Tue, Feb 9th, 2010 Selling a business is a monumental decision in a business owner’s professional and personal life. Similarly, the decision to represent a business owner requires careful analysis on the part of the M&A advisor (especially those that primarily work on a contingency fee structure) since a typical assignment requires a significant investment of time, over an extended period, by both the seller and advisor. It is essential to perform a thorough, objective analysis prior to beginning the process, to determine what can be expected in the following areas:
There is an array of formulas and methodologies for valuing a business; however, the value is ultimately determined by the amount an acquirer is willing to pay for it. A qualified professional intermediary is able to apply both formulations and experience to determine an anticipated valuation range with a high degree of certainty. The decision to move forward and pursue the sale of the business should be made using this valuation as an assumption, rather than basing the decision upon the hope of “finding a needle in a haystack” (i.e. a buyer willing to substantially overpay). Proceeding without an adequate valuation assessment will result in wasted efforts, compromised confidentiality and a loss of business focus.
A favorite expression in our firm is “You can name the price if we can name the terms”. Price and terms tend to have an inverse relationship. For example, an all cash transaction will generally yield a lower price when compared to a transaction that includes seller financing. Any meaningful discussion about price must include an analysis of potential terms. To be properly prepared to enter into the selling process an owner needs to be cognizant of the various available options for transaction structuring.
Although most owners hope to receive the highest possible purchase price, the after-tax yield is a more relevant benchmark to target. The question that should play a more consequential role is, “what will I be left with after paying taxes and fees”. The manner in which a transaction is structured (i.e. stock sale vs. asset sale, excluding assets, consulting, etc.) will have a major impact on the tax implications. An informed decision based upon an understanding of valuation and transaction terms must also consider the anticipated after-tax yield.
If issues exist that may potentially jeopardize a transaction, a seller is ill served by hiding his or her head in the sand. Eventually these issues will surface and it is far better to be prepared and pro-actively address them, rather than have to take a defensive posture when they are independently discovered. Such “deal killers” may include a lease that needs to be negotiated, property to be cleaned up, equipment to be replaced, financials to be revised, pending litigation, key employee retention, customer retention or concentration, etc. There are a variety of ways to disclose, present and/or remedy these issues. Addressing these issues in a timely and forthright manner avoids spending months identifying qualified acquirers only to have the deal “crash and burn” when these undisclosed issues come to light. With proper presentation, challenging or problem issues can typically be dealt with successfully.
A common mistake of sellers and advisors alike is to skip a step in the logical business sale process. Without investing the time and effort to perform the proper initial work it is impossible to establish the proper footing, with appropriate and realistic expectations for all parties. Conducting a critical analysis prior to deciding whether or not to move forward increases the probability that the project will achieve the desired result. A business owner must be armed with the key preliminary information to confidently make an “informed” decision as to whether it even makes sense to begin the process of selling the company. Completing this analysis will also enable the seller and intermediary to confirm that they are on the “same page” with expectations, while affording time and a basis for the parties to gain an added comfort level with one another prior to embarking on the assignment.
