Getting out Your Way
Getting out of a business - your way is a strategic process, and like buying or starting a business, it takes time. Proper preparation and positioning of the company is one of the most important aspects in selling. You must make plans, select an appropriate method to leave, and spend a considerable amount of time to effectively implement your plan.
The starting point in selling is to begin answering tough questions in terms of both your personal and business objectives. Selling a business should be viewed as a process involving personal goals, knowledge of the business and its prospects, and a long-range business plan. The difference between the successful sale of a business and no sale is simply thorough detailed planning and marketing.
Why Am I Selling?
It is important to be clear on your reasons for selling the business. Following are some common reasons for selling.
1. Level of Risk
I have achieved my desired level of success. I seek to minimize my economic risk and want the security of turning my business equity into cash or a marketable security.
2. Retirement or Succession
I have reached an age that I wish to retire. I have also achieved a satisfactory level of economic security. I need to plan for succession of the company, but no one in my family is interested in the business. I want to take care of my loyal employees.
3. Changing Business Conditions
A trend or future problem is threatening the continued viability of my business. This problem might have do with the market, environmental, or technological changes relating to the future of the business. If I allow optimism and devotion to redirect my efforts until it is too late, I might not have the opportunity to sell the business.
4. Estate, Death, Illness, Divorce
I want to get my estate in order. The heirs to an estate wish to sell the business since they have no interest in running the company, and seek to have liquidity. Illness or divorce have put me in a position where I must sell the business.
5. Money, Boredom
I am not making enough money for my efforts, or I am bored with the business. I have an opportunity to go into another business that offers more challenge. I have an offer for so much money I can't refuse.
6. Additional Capital
The company needs additional investment to expand, and I don't want to risk the money myself.
Be clear on your personal objectives, and once you start the process, be determined to complete the task. Selling a business takes time and effort, and should not be considered a fortuitous exercise.
What do I have to Sell?
Deciding what you have to sell often depends on who is buying. Since a variety of buyers exist for any business, part of the planning for a divestiture is to determine who needs what you have for sale. The following are only a few of the areas that must be considered when evaluating what you have to sell.
1. Technology
2. Product Lines
3. Production Improvements
4. Equipment
5. Earnings
6. Market Share
7. Research and Development
8. Tax Loss Carryforward
How Can I Best Protect My Employees?
Every business has a personality (referred to in most recent business books as corporate culture or character) that is a shadow of its leaders and owners. It is important that the personality of the business is understood and communicated to potential buyers. The planning process should include an understanding of the culture or character of the organization. This understanding leads to clarification of mission statements, better resource planning and utilization, and an intensified commitment to the successful achievement of goals. As an owner, don't expect to walk away from the business right away and don't always accept the highest price bid. Instead, you should look for the best fit in terms of culture and organizational value.
The joining of two management teams or the addition of new leadership after a merger or acquisition is often marred by suspicion, miscommunication, resistance to change, fear of the unknown and lack of unified attitudes and directions. As a result, the working efficiency of the organization is often impaired during a "readjustment period."
An integration or team building program can dramatically reduce the "down time" during a merger. It can quickly create common alignment among management, eliminate suspicions and rumors, and help overcome the resistance to change. The new management team will then be capable of reaching maximum efficiency quickly. The existing employees will also be protected from layoffs, thus maintaining morale at a high level.
Now that you have an understanding for some of the typical questions that you have regarding the sale of your business, we will begin to strategically plan for the sale of the company.
In the chapter on valuation, you will learn to maximize profits and recast financial statements to reflect the business in the most desirable posture. You will see how to describe the selling points of the company, and to become aware of acceptable terms and purchase prices.
Is Now the Right Time to Sell?
The best time to sell is when your company is "in demand." This is when earnings and sales have had a continued period of consistent growth. Since buyers are looking for attractive progressive companies, the best price is paid for companies with above average growth. In most cases, you will achieve the highest value for your company during the times when "business has never been better". Why? Simple. When business is booming, prospects ascribe a higher value!
Realistically, most owners are unable to select the perfect time to sell their business and to get the highest possible premium for their businesses.
In order to achieve a good price for a business, you must be able to show a good historic earnings record and the promise of future growth. It is, however, the practice of most closely held businesses to suppress recorded profits in order to reduce income tax expense, and to retain working capital in their companies. As a result, most financial statements of such businesses rarely reflect the actual earning capability of the company. Until a valuation is performed with proper recasting of the company's historic financial statements, most sellers will have a difficult time estimating the value of their equity.
How Will I Sell the Business and Maintain Confidentiality?
The sale of any business is fraught with many potential problems. Any seller should have competent professional counsel to guide them on the critical issues.
A major concern is the importance of maintaining confidentiality and secrecy during the divestiture process. It is important to avoid letting employees, suppliers, customers and competitors believe your business is for sale. Rumors of an impending sale, acquisition or investment often have adverse effects on employee morale or customer relationships. Most buyers respect confidentiality while they are actively looking at a deal. Experience has shown that once the buyer's interest in the target company ceases or once negotiations have started, rumors often will begin to circulate. To minimize the unauthorized dissemination of financial data, the buyer is normally requested to sign a binding "confidentiality agreement" that prohibits the buyer from disclosing information to anyone outside of its organization. The buyer must be sensitive to the need for confidentiality when performing due diligence and ensure nondisclosure to employees, customers, suppliers and competitors. Both parties to a transaction must seek cooperation from their public accountants, attorneys and other representatives to ensure that the transaction does not become public knowledge prior to completion of the sale.
Some of the major issues seen during the selling process result from the seller not taking proper steps to ensure confidentiality. The following are just a few examples of these problems.
* Key people hear that you are selling the business, and they become uncertain as to their future and start to seek other positions outside the firm.
* Competitors spread the news that your selling, making the company look like it might be unstable.
* Suppliers get concerned about the future of the company, and look for other ways to distribute their products.
Confidentiality is one of the most critical reasons for an owner to hire a merger and acquisitions professional when considering the sale of his business.
What Makes My Company Attractive to Buyers?
The "Attraction Factor" is much easier to realize once you've carefully considered what you have to sell. Determining what you have to sell is another valuable service that the merger and acquisition firms provide the seller. The majority of owners will find it difficult to assess without outside professional guidance.
The answer to this question, however, will always begin on the buyer, and what he wants in a business. A thorough understanding of buyers and their strategies are the key to understanding why a company is attractive.
In considering what will be attractive to a potential buyer, remember this: Your buyer will have his own vision for your business. Value is in the eye of the beholder.
Who Will Pay the Highest Price for My Business?
Since each buyer has a unique set of characteristics, their desires will differ according to their goals. The value of a deal depends on these goals, and a seller can expect a higher value from a buyer with synergy or a vision for growing their business.
Everyone has heard about deals where the price of a company was bid to an astronomical levels. This usually happens when a specific buyer has a strong motive for making the purchase. It could be a financial buyer - perhaps a leveraged buyout group, a foreign buyer anxious to crack the American marketplace or a strategic buyer. Which type of buyer has the edge is the subject of a continuing debate among business professionals. Many feel the strategic buyer has the upper hand, because of synergy and financial stability.
Many others, however, contend that financial buyers might be in a better position to overpay, especially if they have to put funds to work, since the corporation still has shareholders to answer to. Others believe foreign buyers are unstoppable because they are willing to pay exceptional premiums to break into the North American market.
After all of this debate, the bottom line is this: A buyer must be willing to pay what it takes to buy a target company that is in demand. What this means to a seller is that he position his company in a manner that buyers are willing to bid high.
What is the Best Way to Describe the Company?
To attract buyers - and achieve a good price - the owner must develop a business plan that demonstrates the viability of the business. This plan is usually incorporated in with other pertinent information on the company. This ultimately will become an offering memorandum that is shared with prospective buyers. This document becomes the initial presentation of the company's products and capabilities. This same document is often used to aid the buyer in obtaining financing for the business.
How Long Will it Take to Sell the Business?
Experience indicates that estimated timing for the completion of a sale or merger transaction is in the area of six to nine months after completing the planning process. Attempting to sell a business without the proper planning usually results in wasted time, with potential buyers losing interest or becoming alienated.
How Do Overall Economic Conditions Affect the Sale of My Business?
General and regional economic conditions will always affect the sale of a business. But rather than focus on this, it is more important to look at the trends in your specific industry. Each segment of the industry might be affected differently by a particular trend or development. It is more important to concentrate on the logical impact in terms of valuation and demand for the business when considering the relevant factors. If most of the trends are negative, your business might be worth less than if these trends are positive. This impact is not unlike selling a home in a depressed housing market versus a "hot" market.
How do I Locate Potential Buyers?
Based on the detailed criteria developed in the planning stage, the search and screen process is a systematic approach to seeking potential seller and merger candidates. By applying the established criteria from the personal and business planning, the research and screening process for best potential buyers will enable the owner to select a few likely candidates from thousands of possibilities. The seller must establish parameters for the buyers to be contacted, and have some understanding as to what they would bargain for.
MRCworldwide have extensive networks of foreign and domestic strategic and financial buyers. The more qualified firms generally work with the following research source materials.
* Established Investor Contacts
* Client Management Interviews
* Industry Research
* Supplier Research
* Customer Research
* Public and Private Data Sources
* Private Investment Groups
* International Investors
* Network of Domestic and International Affiliates
How Do I Get Information on Why a Buyer Would Consider My Business?
Your first step to understanding a buyer's motivation is to identify what kind of buyer it is. The best way is to understand a public or private company is to spend some time evaluating their businesses. This means attempting to understand the buyer's business and strategy.
There are many sources where you can obtain information on corporate buyers. This includes management, suppliers, customers, articles and financial reports. Individual buyers are more difficult to obtain information on, and the seller must usually get the financial position and objectives directly from the buyer.
The evaluation of a buyer is another valuable service that the merger and acquisition firms provide sellers. Gathering this information is difficult for the owner of the company to satisfy without outside professional research and guidance.
What is My Company Worth?
There are numerous possible values for a given company. The purchase price for a business is always determined by negotiation. When first considering the sale of a business, sellers are uncertain about an asking price, although they are familiar with the business and operations. Buyers, who are normally more familiar with valuation and the buying process, are unfamiliar with the seller's business, so valuation, in many ways, is more difficult for the buyer. Expert opinions can help the seller and buyer make a more impartial and informed decision. No transaction, however, can be completed unless both the seller and buyer can reach an agreement through negotiation. It is my experience that valuation problems arise much more in the buyout of closely held companies than in divisions of corporations. The owners of closely held companies often have unreasonable expectations of value.
Questions Sellers Ask Regarding Value
1. What is the value of a business that increases our market share?
2. What is an acceptable price, given current rate of growth?
3. What is the value based on future earnings projections?
4. What is the value of assets and goodwill of a going concern in my industry?
5. What is the market value of comparable firms in the industry?
Until a seller has answers to these questions, and is aware of an estimated value for his business, many of the important points required for negotiation of a transaction with a buyer will be unavailable.
How Do I Negotiate to Get What I Want?
Negotiations are personal matters conducted according to the personalities of the individuals. Negotiations involve many instances where judgment is brought to bear to determine proper procedure and proper setting. Prior to each negotiation session, strategies should be considered carefully, including who should be present, and who should be the major spokesperson. Successful negotiating tactics involve interpersonal relations as well as business, technical and financial knowledge.
Why is Structuring the Deal So Important?
There are a number of reasons that the structure of the deal plays an important role in selling. For starters, different methods of payment might also afford adjustments in the initially conceived price. For example, a seller might take less for cash up front, and might get more for a purchase that is drawn out.
Parties unable to agree on price should consider changes in the payment plan. This will usually help to arrive at a mutually satisfactory solution.
The two extremes in payment plans are:
1. An acquisition price that consists of a low down payment with little security for the debt that must be carried by the seller.
2. An acquisition for cash or another readily marketable security. Between these extremes are innumerable combinations and methods for paying a purchase price.
Do I Need Specialized Advice and Advisors?
To ensure the most advantageous sale, assembling a team of experienced professional advisors is a must. Often buyers and sellers are ready to consummate a deal before they bring in professionals. The caliber of your team can greatly influence the value you receive for your company. If advisors enter the deal late, they may be limited to coping with the unintended consequences of a poorly thought through transaction. Early discussions with M&A advisors, investment bankers, lawyers, and accountants are very important.
In selecting professional advisors make sure they have the experience and skills necessary to effectively support you in completing a transaction. Be aware that your current accountant or attorney may not be experienced in the divestiture or merger of a company. They may also be influenced by the possibility that the buyer might discharge them after completing the transaction.
The letter of intent and the acquisition or investment contracts are the most important documents in any acquisition. Once a buyer and seller begin to negotiate the details of the acquisition, the problems of substance, form and mechanics of the deal structure become the major issues. The result of the investigation of the seller's business and all of the negotiations between buyer, seller and investor should be reflected in the legal documents. The signing of these documents fixes the rights and obligations of the parties to one another, plus sets the basis for income tax obligations and other security, creditor or legal obligations. Although many of these details are considered mechanical steps for the attorneys and accountants, special skills and know-how to obtain their proper preparation and execution might have a significant outcome on the value realized from the transaction.
When should I give a Buyer permission to perform Due Diligence?
One of the most difficult things for a business owner is to grant the buyer access to books, corporate records and key personnel. Once the buyer and seller have signed a letter of intent, then the buyer is normally allowed access to the company to perform specific due diligence. Although the letter of intent is a non-binding agreement, it normally expresses the intent to purchase, and describes the price, terms, conditions, warranties, and other pertinent deal information. The letter of intent normally gives the buyer an exclusive right to negotiate for a specific period of time. Many advisors and sellers insist that a buyer put up money as a commitment fee in order to make the letter of intent more binding. The commitment fee is normally forfeited by the buyer as liquidated damages if they do not complete the transaction.
Do Corporations selling a division have the same issues as closely-held companies?
Yes, however, normally the advisors selling these companies are sophisticated and have handled the sale of numerous companies both large and small. These divisions are frequently not attractive to other large corporations because of size, market share, or profitability, making them excellent targets for entrepreneurs. When they go on the market, they are normally sold by professionals who understand valuation, and approach the market in an unemotional way. The board has normally authorized the sale, and the advisors are instructed to obtain the best purchase price. Financial statements are normally audited, and due diligence requirements easier to perform. These companies may be more attractive to buyers, since many times the closely-held company may be more difficult to deal with in completing a transaction.
In Summary
There is much complexity in the purchase and sale of a business, and it is impossible to address such a wide range of potential topics. These topics include estate planning, tax planning, succession planning, business planning, negotiations, buy-sell agreements, consulting agreements, noncompetition covenants, equity redemption's, funding, and host of other technical issues.
