You’ve thought seriously about selling your business but you really don’t know where to start. You have heard some horror stories about different selling processes, paying an upfront fee and settling for less than what you really wanted but people get so far into the process that they can’t turn back. You’re not really big enough to hire one of the Wall Street investment bankers and you don’t know any reputable mergers and acquisition firms.
Does this sound familiar? Don’t despair, you are not alone. Most owners of small businesses with sales revenue ranging from $5 million on up to $100 million face these same questions and these same doubts. Hopefully the following tips and steps will help put your mind at ease and provide some direction as to what actions you may or may not want to take.
TIP #1 – Preliminary Assessment of Company Value
Preliminary is the key word here. Most owners have an idea of what their business is worth and what they would settle for if they decided to sell. Unfortunately, statistics show that most owners have an opinion of value that is generally higher than what the market will bear. So before you go off and hire that New York M&A firm or go to that seminar about selling your business talk to your accountant, a favorite consultant that you know or have done business with, your banker or even your attorney. Do some networking and you may find that you can get a preliminary valuation done for a much smaller fee ($1700 to $2500). This will at least give you a platform value and some knowledge to determine your next steps. (E-mail [email protected] for more information on a preliminary valuation utilizing industry methodology)
TIP #2 – Have a Strategic Business Review Performed
You had a preliminary valuation done and you are comfortable enough to take the process to the next level. That means you need to have a strategic assessment completed. This can be performed by you as the owner and any family or confidant that you have in the business. However, it is recommended that you have an outsider perform this assessment. As owners working in the business on a daily basis, it is often difficult to see the broad scope of the organization in total. You need to know just how ready your business is for the selling process. There are numerous readiness factors to explore before you make that final decision to sell. Failure to go through this assessment and correct or compensate for any issues that may be uncovered can cost you hundreds of thousands of dollars in the selling process. You can have a strategic business assessment done by any number of wholesale distribution consultants. Prices will range from $5,000 up to $15,000 for this process. You may decide after reviewing this assessment that the time is not right to maximize share holder value by selling the company. It could make more sense to continue to grow the business by following the recommendations outlined in the assessment.
TIP #3 – Who is My Buyer?
You had an assessment, you put lipstick on the pig (fixed any issues uncovered) and now you decided to take your baby to market. Don’t jump right into the M&A arena and hire that big mergers and acquisition firm. Chances are very good that you already know who the buyer or buyers might be. Is it your biggest local competitor, one of the national firms, one of your suppliers or customers looking for vertical integration or could it be one of the many investment groups. Do your homework before you commit to paying the type of commission you will end up paying with even a smaller M&A firm. Explore the internet and look at businesses for sale or companies that are looking to buy. Talk to your association. You may end up with several interested parties that can drive up the price without paying high commissions. (Of course, the minute you start discussing a sale with any potential buyer be sure to get your attorney involved)
TIP #4 – I’m Ready to Sell, What Now?
Whether you do it yourself because you know of numerous prospective buyers or you decide it’s too much hassle and look for professional M&A help, the next step is to create a comprehensive document, The Confidential Strategic Business Review Report. This document describes your company in detail. It includes recast financials. (Financials that are adjusted to create a realistic EBITDA taking out owner perks that would not be costs to a new owner) EBITDA is earnings before interest, taxes, depreciation and amortization. Acquisitions are often made as a multiple of EBITDA.
If an M&A firm represents you, preparation of a one-page Confidential Profile which highlights the acquisition opportunity without disclosing the name and location of your company is essential. This profile is used during the initial buyer/Investor contact phase.
At this point, make sure that the firm you pick matches your company and even more important, make sure you are comfortable with them. Factors you should consider when selecting an M&A firm include:
o How many companies have they sold in wholesale distribution
o How many companies match or come close to your company’s revenue stream.
o References, and you must check them, are excellent
o What industries do they specialize in
o What is the size of their firm? You don’t want to be a little fish in the ocean but you also don’t want to be a whale in a pond.
o How many active qualified buyers do they have in their data base? It should be hundreds if not thousands.
o How many private investment funds are they connected to?
TIP #5 The Basic Steps in Concluding a Sale.
Things are going to get both exciting and frustrating. Again, the following steps apply regardless of who sells your business but are primarily the steps utilized by an M&A firm taking your business to market.
Step #1. TARGETED BUYER SEARCH
A targeted buyer search is performed from a data base of potential buyers and investment funds. If you are using an M&A firm this data base will more than likely be over 10,000 in number. A list of potential synergistic buyers will be the result of this search. This list is reviewed by ownership to discard any obvious mismatches or personal owner concerns about anyone on the list. A second formal valuation that includes equipment and property appraisals may be a desirable option at this point.
Step #2. INITIAL BUYER CONTACT & DATABASE PLACEMENT
Targeted Buyers & Investment Funds are contacted via mail, which includes the Confidential Profile. Concurrent with the above activity, the client company is listed on the Merger & Acquisition on-line database, presenting the acquisition opportunity to the database’s registered buyers. Interested buyers and other M&A intermediaries generally will respond via E-mail. .Personal Follow-up to determine potential buyers’ interest in obtaining The Confidential Strategic Business Review Report is conducted to ascertain interest.
Step #3. INTERESTED BUYER CONTACT and FOLLOW UP
Upon receipt of an endorsed Non-Disclosure Agreement, The Confidential Strategic Business Review Report is sent to interested buyers/investors. The M&A firm or your representative follows up with interested buyers and provides additional information as may be required. Buyer’s credibility (ability to buy) needs to be verified at this point. A buyer visit is arranged to view the premises and speak with ownership. This visit can be arranged for after hours if ownership is concerned with confidentiality.
At this point discussion and counsel needs to occur to prepare relative to pending buyer visit and preparation of buyer visit agenda with meeting objectives that have been predetermined. (Management presentation, facilities tour, additional documentation required, buyer-client interface & discussion guidelines and other relevant details to ensure a positive image and successful meeting).
Step #4. Getting a Letter of Intent
Confirmation of buyer(s)’ interest in pursing a transaction and obtaining of a Letter of Intent is the number one objective. Ideally several offers presented for comparative purposes and obtaining the most favorable price and terms will maximize the value of the sale. Of course you are not obligated to accept any offer presented. A letter of intent is a basic contract that states the buyer will acquire the business at a suggested price assuming all details and financial information submitted is accurate and passes due diligence on the part of the buyer.
Your representative should interface with your professional advisors (CPA, attorney, financial planner etc.) as may be required in providing their assessment of a proposed transaction. Guidance should be provided relative to negotiation of deal points and other issues as may be required.
Step #5. Due Diligence and The Deal Consummation
Assistance should be provided to prepare for the buyers due diligence. Don’t try to conceal or hide the dirty underwear. Own up and show what has been done to put it in the wash. Honesty is essential. Generally speaking, the process is predominantly financial. However, employee concerns and other issues may arise. Your representative should be available or on cite throughout the process. A thorough inspection of inventory and accounts receivable are a key part of due diligence. Experience tells us that inventory value is always a bone of contention. What is aged, ailing and dead inventory valued at? Be prepared for further negotiations. Have a heart to heart with your advisers. Make sure they have a comprehensive understanding of your objectives. Keep in mind that although most good attorneys are deal makers, some are deal breakers.
This process sounds more complicated than it really is. The real difficulty lies in the initial decision on whether you should sell your business or not. Although this article indicates that selling your business yourself is possible, and it is, make no mistake it is not recommended that you attempt to sell your own business without proper consultation from professionals that know the mergers and acquisition business.