Passport to Business Success: Maximizing the Business's Potential When Selling
Written by: Howard Klein
As you enter the marketplace to sell your business, there are specific steps we recommend to maximize the potential of achieving the best transaction. While the 2016 market continues to be hot and while you have taken the steps outlined in our previous article to maximize value, your approach to the marketplace will decide the ultimate success.
Align Ownership. The first step is to get all the owners on the same page. When an organization has several to many owners, it is critical that the leader understands the boundaries that would produce acceptable terms for any sale. This would include retained interest, valuation, ongoing employment, tax considerations, and new duties and responsibilities. All too often, when ownership is not aligned in their thinking, a lot of hard work and cost can be squandered as a transaction falls apart.
Find the Right Representation. Critical to the process is finding the right fit of investment banker. You want a firm which will lead you through all of the decisions you need to make, has insight on the industry in which you operate and has connections to the right buyers (even with an auction approach). You also need to understand the technical complexity of your business and make sure the banker is comfortable. Feeling the right connection will make the transaction much more productive.
Decide on Market Approach. Often large multi-billion dollar corporations have only a handful of qualified and properly capitalized potential acquirers, but lower middle market companies (businesses whose values range generally between $10M and $300M) often have an enormous number of potential buyers. Some of these potential buyers are known to the business owner and some may be known by the banker, but no one will have a contact list broad enough to capture all potential buyers. The banker must have tools and resources to research the largest and most qualified data set of potential relevant buyers. The process should not be rushed as the banker should review competitors, customers, strategic buyers and relevant private equity firms. This process can be very time-intensive, but it is one of the primary factors in determining the success of the sale; for if you don’t find the best buyer, how can you get the best outcome?
Qualify the Potential Buyers. The next step is to qualify the potential buyers, as many will not have the ability to purchase the business. While many buyers may show interest in an acquisition, a good banker will know the right questions and have enough market intelligence and expertise to understand the history of ability to close, capital structure to fund and success on integration of the buyers thereby pre-qualifying the buyers before impacting the owner and management team’s time and attention. While this step isn’t complex, if it is done incorrectly the company will lose precious time and risk confidentiality.
Negotiation Process. There are several ways to approach the negotiation process. Some bankers will suggest a negotiation only with one highly confident buyer. While this approach has the ability to produce a quick result, it also comes with high risk. Generally, we see sellers more likely to achieve their goals by negotiating with several qualified buyers. Competition in a sale process does typically drive up purchase price and quicken the pace and accountability of buyers, but it should be handled carefully, respectfully and professionally. The seller will also need to act quickly as indecisiveness can make buyers walk away.
Structure of the Transaction. The structure of the transaction is also critical to the owner’s success. Aside from an asset vs. stock (ownership) sale of a business, there are many other determining factors that come into play. These include future earn-outs; terms and interest rate on financing; liabilities assumed by the acquirer; employment contracts; non-compete agreements; working capital transfer considerations, rollover stock ownership and equity options packages; relocation; employee preservation versus redundancy layoffs, etc.
Terms and Agreements. Having the right attorney working with you can make the sale move along more smoothly. Typically an attorney whose practice focuses on merger and acquisition has the ability to speak the same language and, therefore, the closing can be more expedient. Here are some terms and agreements with which you should be familiar. Buyers generally express interest in three stages through three documents: the IOI (indication of interest), LOI (letter of intent) and Purchase Agreement. The IOI is non-binding and provides the proposed terms, valuation and structure for a transaction. Generally, the seller and their bankers will invite the buyer to learn more about the company from these IOIs. LOIs are a more serious nonbinding commitment of interest by the buyer outlining the terms in which they will purchase the company. Once they are jointly executed, the seller is typically under exclusivity with that buyer, such that they cannot negotiate with other buyers during this stated period of time. Simultaneously, the buyer is conducting heavy due diligence on the business with the intent of acquiring it. During the exclusivity period, the buyer must determine quickly if they want to proceed, proceed with change or discontinue the transaction as proposed under the LOI. If they continue, the Purchase Agreement must be drafted to define all the details of the transaction: legal, financial, representations, warranties, etc. The Purchase Agreement is the definitive document outlining the terms of the sale.
The Pathway to a Successful Exit. Hear from leading experts on what you should be doing now to help you prepare and drive valuation, on April 28, 2016, at the Fairview Country Club in Greenwich. The notable panel includes Alan Badey, managing partner of Citrin Cooperman’s White Plains office; Sylvie Gadant, Transaction Advisory Services practice leader and partner at Citrin Cooperman; Gary Karlitz, Valuation/Forensic practice leader and partner at Citrin Cooperman; Gretchen Perkins, partner at Huron Capital; David Swerdloff, partner at Day Pitney; and Douglas Donohue, CEO of Excel Partners Holdings. For more information, contact firstname.lastname@example.org.