The Business Sale: An Owner's Most Perilous Expedition

For most owners, the business sale, merger, or acquisition process is a mountain of uncertainty.

The Business Sale...An Owner’s Most Perilous Expedition provides practical steps to navigate an owner through the uncharted journey of selling a business. Written by experienced merger and acquisitions professionals, this book offers insider information on the journey to a successful business sale. This book gives owners a greater understanding of the process and the ingredients that go into a successful business sale.

This book will give owners a greater understanding of the process and the ingredients that go into a successful business sale. It reveals tactics to help sellers:

• Maximize your chance of success with strategic pre-sales planning
• Prepare your offering documents to best position your company
• Avoid common pitfalls that plague inexperienced sellers
• Identify and evaluate the different types of buyers
• Learn which tangible and intangible assets can elevate the value of your business
• Learn how to profile the right buyer
• Chart a course through sensitive negotiations
• Sustain business momentum throughout the process
• Properly structure the deal

Section I: Hiring the Right Intermediary

Key Benefits of Using an Intermediary
Product synergy occurs when the purchaser and seller have complementary products that, when combined, create greater value.

1. Strategic Fit means synergy between the purchasing entity and the seller. This could take many forms, but a few examples include product, distribution, geographic, and management synergies. Product synergy occurs when the purchaser and seller have complementary products that, when combined, create greater value.

2. Understanding the Process of selling a company is a vital component to a successful divestiture. Despite the success of many companies, most owners do not fully comprehend all aspects of a business sale transaction. Conversely, an intermediary handles several business deals daily, so they are experienced in all aspects of business sale activities.

3. Creating Multiple Options relates to the ability to orchestrate and manage several buyers at the same time. The classic mistake a business owner makes when selling his business is dealing with one interested party at a time. This not only limits an owner’s likelihood of landing a successful deal, it also limits the number of potential offers.

4. Communication and Negotiation is the foundation of every deal, but contrary to popular belief, it is not the only step that matters. This is by far the most common stumbling block of most business owners. They perceive themselves to be excellent negotiators; therefore they assume they can negotiate the best possible deal. Many times owners forget that a lot more goes into “getting a good deal” than their ability to communicate.

5. Few sellers know what is reasonable to expect and how to Manage Expectations. Is it reasonable to ask for a confidentiality agreement before releasing any information? How much information should I release initially? When should I meet with the buyer? When should I expect a letter of intent? What about earnest money – how much and when? Who drafts the purchase agreement? When do I tell my employees? How long should I allow for due diligence? Who pays for due diligence? These are just a few of the questions that come up during the process. Knowing what is reasonable dictates how you respond to the buyer and demonstrates your skill level. Small things such as this dictate who controls the process, who bargains from a position of strength, and who gets the better deal.

6. The biggest risk a business owner faces when attempting to manage the process himself is the inability to Stay Focused on the Business during the sales process.

7. The sale of a business is like any other process – Sustaining Momentum is critical. When you have positive momentum during the process, good things tend to happen. Conversely, negative momentum tends to feed on itself.


The Engagement Agreement
Due to the personalized nature of each business sale project, most merger and acquisition experts do not follow a standardized agreement format.

The initial term states the period of time the intermediary will actively pursue the marketing of a business sale. Upon expiration, the intermediary is still protected for a period of time called the survival period. This means that if the business is purchased by a buyer that had contact with the intermediary during the initial period, the intermediary will still receive his full performance fee.

Note the success fee or performance fee is paid on all consideration received for the business. The business owner may have choices as to how he accepts the structure of his deal: all cash, seller financing, stock, royalty, etc.


Section II: Pre-Sale Planning

Determining Business Value
So what drives business value? Conversely, the lack of such features in a business will detract from market value. To the extent that these elements are improved in a particular business, the market value of the business is improved.

Growth Rate: The growth rate of sales and profits compared to our national growth rate and the growth rate of the company’s particular industry. Higher growth rates command higher values.

Operating Profits: Higher profits as a percent of sales compared to industry averages. Operating profit margins that exceed industry averages will command higher values.

Management Quality and Depth: Depth, quality, tenure, experience, success record, education, as well as succession for managers and key employees. Above-average management and employees will reduce risk during transition and justify higher multiples.

Niche, Market Position, Brand Awareness and Identity: If a company fills a definable niche, commands a special leadership position, or has strong and favorable brand awareness in their market - whether for products, services, geographic areas, production efficiencies or certain capabilities – a higher value should be supported.

Multiple Customer Groups: If the product or service offerings of a company have multiple customer groups, markets, or end users, a higher value is justified.

Proprietary Products: The more proprietary the products, the higher the profit potential and value.

Customers: Diversification of customers, their length of time buying from the company, as well as their financial strength and payment history are important considerations when assessing a business. If the answer is very little, then the company has virtually no customer concentration risk and can command a higher value.

Product Mix and Gross Profit: The greater the number of products the company sells and the greater the gross profit on each line, the stronger the case for a higher valuation.

Condition and Appearance of Tangible Assets: Does the business “show well”? Don’t forget to consider patents and other intangible assets, favorable leases, or agreements.

Interim Results: Buyers are interested in what the business will do in the future. List the level of revenues that the business, without additional investments or hiring, could support.

Projections: The higher and more certain the projected sales and cash flow of the business, the higher the multiple of trailing cash flow.

Overall Reputation in the Community and Industry: Healthy and favorable reputations make doing business easier.

Quality of Financial Information: Financial statements present the financial health and performance of a company.

Absence of Risk: Risk and uncertainty lower value.


Tax Planning and Offering Documents
Four key offering documents must be prepared in advance of any contact with buyers:

1. The Confidentiality Agreement is a critical document of the sale process. The purpose of the confidentiality agreement is to limit how such information can be used.

2. Confidential Offering Memorandum: The purpose of the offering memorandum is to help interested parties understand your business, including its strengths, weaknesses, and potential.

3. Generic Summary: The generic summary is a tool for attracting buyer candidates. To determine whether the business may meet a buyer’s criteria, a generic summary provides basic data about the company, but not enough information to discern the identity of the offered business.

Recasting Income Statements and Balance Sheets

By recasting, we adjust the historical financial statements as follows:

Non-Recurring Expenses: Eliminate those expenses that burdened the historical profits, but are not expected to do so in the future.

Unnecessary Expenses: Eliminate those costs that affect the historical profits, but that are not necessary for the operation of the business going forward.

Owner Benefits: Add back to net profit the total dollar value of all benefits received by the owner.


Section III: Marketing

Generating Buyer Interest
First, an owner and/or intermediary will create two lists: a short list and expanded list. The short list will encompass individuals or companies that the owner or intermediary already has specific knowledge and are easy to profile. This list may include competitors, key management personnel, partners who do not wish to sell, and key customers.

There are two basic ways to approach marketing a business for sale: the “rifle method” or “stealth trolling”.

The traditional way of marketing a business is the rifle method. If you
After you have qualified the long and short list into a targeted group of potential buyers, you are ready to disburse the confidentiality agreement and begin the process of courting buyers.

The second way to approach the sales and marketing effort is called stealth trolling. This can be done in conjunction with the rifle method. If you think about this term from the perspective of fishing, it would mean you were trolling for fish with invisible bait. The contact is made with the decision-maker. However, instead of leading with “I got a product”, the owner or intermediary focuses on gaining insight into a buyer’s plans for the future.

Section IV: Negotiation

Listening and learning is essential to a successful negotiation process.

Determining Fair Market Value: To keep the negotiation on track, it is important for both parties to establish realistic guidelines in regards to fair market value. Perceived value varies among individuals, including sellers and buyers.


Final Negotiation & Agreement
During the final negotiation phase, price, terms and conditions are agreed upon. Key issues are reviewed, formalized, and accepted. Parties are near the closing process, without actually resolving the transaction yet.


Section V: Closing

Closing Documents and Procedures
Generally, the purchase agreement contains the following sections:

The Introduction section of the purchase agreement usually contains the names, addresses, and various background information regarding the buyer and seller.

The Terms of the Deal are fully defined in this section of the purchase agreement.

The Representation and Warranties section of the purchase agreement includes statements made by the buyer and seller that are considered factual.

The Pre-Closing Obligations section of the purchase agreement generally defines the activities that the buyer and seller have undertaken during the period between the signing of the purchase agreement and the closing date.

The Post-Closing Obligations of the buyer and seller define the actions that are taken if the buyer or seller representations are inaccurate.

The Miscellaneous Provisions section of the purchase agreement generally covers the following:

• The state laws governing the purchase agreement
• Transaction fees
• Responsibility for transaction fees
• Circumstances by which the agreement will terminate

The Closing Procedures section of the agreement defines the documents, property, and considerations that are used to complete the transaction.

Settlement Statement: The settlement statement is a worksheet which outlines in detail the payments and expenses of the buyer and seller.

Promissory Note: If the deal is made on an installment basis, a promissory note is necessary.

Security Agreement: A security agreement accompanies a promissory note. The security agreement creates a public record to record the seller’s interest in certain collateral which is named in the agreement.

Employment or Consulting Agreement: If the services of employees, owners or other consultants is a part of the deal, the details of the employment are provided in this agreement. The employment agreement outlines the amount of compensation to be paid, the types of service to be rendered, and the length of agreement time.

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