Since selling companies in the largest profit center for the Company, I think it is important that you understand the deliberate steps we undertake in each engagement. There is a reason that we sell over 90% of our assignments and we will be glad to review that process with you.
This will be one of the most important questions a buyer will ask a Seller. There are many good reasons for selling: retirement, disputes amongst partners, health issues and a lack of enthusiasm. Several difficult reasons for a selling business that will negatively impact value are: declining revenues and profits, poor industry outlook, high customer concentration and etc. Moreover, a Seller that is flexible in transitioning in a new Buyer will secure a more lucrative offer.
Return will be measured by the buyer as “free cash flow” available for return or reinvestment. We will assemble a 4 Year Cash Flow Analysis that delineates precisely the return being generated. Obviously, companies with a record of increasing revenues, profits and cash flow will sell at a higher multiple.
While all buyers will be paying a market multiple for the cash flow of the business, the specific reason they make the purchase is because of the inherent perceived opportunities for growth in the current or tangential markets. Additionally, there may be synergies between the buyer’s customers, products or services and the target company’s customers, products and services. The buyer might be able to cross sell his products and services to the Seller’s customer base and vice-versa.
During this stage, we assimilate the data we have gathered into an organized Executive Summary with appropriate cash flow analysis. We examine market multiples for companies in the same market. We will then prepare an analysis of the likely range this business will sell for today in the market. Other factors influencing this valuation will be the appetite of financing institutions for this transaction, owner’s willingness to provide some financing and the flexibility of the Owner in transitioning a new Buyer. Additionally, we encourage our clients to engage the services of a Valuation Expert, particularly one that is used by the banks to support their valuation of the deal.
We now have the marketing materials necessary to approach all qualified buyers for the entity being marketed. The subset of possible buyers will include the universe of individual buyers, strategic buyers and financial buyers (Private Equity Groups). We will require all Buyers to sign our Confidentiality Agreement and in addition, individual buyers will be required to submit a Personal Financial Statement prior to receiving our comprehensive Executive Summary. Prior to running national ads on the company and sending generic information to the targeted Buyer List, we will confirm this database with the owner to avoid sending materials to undesirable buyers.
Once the marketing process is completed, we expect to have several interested parties. We strive to have several buyers competing for the opportunity in order for us to secure the best value for our client. We are often dealing in non-binding LOIs that outline the price, terms and stipulations under which the buyer is willing to purchase and the seller is willing to sell the business. The more precise and detailed the LOI is with accompanying terms and conditions, the easier it is to draft the final purchase documents. Once the LOI has been signed by both parties, the Buyer will initiate a review of the business typically known as “Due Diligence”. During this limited period of time, the Buyer will have exclusive rights to buy the business subject to his review.
Seller Suggestion: Prior to selling the business, make sure that your accountant and lawyer are aware of your intention to sell. Make preliminary calculations as to what the tax bill will be under the various sales scenarios. Prior to proceeding to the sales process, make sure that you have detailed financial statements for the past 4 years along with the accompanying tax returns. Also make sure that all corporate records including Minutes of Board Meetings and Shareholder Meetings, Strategic Plans, Customer Contracts, Operating Manuals, Organizational Charts and current Leases are available and updated. Remember, that 90% of the sales of companies under $50 million are done as an asset based sale. You should have detailed listings of all assets included in the sale. If you have specific personal assets that you do not want included in the sale, remove them from the premises prior to marketing the business.
Once Due Diligence has been completed, we proceed to Closing. This should be a relatively perfunctory process if all corporate records and financial information are available and have been updated.
1. After some soul searching, understand what you will do with your time once you have finished with transitioning the new Buyer.
2. As mentioned above, understand upfront the estimated tax to be paid with the sale of your company.
3. How will you invest the net proceeds from the sale of your business? We would highly recommend that you secure the advice of an established and reputable financial planner.