The Sign Businesses For Sale Blog
Learn the Dynamics and Save the Deal
Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.” Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.
Neglecting the Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business. At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball. Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits. A potential buyer could become concerned if the business flattens out or falls off.
Solution: For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history. This is no time to be overly cost conscious. The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.
Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family. The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.
Solution: By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.
Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached. It happens, perhaps more frequently than not. The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.
Solution: Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach. Involving senior management can also prevent information leaks.
Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively. According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs. With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.
Solution: Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some. Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important. If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.
Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction. Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets. If the owner is selling real estate, an environmental study is necessary. If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction. These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.
Solution: The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.
Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run. However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.
Solution: If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.
Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time. The potential buyer probably will have a similar set of expectations.
Solution: Decide ahead of the negotiation which are the very important items and which ones are not critical. In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.
Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end. For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time. It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties. What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months. If it does, this means that the deal is dragging and is unlikely to close. The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.
Solution: Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost. The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.
Selling: What Does An Intermediary Expect From You
If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary. You probably have wondered what you could expect from him or her. It works both ways. To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you. By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:
• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second. It takes this kind of partnering to get the job done. You have to return all of his or her telephone calls promptly and be available to handle any other requests. You, other key executives, and primary advisors have to be readily available to your intermediary.
• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary. Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale. Only they can provide the necessary information.
• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer. An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc. The lines of communication must be kept open.
• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers. They will need to know just what is required, and expected, from such visits.
• You will rightfully expect the intermediary to develop a list of possible acquirers. You can help in several ways. First, you could offer the names of possible candidates who might be interested in acquiring your business. Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.
• Keep your intermediary in the loop. Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents. Now is not the time to assume that the intermediary’s job is done. It may just be beginning as the details of financing are completed and final deal points are resolved. The intermediary knows the buyer, the seller, and what they really agreed on. You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.
• Be open to all suggestions. You may feel that you only want one type of buyer to look at your business. For example, you may think that only a foreign company will pay you what you want for the company. Your intermediary may have some other prospects. Sometimes you have to be willing to change directions.
The time to call a business intermediary professional is when you are considering the sale of your company. He or she is a major member of your team. Selling a company can be a long-term proposition. Make sure you are willing to be involved in the process until the job is done. Maintain open communications with the intermediary. And, most of all – listen. He or she is the expert.
Family-Owned Businesses Do Have Choices
Family-owned businesses do have some options when it comes time to sell. Selling the entire business may not be the best choice when there are no other family members involved. Here are some choices to be considered:
Internal Transactions
- Hire a CEO – This approach is a management exit strategy in which the owner retires, lives off the company’s dividends and possibly sells the company many years later.
- Transition ownership within the family – Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
- Recapitalization – By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
- Employee Stock Ownership Plan (ESOP) – Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset. ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.
External Transactions
- Third party sale – The process could take six months to a year to complete. This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after the closing.
- Complete sale over time – The owner can sell a minority interest now with the balance sold after maybe five years. Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
- Management buy-outs (MBOs) – Selling to the owners’ key employee(s) is an easy transaction and a way to reward them for years of hard work. Often the owner does not maximize the selling price, and usually the owner participates in the financing.
- Initial public offering (IPO) – In today’s marketplace, a company should have revenues of $100+ million to become a viable candidate. IPOs receive the highest valuation, but management must remain to run the company.
Source: “Buying & Selling Companies,” a presentation by Russ Robb, Editor, M&A Today