WHAT TO AVOID

Each year, many middle-market companies change ownership. Although the reasons for selling may vary, the goal of the each of these sellers remains consistent: to maximize proceeds from the sale.

Too many of these business owners do not realize the full financial benefit from this important liquidity event because they are unprepared for the complexities of the process and, as a result, make one or more common mistakes. This is unfortunate because most owners will have only one opportunity to turn his or her largest single asset into liquid equity – one opportunity to benefit both financially and personally from all the years invested in the business.

Entrepreneurs who seek to maximize proceeds from the sale of their companies need to be proactive in defining their objectives, identifying their options and developing a thorough understanding of the many elements of the sale process. Those who are well prepared will be positioned to maximize the potential rewards and minimize the risks by avoiding some of the most common and costly mistakes.

MISTAKE 1: Not Knowing or Understanding the Value of the Business

Value is not obvious, nor is it constant or consistent. The value that an accountant places on a business can vary significantly from its value in an M&A transaction. One value deals strictly with financial statements, while the other considers the many subtleties that determine market value. Market value is defined as what buyers will ultimately pay. One value will focus on past performance and the other looks to the future. One relies on tangibles, while the other examines off-balance-sheet assets such as customer lists, proprietary technology, brand names, organizational strength and other intangibles or unique aspects. Some business owners assume that value can be determined by a single accounting formula or a multiple of past revenue or profits. These informal valuations, generally, simply apply averages and disregard the vast differences among individual companies. As oversimplified formulas, they can result in gross distortions of value that are virtually ignored or irrelevant in the professional M&A marketplace.

MISTAKE 2: Not Preparing a Formal Exit Plan

Every business owner will someday exit his or her company – either through sale, transition or succession. Most, however, are so involved in the day-to-day challenges and activities associated with running the enterprise that they lose sight of this reality and, therefore, neglect to prepare. The fact is, if an owner does not prepare for the time when he or she will leave the business, the event is not likely to yield the expected or desired results. Exit planning takes time and requires clear definition of objectives and careful consideration of appropriate options. An exit plan is an action strategy designed to protect the net worth of a business owner and maximize the value of the business – done properly, it provides a blueprint for satisfying personal needs and achieving financial objectives. It places the business owner in control of … why, when and how to exit. Done poorly, or not at all, there is a risk of being controlled by circumstances and minimizing the financial rewards.

MISTAKE 3: Not Seeking Professional Advice

The sale of an entrepreneur’s business is frequently the largest and most important financial event of his or her life – for most, it is an opportunity that will be presented only once. The successful sale of a business requires a carefully planned and methodically structured process in which each step is done right – the first time – when seeking to maximize the financial reward. While owners are expert at successfully running their companies, few are prepared to navigate this complex process and, therefore, they are at a distinct disadvantage. The right professional intermediary can provide invaluable advice, support and representation – most importantly, the benefit of experience that can make the difference between a successful transaction and a missed opportunity.

MISTAKE 4: Selling at the Wrong Time

Timing is key to many successful business transactions. It is equally important when seeking to maximize the value of a business at the time of a sale. The time when a business enters the market can determine how quickly it sells and at what price. Selling when the market is right presents an opportunity to maximize proceeds. On the other hand, entering a market that may be less than ideal could substantially erode value. One of the costliest mistakes can be to allow factors such as age, unplanned retirement and other similar considerations to dictate timing. Taking control of the process means being ready to act when the time is right and not taking the risk of being controlled by circumstances. This means being proactive, preparing documentation, watching the market, testing the market and constantly reassessing exit strategy objectives in terms of external factors and changing market cycles.

MISTAKE 5: Selecting the Wrong Buyers

Too many business owners waste valuable time and effort on potential buyers who, typically, will pay the least. All too often, they focus on prospects they already know – vendors, customers, employees or competitors. Buyers such as these frequently lack the means and motivation to pay what a company is really worth to more sophisticated buyers who have strategic acquisition goals and are willing to pay accordingly. In contrast to local buyers or those known to the business owner, some of the best buyers are often among the most unexpected acquirers. For example, companies – both public and private – often pay premium prices to acquire seemingly ordinary businesses that offer a synergistic advantage to their current operations. Private equity groups, sophisticated buyers who are in the business of acquiring companies, are among the most desirable potential buyers and foreign buyers also play a role in realizing optimum value for U.S. companies.

MISTAKE 6: Not Clearly Understanding Buyer Motives

Understanding buyer motives – and why a particular company may be important to them – can be of great benefit to a business owner when the goal is to optimize value. For many corporate buyers, acquisitions are an integral part of a preferred strategy for achieving growth and expansion goals, improving operating efficiency or increasing profitability. Many have found that it is easier and most cost- and time-effective to buy market share than to build it internally. Business owners who can view the sale process from the perspective of potential buyers tend to benefit the most when it comes to maximizing their exit options and maximizing proceeds from the sale.

MISTAKE 7: Improper or Incomplete Documentation

Quality documentation is essential to attracting the attention of the best buyers – and capturing their interest. Documentation prepared from the perspective of potential buyers can turn a company’s past into a valuable, saleable future. Complete and well-prepared documentation will present a realistic, defensible foundation for the company’s value and substantiate buyer expectations of future earnings – return on investment. It should give potential buyers a basis for meaningful comparison with other investment opportunities and provide a detailed, accurate and strategically compelling portrayal of how the business is likely to perform in future years.

MISTAKE 8: Dealing with Only One Suitor

A single buyer can gain control of a transaction and weaken the seller’s negotiating position. Without other prospects, the seller has fewer options and limited leverage in terms of obtaining the desired price and terms. Multiple buyers, on the other hand, create a competitive environment with a sense of urgency. This tends to maximize the market value of the business and facilitate the transaction – key benefits to the seller.

MISTAKE 9: Focusing on the Past

All too often, companies that enter the market are not positioned to their best advantage and, therefore, fail to capture the interest of serious buyers. Owners of these companies focus on the past performance of the business and base its worth on valuation myths, multiples or averages that will generally result in an unrealistic estimate or perception of value. In addition to considering their primary strategic or synergistic acquisition goals, buyers will base their decisions on the company’s future earnings potential and its ability to produce the desired return on investment. Business owners seeking to maximize value should… explain the past and sell the future.

MISTAKE 10: Mentioning a Price

An old adage in M&A goes like this, “whoever mentions price first, loses”. For sellers, it pays to focus on value – a company’s optimum earnings potential, its dividend paying ability and potential return on investment. This focus, in combination with a carefully crafted marketing plan that properly positions the business in the marketplace, accurate and compelling documentations, access to the right buyers and last, favorable timing will serve to determine market value: what a willing buyer is willing to pay a willing seller.

Those that don’t learn from the mistakes of the past or the mistakes of others are doomed to repeat those mistakes. -ancient investment banking proverb

FRIDAY, MARCH 12, 2010

Selling Your Business?

Selling Your Business? You should consider these…….

1. Be flexible. If you are inflexible as to terms, many buyers will simply walk away.

2. Be prepared to accept a lower bid for lack of management depth, dependence on a small number of clients and lack of geographical distribution. There is generally a “small company discount” factor that buyers apply to companies with less than $3-5 million in EBITDA.

3. When you are about to get a letter of intent, make sure you let the buyer know what details you want included. These details might include timing, what liabilities you want assumed and due diligence procedures.

4. Be advised that many buyers will value Sub Chapter S corporations less than a C Corporation.

5. Make the company more visible by attending trade shows, running ads or tying up patents and trademarks. This will enhance the perceived value of your company.

6. Selling a company involves inconsistent objectives: speed, confidentiality and value– pick the two that are most important because sellers usually don’t get all three.

7. Remember that companies get stale after sitting on a shelf for a while. If you want to sell, move diligently towards that goal.

8. Don’t expect to win every point of contention. You want a deal, not a deal breaker.

9. Generally speaking, professional M&A advisors put upward pressure on valuations. Make sure to select an experienced advisor.

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