What Should I Consider When Deciding to Sell?

■ Middle-market business owners considering the best course of action for the future of their businesses have several choices – among them, the option of selling the company.

■ The decision to sell can be a difficult and emotional turning point for the business owner, and the motivation for selling often complicated and subjective. Some of the obvious reasons include retirement, health issues and the desire for liquidity. Some of the not so obvious reasons might include partnership disputes, diminished interest, lack of operating or growth capital, and lack of suitable heirs, among many, many others.

■ Whatever the reason, the decision to sell a business should involve extensive planning and preparation in order to negotiate and execute a sale on the most advantageous terms. An owner with a sound, well thought out strategy for selling his or her business is often better able to realize an attractive value for the company than someone who enters the process unprepared.

■ This strategy typically includes a financial appraisal and assessment of value, marketing the business, locating a prospective buyer, structuring the transaction, managing the buyer due diligence, negotiating and closing the transaction and post-close integration.

■ Despite the importance of having in place a clear-cut knowledge of the business when deciding to sell, according to a recent survey of small business owners, 65% do not know what their company is worth and 85% have no exit strategy (M&A Today).

■ Closely held family businesses, in particular, often do not have the benefit of counsel from experienced advisors, and the owner’s emotional connection to the business can cloud his or her own ability to objectively assess the true value of the business.

■ Fortunately there is a wide variety of resources are available for most sellers needing professional advice and expert guidance with the selling process. Some of these parties include other business owners in their particular industry, management and other consultants, professional intermediaries, business valuation experts, accountants and attorneys. While each of these sources contribute valuable expertise to the selling process, their specialized skills alone may fall short of what is needed to successfully consummate a transaction in today’s sophisticated climate.

■ An experienced, full-service M&A intermediary can assist in servicing the business owner in all aspects of the selling process, including valuation, negotiating the terms of sale, preparing a comprehensive presentation package, professionally marketing the business, finding and screening prospective buyers, and evaluating offers.

What are some of the Most Common Mistakes Made by Sellers?

■ The typical business owner sells one business in his or her lifetime. On the contrary, strategic buyers often acquire multiple businesses each year, and financial buyers can be even much more active. Invariably, inexperienced sellers will make mistakes that buyers can capitalize on. Some of the most common mistakes include the following:

• Not knowing the value of the business – Private business owners minimize profits to reduce taxes. Thus, their company’s financial statements often do not reflect the true profits and value of the business. As a result, many companies sold by their owners are sold below market value.

• Using a multiple or ratio to set price – There is no single multiple or ratio that applies to all privately held businesses. Each business is unique and requires a comprehensive review and analysis of the company, as well as a strong understanding of the dynamics of the M&A marketplace, in order to determine potential market value.

• Selling at the wrong time – Many sellers wait too long to sell, not understanding that one should sell when the market is ready. Conversely, many business owners spend a lifetime building their businesses, only to sell hastily, failing to recoup the actual worth of the company.

• Trying to rush the sale – Once a seller has decided to sell, he or she understandably wants the whole selling process to be over quickly. But systematically selling a business – including finding the best buyer – takes an average of 9 months.

• Negotiating with only one buyer – Although business owners often feel more in control when dealing with a single suitor, generating interest from multiple buyers can in itself build value for the business.

• Not understanding the buyer’s motives – Rather than emphasizing the business’ growth potential, sellers often dwell on past performance. Buyers, however, are looking for future return on investment, growth potential and synergy.

• Selling to the wrong buyer – Business owners often underestimate the appeal of their companies, and overlook some of the best prospective buyers for their businesses.

• Improper documentation – Buyers expect professional documentation on a company, including recast financial statements and five-year pro formas backed by solid research and analysis that shows the potential of the business for new owners.

• Managing due diligence – Once an interested buyer is engaged, sellers are faced with the often arduous phase of due diligence. During this stage, sellers must carefully manage the dissemination of information to the buying team.

• Assessing and negotiating offers – Companies rarely sell for all cash at close. Instead, terms are often structured and can have complex tax and legal implications. Sellers should be able to assess and negotiate the terms of the transaction from every angle: personal, legal, and financial.

■ Almost anybody could attempt to sell their business, but at the risk of incurring these common mistakes. An M&A professional with specialized skills and knowledge can help to complete the transaction with favorable price, terms and conditions.

What are the Benefits of an Intermediary?

■ By entering the often unfamiliar territory of the M&A arena, many business owners run into one or more of the pitfalls detailed above. Retaining and working with a skilled advisor in preparation of the sale can help to minimize these risks and offer a number of distinct benefits to the business owner, including the following:

• Evaluating the business – When determining a company’s value it is helpful to seek the assistance of a professional who is credentialed, trained and experienced in performing business valuations. An intermediary can best assess the value of the business, backed by an objective and realistic analysis of both quantitative and qualitative, tangible and intangible factors associated with the business.

• Exploration of transaction alternatives – An experienced intermediary can assist the business owner in defining the most appropriate exit options and in exploring various transaction alternatives such as a stock or asset sale, a merger, a recapitalization or a partial sale. The appropriate deal structure depends on a number of shifting and dynamic factors that can be difficult for business owners to anticipate on their own.

• Market expertise – The value of a company is greatly influenced by demand in the marketplace for companies in a particular industry. A professional’s knowledge of specific external trends and activities, which indicate a change in supply and demand, is critical in determining value and the best time to go to market.

• Experience with buyers – Skilled in negotiating with different types of buyers, an M&A professional can use that experience to leverage diverse interests. The intermediary also has the ability to screen prospective buyers, manage the release of information to buyers and act as a mediator between buyer and seller in emotional circumstances.

• Time savings – When business owners do attempt to sell their businesses on their own, the required time and effort involved can detract from day-to-day operations. The often-complex selling process can span months, during which time it is vital for the business owner to conduct business as usual to maintain profitability until the transaction is finalized. M&A intermediaries have the time and resources to devote to the transaction, enabling the owner to focus on the primary operation of running the business.

• Credibility – In attempting to sell the business alone, the owner risks being perceived by the other side as lacking seriousness or credibility. Without an intermediary to aid in negotiations, costly mistakes can occur.
What Should I Look for in an Intermediary?

■ When assessing the types of M&A professionals and the range of services they provide, industry experts encourage middle-market business owners to look not only for an intermediary who has experience with their type of business (both in size and in the industry), but one that also possesses the following characteristics:

• Competence and trustworthiness – The team of advisors must develop a strong relationship with the ownership group, have the ability to understand interpersonal and family dynamics, and be able to interpret the true agenda of the owner, management and family. This interpersonal guidance is a skill gained from years of experience.

• Length of time in business – New advisory firms crop up all the time. Select an M&A intermediary with a long history of closing transactions in a range of industries.

• Track record of success – Beware of the intermediary with limited deal making experience. As in every other business, companies with a strong history of success will be able to offer the most competent service. Ask to see proof of the M&A firm’s success, such as “tombstones” announcing their completed transactions.

• Familiarity with the industry and with current trends – Numerous external factors are involved in the final determination of price, including the timing of the sale with respect to market demand, the rate of industry consolidation, and the level of industry or segment growth and integration. An intermediary should possess a familiarity with these factors as they affect M&A, and sophistication with the interpretation and analysis of market and industry information as it pertains to the sale.

• Knowledge of markets of operation – A qualified intermediary should be able to expertly analyze and interpret important trends and M&A activity occurring among the company’s competitors and in key end markets, as these segments serve as viable sources for finding interested strategic buyers.

• Access to buyers – An M&A intermediary’s understanding of the buyer universe, including financial and strategic buyers, both domestic and international, is vital. An intermediary should have a robust proprietary buyer database, containing detailed information on the many corporate and equity group buyers. In addition, the intermediary should have ready access to the wide variety of electronic database resources used to identify buyers. These resources, combined with strong relationships with private equity groups and active corporate acquirers, can greatly enhance a firm’s ability to target the most qualified, interested buyers.

• Credentials and licenses – M&A professionals should have the appropriate credentials and required qualifications to assist in the sale. Relationships with attorneys, CPAs and other tax advisors are also critical in the drafting of documentation and in ironing out the purchase agreement.

• Maintaining Confidentiality – The need to establish concrete safeguards in order to maintain confidentiality is absolutely critical during the entire transaction process. Should employees, customers, or competitors get wind of the owner’s intentions, the integrity of the deal could be sacrificed. Experienced transaction intermediaries understand the overwhelming importance of maintaining confidentiality.

■ The potential rewards of a successful business sale are great, but this complex and often time-consuming process should be expertly managed. An experienced and qualified M&A intermediary can improve the likelihood of a successful sale, as well as simplify the process for the business owner.

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