SELLING THE COMPANY
Click here for the Executive Summary.
The Buyer Pool
The owner who wishes to exit his company must understand the importance of conducting a comprehensive and knowledgeable search for the best buyer or investor. A successful sale is only one where the owner’s objectives are met and the best terms and price are secured.
The following are the elements necessary to ensure a successful sale.
A proper buyer pool must be developed
Generally a business owner has a circle of clients, competitors and suppliers within the industry that he believes will have the only real and active interest. Though part of an intermediary’s expertise is to develop this list more fully, so as to uncover companies in the same industry that the owner may not be familiar with, this limited approach will unnecessarily constrict the buyer pool. Both strategic corporate buyers and private investors must be brought to the table for a successful sale to occur.
Understand differences among categories of buyers
Potential buyers may be divided into three categories:
- Competitive strategic buyers;
- Private Investment Firms;
- Non-competitive strategic buyers, such as:
- the company’s clients and suppliers;
- buyers that may be within the company’s general industry, but not within the industry segment; or
- buyers that are within that segment but are geographically removed
It is important to recognize that there are fundamental differences among the various buyer groups. Each potential buyer group will use different models and criteria to value a company based on internal corporate issues and objectives. As companies change, so do their criteria and models. The only successful sale can occur after all three buyer groups have been approached.
Issues to consider:
Competition can and have feigned interest to gain proprietary information, key employees and a better understanding of any weaknesses you may have. A good intermediary can help prevent this.
Approaching Diverse Buyers.
One of the purposes of developing leads within several buyer pools is to uncover potential qualified buyers one would not normally expect to have an interest in the company. Corporate decisions are made directing its management to expand operations into specific geographical areas or into industry segments. Depending on the industry, economy, growth opportunities, and various other factors, one of these buyer segments is more likely to value a company higher than the others. All three need to be engaged.
Alternative Exit Strategies
Just as it is important in exploring all three different buyer groups to achieve the optimal pricing model for your business, it is just as crucial to explore other exit strategies. Under the proper circumstances the following alternatives could prove to be better for you and your company:
- Going public through an Initial Public Offering (IPO)
- A Management Buyout (MBO)
- An Employee Stock Ownership Plan (ESOP)
These are explored in a little more detail below.
Taking a mid market (revenues $10 to $50 million) company public can be very expensive and risky if not properly protected by the right support groups. We work with turnkey IPO Service Providers that take you from the beginning to two years following the public offering. The goal is to qualify your company so that it can be listed on a national exchange. They handle all the SEC work, brokers, and market makers to ensure your success.
Management Buyouts are an excellent way for an owner to exit a company knowing that his legacy will carry on in a manner he chooses. MBO’s not only include current management but could include family as well. Quite often, however, management is under funded and the owner would then have to carry back a significant note. A good intermediary should be able to locate a friendly Investment Firm that would provide management with a significant equity portion, an all cash exit for the owner, and plenty of funding for future growth. This is not only a very financially rewarding scenario for the owner but allows him to reward his management with the opportunity to make a very competitive bid on his business.
Employee Stock Ownership Plans allows the owner and company many tax savvy ways to exit the company. An experienced ESOP Provider would enable the owner to exit completely or partially at full value while at the same time giving employees the opportunity to become owners.
Additional Elements of a Successful Transaction
Time is of the essence
Buyers are generally the beneficiaries of an extended acquisition process. The seller is almost always adversely affected if the process does not move forward on an expedited basis. Fundamental changes in a company, the economy or an industry are often viewed as detrimental, even though an objective analysis should indicate the contrary. For example, if a manufacturer lost a major customer during the course of negotiations, its value and desirability would be decreased even though the customer were replaced by a larger and better customer. Many buyers don’t like to deal with uncertainties.
Qualify your potential buyers first.
Before revealing who you are, make sure you qualify your potential buyers. You should determine their amount and source of funds, how they would structure a transaction, and why they would have an interest. Until you receive this information do not reveal your identity or anything of substance regarding your business. A good intermediary or trusted advisor would be able to do this for you.
Multiple concurrent bids
Almost always it is in the best interests of the company for buyers to realize that the company is being reviewed by others. This makes the company more attractive and is crucial to not only enhance the price and terms of a company they desire, but speeds up the process as well.
It is always optimal for bids to be secured in the same time frame. For an owner to gauge the appropriateness of a bid, he must have other bids for comparison. A high bid can serve as a catalyst for increasing other bids.
The Descriptive Memorandum describes the business opportunity and must be concisely written in a manner professional buyers and Private Investment Firms are accustomed to seeing. Anything else can be a red flag for potential buyers signaling a lack of sophistication. Buyers value companies that are well organized and have undertaken their operations in a systemized and well thought out approach. Buyers may see a poorly written Descriptive Memorandum as an opportunity to acquire the company at a bargain price.
Protection through confidentiality
Confidentiality is also of paramount importance. Exposing your company’s history, proprietary information, key employees, clients, and financial information should only be done once the potential buyer has been thoroughly screened, and the necessary Non-disclosure Agreements have been signed. The owner should never have direct discussions with a potential buyer on the outset. Only after a buyer has demonstrated its intent and ability to purchase the company should direct dialogue begin.
Bring in key personnel early, but keep it confidential from everyone else until the transaction is complete.
The optimal way to contact potential buyers is through an intermediary. Professional intermediaries will assist in getting you the best terms and price possible. The premier firms usually have thousands of identified potential buyers before you have even contacted them.
A good intermediary should be able to get a significant amount more for your business than someone unfamiliar with this type of transaction. For instance, in the RJR Nabisco sale, management made the initial bid of $75 a share. That seems like a good price for the stock holders since at the time the stock was selling for $55 a share. Rather than assume that was the best possible price, they hired an intermediary who brought in additional buyers including KKR. KKR is one of the largest Private Investment Firms in the world. The intermediary drove the price up to $109 a share where KKR had won the bid. This was a 45% increase over the bid the company had secured on its own behalf, and nearly double the open market.
In the Nabisco case, the intermediary’s fees were $300 million. Was it worth it? The original bid of $17.6 billion dollars rose to $25.3 billion. This was an increase of $7.7 billion, or 25 times the fees paid to the intermediary. Though for this particular transaction the intermediary was brought in to increase the price, for most business owners the intermediary can assist in understanding the buyer’s financial models and uncovering more potential buyers. For RJR Nabisco, the number of potential buyers would be relatively small, since finding those entities that have the billions of dollars and the sophistication to run such a company is rare indeed. A company with a value of $20-$50 million is a different story however, as there are literally thousands of potential buyers for those.
Pricing your business
Have a figure in your mind of what the price of your business should be. Review that figure with your trusted intermediary or advisor. If it falls into the range of where they believe the market is, proceed to market. In reality there is no exact value of your business, only a range. The key point is never to reveal your price as that now becomes a ceiling. If the buyer is interested, he’ll come to you with a price.
There are literally hundreds of ways to price a business, but all these models are designed to do one thing and that is to determine the market price, which is what buyers are actually willing to pay. The market price is the true price. Make sure you develop a proper buyer pool; otherwise you will lose money, period
Going at it alone
It’s wise to never go through any M&A process alone. You should at least have somebody outside your organization on your side. Just as a new buyer unfamiliar with your service or products may need help in making his most appropriate choice, a business owner relatively new to the M&A process will need help in fully developing and constructing his many options. A good intermediary must also understand the importance of conducting a comprehensive and knowledgeable search for the best buyer or investor. A successful sale is only one where the owner’s objectives are met and the best terms and price are secured. That means presenting choices, such as a valuation as a public company vs. a private one, and approaching different buyer pools where different valuations are likely to occur. You need to properly navigate the M&A waters to ensure the optimal transaction for you and your company.
Some Common Issues
S Corporations vs. C Corporations
In order to avoid unforeseen corporate liabilities many buyers insist upon an asset sale rather than a stock sale. Unfortunately the sale of a C Corporation’s assets will result in double taxation – first at the corporate level, and then at the shareholder level. S Corporations generally have an advantage when selling in that they can sell all the assets of the company without the owner being double taxed. There are strategies that can effectively halve the C Corporation’s tax liability at the corporate level. A good intermediary should be able to point the way.
It’s the size of the divested operations that matters, not the parent company. Often a large company that wishes to sell off a small mid-market subsidiary ($10 million minimum revenues) will be better served by a mid-market M&A firm, rather than a major investment bank.
Companies that are struggling often need specialized help. Cash and experience can craft strongly aggressive strategies that break the cycle of poor performance. Certain Investment Firms specialize in turnarounds.
Environmentally impaired assets.
There are ways a company can effectively eliminate it’s continuing liabilities. It takes a knowledgeable Private Investment Firm to achieve these results.
When marketing your business it is important to understand the various buyer types. Each different type will have a different pricing model for your business. It is important to make sure that your business has been priced by the various models so as to ensure that you have received the optimal price. Also, be sure to understand that a transaction with a Private Investment Firm, going public or the establishment of an ESOP may be better options.
A seller should move quickly but carefully through the transaction as it is almost always in the buyer’s favor for the process to take longer than normal. Never give your price to a buyer. An attorney who represents himself has a fool for a client and the same holds true for selling your business. A trusted intermediary or business broker will ensure you have tapped the entire market to capture a fair price. They will also advise you as to how the process works and should be able to quickly point out any red flags on the way.