How to Sell a Business
Corporate Development Capital represents private business owners and middle market publicly owned companies in the purchase and sale of businesses. The following discussion will be focused on the sale process of a private owned company, but the process is similar to selling an entire business or just a unit or units of a business (often called a “spinoff”).
The first step is planning; for a privately owned company, this is commonly called Exit Planning and in a larger company this is just part of the planning for the continuing value optimization of the business and may include the sale of an under-performing or non-strategic part of the business or the sale of the entire business to get the shareholders a liquidity event.
All owners of private business should, as part of their overall strategic plan, create, update and implement an Exit Plan. No one lives forever and there will be some kind of “exit” eventually, therefore, the smart owners plan for this event so they accomplish their objectives, which many times are to get the best after-tax value from the business sale. The first planning step is to determine what the owner’s objectives are, then develop the exit plan and then execute the plan. The selected owner objective drive the exit process and there are a wide variety of ways an owner can exit a business. Sale of the entire business to an outside party is the most common exit option. Other exit alternatives include a recapitalization, which is a partial exit, with the goal getting the owner some liquidity and to reduce risk by getting some “chips off the table. Other alternative include the transfer or sale of the business to a family member, a business partner, the management team or the entire employee work force (commonly using a tax advantaged ESOP structure).
When we work with a business owner client we help him/her determine objectives and then create the plan for his execution. We develop this plan in conjunction with other advisers, like attorneys, CPAs and wealth advisors, etc. so the plan holistically covers the business owners complete life issues and financial planning. The next step is to prepare a business valuation which is determining what the probable market value of the business is. Once we have the current value, we then develop a Value Enhancement plan so the owner, over the course of several years, can implement to create significant additional value so that when the exit occurs the after-tax value is greatly enhanced. The focus is on creating greater value by increasing cash flow and reducing business risk, with the expectation that business buyers like large and will pay more for a company with growing and predicable cash flow and low business risk.
Business value is a function of cash flow and risk.
The primary goal of an Exit Plan is to have the owner position the business so that when the owner is ready to exit and the business is doing well and the external market factors are favorable, the owner can “pull the trigger” on the exit. For a more detailed discussion go to the Exit Planning page.
Through the exit planning process, we gain an in depth understanding of the owner’s financial, lifestyle, business and financial objectives and the owner hopefully has implemented his Exit Plan so the business value is enhanced. At this point the business needs to be prepared for sale. Once he makes the he decision is made to exit then the business needs to be prepared and positioned for a successful sale.
Inputs to the planning process may include detailed assessments of the following:
- · Business valuation
- · Expected tax consequences of a sale
- · Anticipated concerns of likely buyers during due diligence (critical!)
- · Drivers of business value
- · Market/ industry conditions, trends and timing
- · Transferability of key assets (e.g. leases, contracts)
- · Business strategic position (e.g., SWOT and competitive analysis)
- · Business operations and systems
- · Current company business and marketing plans
- · Financial performance (on dozens of income statement and balance sheet metrics)
- · Customer turnover, satisfaction and trends
- · Merger and acquisition opportunities
- · Organic (internal) growth opportunities
- · Cost position and cost reduction opportunities
- · Owner and key manger leadership/ management capabilities
- · Technology and product lifecycle
- · Real estate, facilities and equipment
- · Employee recruiting, training and compensation plans
- · Product/ service breadth and quality
- · Legal and legislative issues
- Preparation of Selling Memorandum
An adage reads: “You only get one chance to make a first impression.” This certainly holds true in the sale of a business. Prospective purchasers first impression of a potential acquisition is based the selling memorandum, the prepared materials that provide a detailed overview of a business for sale.
There are several versions of a selling memo, a disguised executive summary that gives a brief introduction to peak buyer interest but withholding identity of the business, and more detailed versions that are provided after buyers sign non-disclosure agreements and are qualified and prove their seriousness. Memorandum may be prepared in a variety of formats, including paper, PDF, spreadsheets, Internet, and digital video, to fully and persuasively communicate the opportunity. The full written versions range from 10-100 pages in length, depending on the size and complexity of the company. The memorandum are prepared by CDC, with input, review and approval by the client.
Topics covered in the various selling memorandum may include the following, depending on the business:
- · Executive summary
- · Market and industry environment
- · History
- · Owner, management team & employees
- · Products & services
- · Financial history and recast financial statements
- · Financial projections
- · Growth opportunities
- · Potential synergies with acquirers
- · Customers (e.g., profile, concentration, segmentation, etc.)
- · Suppliers (e.g., concentration, exclusives, terms, etc.)
- · Lease and facilities
- · Equipment
- · Operations, overview and systems
- · Sales & marketing strategies and systems
- · Intangible assets (e.g., intellectual property, franchises/ licenses, etc.)
- · Photographs and/or video
- · Overview off Hawaii economy and lifestyle
- Marketing Plan – Development & Execution
We create a detailed marketing plan and take the business to market. The marketing plan may address the following issues, depending on the size, industry, complexity of the business and owner preferences:
- · Procedures for maintaining confidentiality
- · Profile and clear screening criteria for prospective buyers
- · List and/or criteria for buyers that will not be considered (e.g., specific companies, or buyers, etc. to protect confidentiality,)
- · Assessment of the risks and benefits of approaching strategic buyers
- · List of likely strategic buyers worldwide (obtained from a variety of third party and internal databases)
- · List of likely private equity buyers worldwide (from third party and internal databases)
- · Advertising vehicles to be used (e.g., CDC web sites, CDC email distribution lists, direct mail, 3rd party website advertising, telemarketing, etc.)
- Once the plan is developed and approved, execution begins. The sales pitch may vary substantially depending on the target. Industry buyers, for example, will likely be focused on potential marketing and operational synergies, customer overlap and cultural fit. Private equity groups looking for add-on investments will behave largely like industry buyers, while those seeking new platform investments will have significantly different criteria. Foreign corporate vs. foreign individual investors vary greatly in their acquisition criteria. A Korean national’s most important objective may be an E2 or EB5 investor visa to establish US residence, while a Japanese corporation may be primarily interested in establishing a foothold in Hawaii and picking up experienced, bilingual talent.
While pitching prospective buyers, we are also qualifying them. We assess whether they have:
- · The financial resources and motivation to purchase the business on acceptable terms,
- · The personality and risk taking profile to pull the trigger, and
- · The management ability to run the company and satisfy stakeholders successfully.
- Through years of experience, we have identified what to look for as well as the telltale warning signs in each of these areas.
Negotiations, Due Diligence, Closing & Transition
Many business owners and even some business brokers share the mistaken belief that finding an interested buyer is the primary challenge to overcome is selling a business. Nothing could be further from the truth. Experience business intermediaries know that fewer than 5% of “interested, qualified buyers” for any business ever get to closing. Phase 6 is frequently the time when we really earn our paychecks.
Our job is to help business sellers overcome the countless challenges that arise in this Phase, such as:
- · Creating an auction-like atmosphere among multiple buyers to maximize value received, while preserving a sense of fairness in the process for buyers not selected
- · Reaching agreement on acceptable price and terms
- · Creating the right deal legal and financial “structure” that addresses financial, tax, legal, and transferability issues for both buyer and seller
- · Overcoming resistance and developing consensus among selling shareholders, family members, and advisors
- · Introducing buyers to CPAs, attorneys and other advisors that are experienced and deal-friendly, not deal-killers
- · Overcoming resistance and developing consensus among key buyer stakeholders and advisors (e.g., family, board of directors, CPA, attorneys, etc.)
- · Helping buyers find the best funding sources for the anticipated transaction
- · Managing buyer demands for information during due diligence that is excessively expensive or time consuming to provide
- · Managing demands from buyers to interview customers, employees, suppliers, and others as part of due diligence vs. the need to maintain confidentiality
- · Overcoming buyers fears and reaching compromises regarding issues that arise during due diligence (e.g., lack of detailed records, discovery that important agreements are verbal understandings and not written agreements, unanticipated landlord demands for approving lease assignment, recent decline in financial performance, recent loss of customers or employees, etc.)
- · Managing volatile emotions of buyers, sellers and their advisors during an extremely stressful and often drawn out process
- · Where appropriate, persuade key stakeholders (e.g., landlord, key executives, or suppliers) to approve and stay on with a buyer
- · Maintaining relationships with and the interest of back up buyers during due diligence
- · Managing the escrow and closing processes
- · Preparing the organization for transition
- · Managing post acquisition integration of systems, technology and people, and communications to key stakeholders