To Invest or Not To Invest
When business owners decide to sell their companies, they frequently have questions about how much they should continue to invest in their businesses. Just as homeowners must decide, for instance, on whether to upgrade the kitchen before putting the house on the market, business owners face myriad decisions about short and long-term investments in systems, personnel, equipment and R&D.
What Makes it so Difficult?
One of the reasons that sellers struggle with investment decisions is that the answers depend on more variables than usual, some of which are knowable only to the potential buyers. As a result, rules of thumb are hard to come by.
Whether to invest in a new machine depends on whether it is critical to a new piece of business, how profitable that new business could be, how integral it is to the company’s growth story, and whether potential buyers would relocate the machine or need it at all.
The analysis is just as complicated for the decision to hire new salespeople, create a new marketing campaign, upgrade a website or commission a new site survey. In all of these decisions, business leaders must weigh the impact of the investment on cash flow, current and future profitability and the company’s future growth rate.
Over time, depending on market conditions, the strategic needs of potential buyers and the historical performance of the company, the importance of each of metric to a sale process could change dramatically.
Recommendation
There is one exercise that we can recommend. Most business owners can list the investments that would have the biggest impact on the value of their companies in 2 to 3 years. We recommend that owners try to picture the sale process falling apart after months and months of negotiations and think about the investments on that list which they would most regret having postponed. Going through this exercise usually brings the highest priority investments into focus.
On a related note, our experience is that business owners sometimes have trouble seeing the value of a good M&A advisor. In addition to the more obvious benefits, such as creating an auction dynamic, a good agent can provide well-informed advice about how the market is likely to perceive a whole host of activities, including making specific investments in the business.
Bootstrap Capital
The principals of Bootstrap Capital principals have sold their own companies and dealt with these investment decisions during their own sale processes. As a result, we are keenly in tune with the issues business leaders face when they decide to sell their companies, as well as many other nuances of transacting in the lower middle market. In situations where a business owner is working through these issues, Bootstrap Capital is, at a minimum, a patient counterparty and, even better, frequently a constructive partner in helping him or her through the process.