Selling Business? First Max your Value
When the economy went south, mergers and acquisitions went along with it, with near-record lows in 2008 and 2009. But as the recovery sputters to life, 2010 featured a significant uptick in M&A activity, highlighted by a standout performance in the U.S. middle market, where growth in the deal count and dollar market exceeded 50 percent. Key M&A variables remain as positive as we move forward in 2011, according to the most recent report from Robert W. Baird. We have seen a healthy rise in local transactions. Companies are implementing growth plans, with acquisitions a top priority for many.
The downside for sellers is that it’s a buyer’s market.
If you are like many recession-weary companies, you may be highly motivated to sell. That motivation can sometimes lead to hasty sales decisions that prevent you from realizing your organization’s full value. As you watch the uptick in the sale of companies this year, remember your goal must be to maximize proceeds.
Too many companies are unprepared for the complexities of this process. A successful transaction requires careful preparation and due diligence from both sides. For sellers, it also requires active involvement in the process from day one to help drive the deal and ensure successful integration.
PREPARING YOUR COMPANY FOR SALE
As you enter the selling process, remember: The time you invest in the sale usually equates to greater returns at closing. Before you begin fielding offers, get your company in the best shape possible. It’s a valuable exercise that attracts buyers and yields higher returns.
• Get your house in order. Begin by taking a close look at your business — the way a potential buyer would. This can be more challenging than it sounds. A thorough self-assessment should help you articulate the positive aspects your company brings to the table besides cash flow.
• A good place to start is looking for cost-cutting opportunities. It’s to your advantage to operate a lean organization, so improve efficiencies and eliminate waste.
• Clean up your financial statements and consider conducting an audit. Collect old receivables and write off any uncollectible accounts. As you review financials, spend time creating a realistic valuation of your company. While you should aim for the highest possible price, research what comparable companies have sold for.
• Today’s buyers are sophisticated, and they require complete and detailed documentation about your business. Preparing it from the buyer’s perspective can help create a foundation for your company’s value, which will help you get a better price.
• Get a good adviser. Because selling can be the most important event in the life of your company, it’s critical to have an experienced M&A adviser in your corner — before it is up for sale. The right professional can help you navigate complexities and identify a buyer who represents the best fit and the highest price.
• An experienced adviser can help negotiate the deal’s nonfinancial terms, such as your employees’ future, your ongoing role in the business, non-competes and earn-outs. They can help develop an exit plan and determine the best timing and implications for your sale, which are key in an uncertain marketplace.
• Determine the right type of buyer. The best buyers for your company may be unknown to you. They must have both the means to pay what your business is worth and the motivation to see the deal through. They also should have some strategic goal for acquiring your company, such as tapping into a new market or eliminating a competitor. Understand the buyer’s motives, and you will be at an advantage when it comes to maximizing proceeds from the sale.
• Have alternative buyers. With only one, you run the risk of weakening your negotiating position and giving up control over the transaction. More than one buyer in the process broadens your options and creates a more competitive environment. A buyer that bears consideration is a financial buyer, such as a private equity group. It will likely offer less money than a company seeking a strategic acquisition, but is often ready to move more quickly. Depending on the seller’s situation, a financial buyer may be the only option. If you have not worked with this type of investor, bringing in an adviser who is experienced in negotiating with private equity firms is imperative.
• Demonstrate your value. Avoid the temptation to set a price for your business too early. Focus on what the buyer values most about your business, whether it’s a new product or service, geographic expansion or human capital. This approach puts you in a better position to document value and negotiate a higher price.
If buyers are focused too much on past performance, they may undervalue your business. Help them see the future value of your business with analysis and documentation of your earning potential. Align this documentation with the strategic goals your buyer has in mind.
DRIVING THE INTEGRATION PROCESS
You’ve agreed to sell your company. The deal has been struck, and due diligence is underway. Your buyers have likely been putting together an integration plan since they first identified you as a target.
Integration is the key to success or failure of any acquisition for the buyer. As the seller, if you have a stake in the deal afterward, jump in now. Buyers are interested in speed — getting integration completed so they can begin to enjoy the acquisition’s expected benefits. If the sale has an earn-out for the seller, speed is important for you as well, because you likely won’t hit the targets if integration fails. Moreover, your and your employees’ future roles can be dramatically impacted by the integration plan.
One of the keys to success is assembling an integration team that mirrors the buyer’s team; operations, information technology, accounting representatives from both organizations need to assess processes for a smooth transition. Insist on this involvement, and if the buyer balks, think about why they don’t want you playing a role in the process.
Taking an active role in the merger stretches resources, but it enables you to watch out for others with a stake in your transaction: employees, customers, suppliers and shareholders. If these groups are important to the new company’s future, understand the buyer’s plans and be able to communicate them to these stakeholders. Watch how the buyer handles the human aspects of integration, including communication and compensation.
If the time has come for you to sell, take the time to do it right. It’s a process that can be fraught with pitfalls. Before you proceed, think about how to best prepare your company and find the right buyer. Your success depends on your ability to be proactive.
Get the right advice, beginning early in the process and carrying on throughout. Remain in control of the process, and be ready to take action when the time is right. With an intelligent, yet measured, approach to selling, you can ensure a smooth transaction and come out on top in a volatile buyer’s market.
- Reprinted with permission of Tatum LLC Austin