker is paid to get multiple offers that give you, the seller, the best options across those three principles. For example, the price could be high, but there is little cash upfront and a large earn-out. Or the price could be lower but all cash and no earn-out. Or the offer could be all cash and a great price but the wrong cultural fit for the employees who will remain in the business.
Given the variables and the different outcomes in the sale of your business, having a well-managed process to bring the right offers to the table is important. Here is a timeline of the process.
About the author
Guillermo Guzman is a strategic advisor at Alexander Hutton. He is also the founder and president of H2O International, Inc., a manufacturer of point-of-use and point-of-entry water filtration products for domestic use. He has 30 years of experience in the water purification industry and is a WQA member. For more information, email Guzman at [email protected].