If you own a business, you’ve undoubtedly poured immense energy into building its value and making...
If you own a business, you’ve undoubtedly poured immense energy into building its value and making it meaningful. You’ve likely also explored how long you’d like to lead the business and how you’d want things to go when it’s time to start a new chapter or sell your stake. If you own a business that’s part of the United States’ aerospace/defense industry, you also intuitively understand that achieving a successful sale will entail complexities and variables that wouldn’t come into play with most other businesses.
Through our past CFO and senior leadership roles and the engagements we’ve been part of within vcfo’s transaction advisory services, we’ve seen firsthand what can make or break a successful sale. Here, we break down five best practices for owners and executive leaders of aerospace and defense companies in weighing and preparing for the successful future sale of their business.
#1 - Start with the End in Mind
While it may seem trivial, any successful sale starts with forming a clear picture of what that success would look like from your perspective. Bringing that picture into focus typically involves thinking about and articulating answers to several key questions related to both financial and non-financial factors, including:
- How many more years do you want to run the business?
- What would selling your business mean for you, any co-founders, and your family?
- In a post-merger environment, what role, if any, would you want to play in the business?
- What specific business milestones or growth targets are you working to achieve before considering a transaction?
- Do you fully understand how external parties would value your business?
Starting with the end in mind also means that achieving a successful sale is something you should ideally be working towards years before putting your business on the market.
#2 - Get Organized Early On
A deal can be substantially delayed, significantly devalued, or derailed altogether when parties evaluating the potential acquisition can’t get the information they seek in a timely manner or when that information is presented in a way that doesn’t give them the confidence or assurance they’re seeking. Before you pursue a sale of your business, be sure you have immediate and reliable access to accurate and properly prepared financial statements, contracts, and pertinent documents typically requested in due diligence.
Issues related to government contracts are among the biggest that aerospace and defense companies have to contend with. Be mindful that any government contract (e.g., SBIR grants, DoD contracts, etc.) could raise issues with potential buyers. In an asset sale, novating a contract can be a burdensome and time-consuming task. This will impact decisions such as whether to structure a potential merger as a sale of stock to simplify and remove friction from the process. Clauses relating to changes in control should also be examined closely. Even in the simplest scenarios, an array of notice requirements and other issues are likely to arise, including:
- Ownership of intellectual property
- Ownership by a foreign entity of purchaser
- Special status designation (e.g., Disabled Veteran)
- Classified products or services
- Small business set-asides
- Export controls
#3 - Get a Quality of Earnings Report
Having a comprehensive Quality of Earnings (QoE) study and report lends credibility to your financial statements, provides more detail and analysis, identifies adjustments to EBITDA, and helps bring skeletons to light. In short, it’s vital that you know where your skeletons are buried before someone else digs them up and uses them to their advantage. A comprehensive QoE report arms you with information that will help you identify, address, and remediate potential negatives.
#4 - Assemble a Cohesive and Competent Team
Selling an aerospace business is a complex process that typically requires a team of specialized professionals to ensure that the transaction comes off. Some level of external expertise and assistance is always needed, in part because internal leaders need to devote ample energy to ensure the business continues to operate smoothly as a transaction advances.
A well-formed transaction team commonly includes the organization’s CEO, CFO, and select other executives, as well as a CPA, investment banker/broker, M&A attorney, wealth manager, and specialized legal counsel for government contracts.
#5 - Closely Examine the Acquiring Company’s Culture
When the time comes to sell the business you’ve worked so hard to build, you will want to feel good about who you decide to sell it to. While purchase price and other factors may be paramount among your priorities, take time and steps to learn about the values and culture of the potential acquiror.
This is an especially important step if you will stay on with the new entity or have an earn-out clause after the sale or merger. Recognize that you will then have a boss, less control, and bureaucracy that you have not had to contend with in the past. Before you make a move, assess that new environment with eyes wide open and be wary of potential biases that could cause you to look past red flags and wrongly rationalize that everything will be fine.
Achieving a Successful Sale
If you have a “Goldilocks” company that appears “just right” in the eyes of potential investors, you can expect a high level of competition and a strong valuation. You should also expect a vigorous due diligence process. Because you are commanding a high price, the deal will be more vulnerable to re-trading or falling apart altogether if performance falls below expectations or something adverse surfaces in due diligence.
Following the proven best practices summarized here will set you up for success when you’re ready to move on from your aerospace/defense business. Start now with your desired end in mind and run a process that will deliver it. Get your business “house” in order by ensuring fast access to accurate financials, contracts, and related information. Get a Quality of Earnings study and report to better portray your company’s financial performance and enable you to address any concerns it reveals proactively. Put the right team in place to help you with transaction readiness and all transaction phases. Lastly, closely examine the values and culture of any acquiring organization to ensure your comfort with whom you’d be selling to and any potential post-transaction role you plan to play.
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Looking to maximize the future transaction value of your aerospace business? Don’t wait until an event is on the horizon. Ask us about our v360™ Enterprise Value Roadmap to optimize your company’s value and readiness, ensuring a seamless and successful transition when the time comes. We believe this is so important we now onboard all new clients with a v360 in the first 30 days giving them a strategic roadmap to optimize entity value.
If a sale is in the near term, we can assist with conducting a Quality of Earnings report and recommendations for areas of opportunity and improvement. Request a Free Consultation with a vcfo expert who can help. We’ve partnered with leaders from more than 6,000 businesses in our 28-year history and are ready to put our experience to work for you.
