Common Questions

Q&ACommon Questions Relating to the Business Sale Process

As a professional business intermediary, we interact daily with business owners and understand many of their concerns. Here we address common questions of business owners relating to the business sale process.

What is the "learning curve" associated with the sale of a Company?

Any task or project done infrequently yields certain challenges due to lack of experience. This is especially true in the context of selling a business.

When business owners misquote a customer job or make a mistake during the normal course of business, they often lose money. However, when there are hundreds of transactions in the course of a year, the financial impact of a few mistakes is not catastrophic. These errors can also be used as a learning experience in order to prevent the same mistake in the future. When selling a business, however, a seller cannot afford to scale the learning curve when the stakes are much higher. The sale of a company is typically a once in a lifetime activity for a business owner and a single mistake in presentation or negotiation can cost hundreds of thousands of dollars.

Just as it takes a business owner years to understand all of the aspects of his or her business and industry, there is no substitute for having extensive experience in handling a broad spectrum of business transactions. Working with a qualified professional intermediary will enable you to avoid making the inevitable mistakes that result from lack of experience with the process. You can't afford to experience a learning curve during the sale of your most important and valuable asset.

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What should you look for in a business intermediary?

It is important to have a comfort level and work with an intermediary whom you can trust to achieve your sale objectives. A professional firm should provide a high level of attention, professionalism, service and expertise to your assignment regardless of the size of your deal. A quality M&A firm will be able to provide you with qualified references from past seller clients, attorneys, accountants, bankers, etc ...

There is a wide array of firms that claim to be M&A Intermediaries. Locally, there are commercial real estate firms that are ill-equipped to handle the complexities of a business sale, or traditional business brokers that typically handle the sale of retail "mom and pop" businesses. On a national level, some intermediaries market their services through seminars and charge excessive "up front" fees, profiting whether or not they achieve the seller's objectives.

A true professional firm will provide unparalleled merger and acquisition representation, while maintaining a competitive success based fee structure that aligns their financial goals with those of the client business owner.

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How do you determine how much a company is worth and can
          Sun M&A advise me with valuing my Company?

Our extensive experience in handling business transactions enables us to keep up-to-date and highly informed regarding business valuation. Our firm has access to comparative data relative to recent transactions in a wide range of industries so we understand how acquirers perceive value. Based upon our experience, we are in a position to provide you with a valuation range that you are likely to achieve so you can make an informed decision as to whether to pursue a sale of the business now or delay to a future period.

Valuing a company is an art, not an exact science. You cannot apply simple formulas or pricing comparisons, as is the case in real estate. Valuation is expressed in a range rather than a specific number. Learn more about the major factors which influence the value of a company.

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What key points do you negotiate in addition to the price of my Company?

The sale of a business involves many elements of financial opportunity to the Principal; the purchase price is only one component of the overall goal. When representing a client, our understanding of all of the available options maximizes the total financial yield to a seller.

Sun M&A takes into account all of the elements of the financial transaction including: yields from a stock sale versus asset sale, amount of initial investment, terms and interest rate on promissory notes, liabilities to be assumed by the acquirer, transfer and negotiation of leases, personal guarantees, employment contracts, consulting agreements, non-compete agreements, current assets to be retained by the seller, earn-outs (percentages of future sales paid to Seller), stock ownership retention, continuation of perks and fringe benefits (i.e. health insurance), purchase price allocation and other pertinent details. The total financial package goes well beyond the base purchase price.

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How should I best present my business for sale?

To optimize the sale process, it is critical to create a professional presentation of the business. Sun M&A prepares a comprehensive, objective and articulate prospectus of the Company that positions the business in the best (and most accurate) light. The presentation of a business must be optimized from both an operational and financial perspective (although here we will only address the operational aspect). The operational perspective must focus on two main components: minimizing risk factors and expansion opportunities/future potential.

Risk factors are defined as anything that may cause doubt as to the predictability of future earnings under new ownership. These may include dependencies on employees, customers, owner relationships or vendors; market uncertainty; competitive developments; regulatory actions, etc. Sun M&A's ability to mitigate these issues at the initial stage will directly impact the perceived value of a company. Minimizing risk factors that could negatively affect the Company is key to increasing a buyer's comfort level with the future earning power and viability of the business.

Expansion opportunities and future potential are growth prospects that have not been pursued under current ownership for a variety of reasons. These limiting factors may include such things as lack of capital, limited desire (due to age or other reasons), limited management capability and sales & marketing issues. Growth opportunities could also involve developing new markets, technology, products and/or expansion into new areas.

In presenting these strategies, it is appropriate to assume that the acquirer will have the financial strength to capitalize on these opportunities. Sun M&A understands how to provide a buyer with a "road map" that enhances perceived value that could realistically be achieved under new ownership.

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What does "recasting financial statements" refer to and how are you
          involved with the process?

Proper interpretation and presentation of financial information is a crucial step in the selling process. Financial statements are typically prepared for tax purposes, not for business sale purposes, and do not accurately reflect the true profitability of a business. One must be able to "read between the lines" of the financial statements and tax returns to present the total discretionary pre-tax income that would be available to an acquirer. Our professionals work closely with you to "recast" your Company's financial statements so that potential buyers accurately interpret the true economic value of your business. Failure to properly present a true cash flow potential can significantly reduce the price that a qualified buyer may offer for your Company. Learn more about recasting financial statements.

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How should financial information be presented to a strategic acquirer?

A strategic acquirer is a company that is looking to grow by way of acquisition. Typically a strategic buyer looks to capitalize on the available synergies with the acquired company, such as eliminating duplicated overhead expenses, taking advantage of purchasing discounts and efficiencies of scale, gaining access to new markets, etc. Given the "strategic" nature of their interest, it is strongly recommended that financial information be presented with these potential synergies in mind.

For example, it may be anticipated that the two companies will eventually consolidate operations into one facility. It follows that the acquired company's facility expenses (i.e. rent, real estate taxes, utilities, property maintenance expenses, etc.) will be non-recurring to an acquirer. It is also likely that a host of other expenses would be redundant in a combined entity. These types of expenses should be "recast" and presented to a buyer as redundant expenses that will not exist after closing. Sun M&A is very experienced in transactions involving strategic acquirers and we work with you to identifying these "add-backs" or cost synergies early in the process to help the buyer recognize the true profit potential of making the acquisition. This leads to maximizing the value of the firm.

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How important is confidentiality and can it be maintained during the process?

It is imperative to maintain confidentiality throughout the sale process and to take measures that will guard against competitors, employees, vendors and customers learning of an impending sale. Experienced buyers often attempt to exploit the absence of a qualified advisor by requesting more information than they should be entitled to see without proper qualification. Our involvement is critical to maintaining confidentiality.

These measures include well written Confidentiality and Non-Disclosure Agreements; generalized, non-descript marketing and educational documents and thorough buyer identification and qualification procedures, among additional steps. The use of a third party business intermediary greatly enhances the probability of maintaining confidentiality throughout the process by providing a communication layer outside of the company and managing buyer access to information. It is virtually impossible for a business owner to maintain confidentiality when selling independently given the natural inclination to share information and speak freely about the business.

Information should be given in stages, as necessary and more sensitive matters do not need to be shared with potential buyers until well advanced in the process.

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Should I alert any of my employees that I am involved in the selling process?

It is critical to protect confidentiality when selling a business. Until such time as the transaction is at or near completion, only the parties that need to know should be aware of your intent to pursue a sale. Sun M&A will work with you to insure that this sensitive area is managed in the correct way.

Sharing this information with employees is likely to generate future job security concerns since uncertainty is what creates the greatest concern with employees. The reality is that human resources, infrastructure and continuity are key factors of the purchase and the majority of business acquirers retain all of the employees after closing. Once employees are introduced to the new acquirer and learn of their operational intentions (i.e. to grow the business, add employees, modernize the facility, etc.) most of the initial concerns disappear. Certain key employees may need to be brought "into the loop" at an earlier stage if they play a valuable role and their input will be critical in the business sale process.

For example, a CFO, Bookkeeper or Controller typically has access to key financial information. A key operational person may need to meet with a buyer to discuss or assure their desire to remain with the company into the future. Often these critical employees will be financially incentivized with equity or bonus plans and/or offered long-term employment contracts for the benefit of all parties.

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How long will it take to sell my business?

The time required to market and sell a business varies greatly with each sale. In general, it takes from 3 to 18 months to complete a business sale, with the most common range from 6 to 12 months.

A variety of factors, including: market conditions; desired transaction structure; availability of financing; sales trends; available competing opportunities; business size and cooperation of professionals (to name a few) greatly influence how long it takes to sell a business. Sun M&A maximizes the probability of closing a sale within the target time frame by targeting multiple interested buyers until a deal is closed. This ensures that you will not need to start the process over again should negotiations terminate for any reason with a lead acquirer.

We recognize that deals can derail for many reasons that are outside of your control; therefore we are focused on keeping alternative options open and active.

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How long will a buyer expect that I remain with the Company?

This question is very difficult to answer without knowing the qualifications and background of the acquirer. In general, the more familiar the buyer is with the industry or the required skills sets, the less dependent he or she is on the former owner.

There are two key areas that must be considered in a transition period. The first involves the time required for a new owner to absorb the majority of the operational aspects of the business. The second involves the time and effort required to transition key relationships with customers, vendors and employees. Most transition periods range from six months to one year. It is common for the former owner to start the transition period on a full-time basis and phase into a part-time role.

Buyers generally expect one to two months of the Seller's transitional obligation to be included as part of the purchase price. Remuneration typically starts after this period.

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Should we negotiate with more than one buyer at a time?

There is an adage in the M&A world that when there is one potential acquirer the buyer is in control, but when there are multiple potential buyers the seller is in control.

Having multiple available options will maximize the chance of negotiating a sale that meets your objectives, while making you less dependent on any one potential acquirer. Working with an intermediary better enables a seller to actively negotiate with numerous buyers independently. The existence of a fall back position avoids starting the process over should a deal fall through for any reason.

Knowledgeable and experienced buyers are less likely to attempt to take advantage of a situation if they perceive that there are additional interested parties.

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Should I have my financial statements audited if I am thinking about selling the
          business?

Acquirers will always have more confidence in the accuracy and credibility of audited financial statements compared to compiled or reviewed statements.

Certified or audited statements reduce the perceived risk that a buyer associates with the accuracy of financial reporting since the CPA firm preparing the audited statement is certifying as to its accuracy, that financial records have been maintained in form and substance adequate for preparing audited statements in accordance with GAAP (Generally Accepted Accounting Principals) and it has conducted a certain level of due diligence. Reducing perceived risk to the buyer can translate to a higher value that a buyer is willing to pay for a business. Smaller firms rarely have certified statements and, as a rule, buyers of smaller businesses do not expect audited statements to be available.

Our opinion is that if your firm generates over $10 million in sales, we would recommend that your financial statements be certified. If public companies are to be the target group of potential acquirers, they normally require certified statements as a pre-requisite to completing the process. That being said, we routinely handle the sale of larger companies that do not have audited statements.

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Is my transaction likely to be a stock sale or an asset sale?

In most cases, a buyer will be interested in acquiring 100% of the assets of the Company. Acquirers are primarily concerned about inheriting any potential or contingent liabilities flowing from the past operation of the Company. An asset transaction also enables the buyer to restate the value of the assets to fair market value (as opposed to its current depreciated book value on the balance sheet) and to re-depreciate these assets. The differing accounting treatment of buying assets versus stock has tangible financial and tax benefits to the acquiring company.

If the Company is a "C" Corporation, it is advantageous for you to sell the stock of the Company to avoid being taxed both at the corporate and individual level. There are a number of creative techniques in deal structuring that must be considered in order to minimize the tax impact for both buyer and seller. Sun M&A works closely with you and the other professionals on your team, to discuss how to maximize after tax value in the M&A process.

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Can I get paid for the "potential" of my Company?

Business value cannot be expressed as an exact number due to the many intangibles inherent in businesses. A realistic value is forecasted in terms of a low-end to high-end range utilizing a variety of widely accepted valuation methodologies.

Aside from simple methods that look at hard assets and book value, most middle market companies are valued, in large part, based on a multiple of cash flow. Buyers (and their advisors) will typically average historical cash flow and attempt to forecast it into the future. In this regard, business valuation is influenced by "future potential" or recurrence of cash flow.

When presented with significant growth opportunities that are well defined and attainable, a buyer will often pay at or above the high-end of the current valuation range. However, acquirers are hesitant to "overpay" for a business by basing a disproportionate percentage of the total deal price on "potential" that has yet to be realized. A buyer commonly states: "I am willing to pay for the Company based upon where it is today, not based upon where I could grow it to."

What is important from a Seller's perspective is that perceived expansion would provide justification for the buyer to consider paying at the upper end of the range of realistic values, but usually not beyond that range unless the Seller is willing to play an ongoing role in implementing the growth plan and tie a portion of the purchase price to future performance (which is commonly referred to as an earn-out). Sun M&A will strategize on your behalf to maximize perceived valuation.

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Does it pay to sell my Company?

The decision to sell or retain a business is a question pondered by many business owners. Selling a business is a momentous decision and involves critical analysis and contemplation. Read attached article to learn more about the pros and cons and decide whether it's the right time for you to sell your company.

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How is Sun M&A compensated for its services?

On a national level, some intermediaries market their services through seminars and charge excessive "up front" fees, profiting whether or not they achieve the seller's objectives.

Sun M&A provides unparalleled merger and acquisition representation, while maintaining a competitive success-based fee structure that aligns our financial goals with those of our clients. Consequently, we can only accept engagements when we believe there is a high likelihood of realizing your goals and expectations.

Initially we provide feedback regarding the likely valuation range you could expect to receive if you were to sell your Company. This will enable us to mutually confirm whether our opinion of likely valuation range is in line with your expectations. You can then be better positioned to determine whether an exit strategy makes sense to pursue now or delay to a future period. The fee structure will vary depending upon the size of a transaction.

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For more information about how you can benefit from the services of Sun Mergers & Acquisitions, please call us toll free (800) 232-0180 or fill out his short form.

Sun Mergers & Acquisitions
411 Route 17 South ~ Suite 300 ~ Hasbrouck Heights, NJ 07604
Phone: (201) 727-1300

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