For many owners, the sale of their
company is the largest, most complex transaction of their career. Due
to its magnitude and impact on their future, it also is one of the most
stressful. A seller will often find solace and security, if they have
an experienced, determined, but compassionate, acquisition advisor that
can provide them guidance during this process. It can be especially
helpful for selling owners, if the advisory firm is headed by a self-made
person. Usually this advisor will fully understand the intensity and
depth of emotions that an owner is facing.
Middle market transactions are defined as deals valued between $2-$250
million. There is very little information available on these deals to
enable a potential selling owner to know what is involved in the sale
process. Correspondingly, prospective sellers are often under numerous
misconceptions that can be harmful. During my many years in acquisitions,
I have talked to thousands of owners/entrepreneurs. From these conversations
I have determined that the following six pitfalls are the most common
erroneous beliefs of middle market owners.
The answers to the following questions should correct these misconceptions.
A Valuation Basically A "Numbers Crunching" Process?
be further from the truth. A properly conducted valuation involves
the complete investigation of a company's business foundation.
It includes defining the company's future opportunities and major
risks along with their projected impact. The following factors
must be evaluated during this process:
of the company's marketing program, including the diversity and
control of its customer base.
companies, the ability to produce a high quality, low-cost product,
and the caliber and productivity of its research and development
or service businesses, the demographics of its trading area, the
quality of its product and/or service line, the attractiveness
of its locations and the ability to run its operation on a cost-effective
of the management team and the presence of a reasonably-paid,
well-motivated work force.
become a prime determinant of the multiple to apply to the company's
expected future earnings.
And Timing the Sale Of A Company Increase The Transaction Price?
dictates that a selling owner plan and time the sale to maximize
the transaction price. As part of the planning process, all factors
defined in Question 1 are evaluated and suggestions are made to
strengthen the business foundation. The solidifying of the business
foundation will increase the transaction price. In addition, the
planning of the sale will enable a company to be prepared to "go
to market" at the appropriate time to generate the maximum
price. It also enables an owner to be capable of responding intelligently
to the unsolicited interest of a prospective acquirer.
The Deal Fundamentally Completed When A Preliminary Price Is Established
At The Letter Of Intent (LOI)?
fact, the execution of an LOI is merely the start of the negotiating
process. Unless you have a sophisticated, experienced advisory
firm that has a strong personality and the ability to control
the deal, it is not unusual for an acquirer to demand a price
reduction between the LOI and the closing. You must make sure
that an acquirer knows that will never be productive. The negotiation
of the Definitive Purchase Agreement (DPA) is a difficult, confrontational
and time-consuming process. The DPA includes all the critical
representations, warranties and indemnifications that are of potentially
equal financial importance to the deal price itself. If they are
not negotiated to provide the seller maximum protection, it can
give the acquirer a post-closing opportunity to recover a considerable
portion of a seller's deal proceeds.
Owners Only Sell Their Company When They Are At Or Near The End
Of Their Business Career?
is definitely no. Most owners don't understand many of the benefits
that can arise from a sale. Usually owners of closely-held corporations
have a vast majority of their personal wealth concentrated in
the business. In and of itself, this is poor financial planning,
but it is a typical by-product of owning a closely-held corporation.
By selling all or part of the company, owners can reduce their
concentration of wealth in the business. In addition, it puts
their estate in more liquid condition. I have advised many younger
owners recently in the sale of their business, who have wanted
to put their financial condition in that shape. They also wanted
to enjoy the finer points of life for a few years, while still
in prime health. After their covenant-not-to-compete expires,
which could occur after a five year period, they can get back
in business. However, they will commit only a small portion of
their sale proceeds to the new business endeavor. This will assure
that they have lifetime financial security. They will be refreshed
and might be eager to pursue a new business endeavor. From a personal
standpoint, this is a very attractive alternative for a number
of owners. Where owners merely want to reduce their concentration
of wealth in the business, but still want to run the company,
a recapitalization with a private equity firm might be the answer.
In this type of situation, a selling owner can get approximately
90% of the deal value while still retaining a 30% interest in
the recapitalized company. As most private equity firms strongly
prefer management to stay, the selling owner should be able to
continue to run his business in basically an unfettered manner.
The only thing likely to change is that the owner will now report
to a Board of Directors. However the owner will still determine
the company's strategic course. For an owner that wants to pursue
this alternative, it is essential that they find the right private
equity firm. Only a few private equity firms are price-aggressive
and pay a price comparable to a strategic acquirer. Certain of
these firms might have companies in their portfolio that are a
strategic fit with the seller. This should enable them to pay
a price comparable to a strategic acquirer. An experienced advisory
firm will know if a recapitalization makes sense for the owner.
They also should know which private equity firms historically
pay a strong price.
A Selling Owner Have To Accept Notes As Part Of Their Transaction
unsophisticated people and advisory firms, which are not overly
concerned about maximizing their client's interests, believe that
acquirers will always want a seller to take back a significant
portion of the purchase price in notes. They rationalize that
an acquirer needs this as protection against legitimate hidden
problems that might be uncovered after the Business is sold, and
because growth-oriented companies must use all available leverage
to fund future expansion. However, this is nonsense. When an individual
sells their company, they have the right to receive their proceeds
in cash except for the equity portion retained in a recapitalization.
A Selling Owner Employ Special Legal Counsel To Handle Their Transaction?
all depends on the sophistication of the seller's present law
firm. If it is a large firm that has specialists in the critical
areas of environmental law, human resources, intellectual property,
corporate finance, and certain other areas, it might be appropriate
to retain the current counsel for the transaction. However if
the seller presently utilizes a smaller law firm of fundamentally
generalist attorneys, they want to employ new counsel that has
specialists in the numerous functional areas to advise them in
the transaction. If the seller employs a sophisticated advisory
firm that will direct the deal negotiations, it is often advisable
to allow the advisory firm to bring in a large, experienced law
firm with whom they are familiar. This will ensure a blending
of compatible negotiating styles with people that are familiar
with each other's negotiating style and skills. This will be a
significant asset to the seller during negotiations.
Owners that avoid these pitfalls
should be able to sell their company at an aggressive premium
price with only limited, if any, exposure to post-closing issues.