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Preparing Your Business for Sale
By Dick
Gregerson, President, Janas Associates.
Reprinted from The Quarterly, Vol. 6, Issue 1,
First Quarter 2002
The market for mergers and acquisitions is strong
despite the weak stock market and our War on Terrorism. Even the
hard-hit tech sector is closing acquisitions. For other business
sectors, there is strong activity. Deal structures, however, have
been revised to reduce the risk to the buyer by having more of the
consideration paid in earnouts, seller financing and compensation
contracts. But, overall prices of small and medium sized businesses
have held up well. With the massive increase in the money supply and
a lowering of interest rates, we should see an increase in credit
for buying companies.
Even during the best of times, only a fraction of
businesses put up for sale actually find a purchaser-approximately
25% found buyers during the boom of the 1990's. This low success
rate is partially the result of a common belief among owners that
selling the business is a last resort after all other avenues have
been exhausted. Buyers rarely purchase a business that has no
future. In hindsight, the owner will realize that the business could
have succeeded if it had been sold at an earlier date.
But even good companies can have problems finding
buyers. Inadequate marketing, poor presentation of the business and
its prospects, and unrealistic pricing stop many sales before they
start. Surprises in due diligence, poor chemistry between buyer and
seller, and mistakes in negotiation can derail a viable deal.
All of these problems can be anticipated and
addressed prior to the company being put up for sale. At Janas we
feel that preparing yourself and your business for sale is one of
the most important steps in successfully completing a transaction.
Before you initiate your sale, you need to:
You will need tax and accounting advice, legal
advice, and mergers and acquisition (M&A) advice to assess your
plan. And once you put your business on the market, speed will both
increase your selling price and reduce your risk.
Define Your Objectives
The first and most important step in selling your
business is defining your objectives. What end result do you want
and is it reasonable? This includes not only the amount of money you
feel you deserve for your company but, also, lifestyle questions.
How long do you want to stay with the business? What kind of role do
you want to play after the sale? Are you planning on retiring or
will you find another job? Are there family members or employees to
whom you have commitments?
It is important to determine how much you need to
get for your business to meet your personal objectives. The services
of your tax accountant or financial planner are essential in
assessing the after-tax yield from ranges of sales prices.
Develop a Sales Program
To successfully sell your business, it needs to be
packaged and marketed like a product. Janas' client businesses are
described in a Confidential Business Review. This document describes
the business, identifying strengths and prospects, and disclosing
its financial history. It identifies areas of expertise, proprietary
technology, and customer relationships that have made the business
successful.
Before a Confidential Business Review can be
prepared, possible types of buyers be identified along with their
potential concerns and motivations. The Confidential Business Review
should be written to answer the kinds of questions that they will
likely ask.
Buyers sometimes have surprising reasons for buying
your company. They may purchase a business to be able to serve their
existing customer base more effectively. For instance, insurance
companies have bought brokerage houses to sell insurance to
brokerage customers. Other buyers may be looking to market a new
service or technology to a new customer base. Recently Proctor &
Gamble bought Clairol because Proctor had developed a new hair color
technology and needed Clairol's established distribution.
Other companies buy to reach a size that makes them
attractive to new groups of investors or meet growth targets. Some,
such as buyout funds, make investments within certain industries or
sectors of the economy based on their investment guidelines. As a
result, you should not only assess your business for its existing
strengths, but also assess its potential strategic benefit to a
variety of potential buyers.
Get Organized
Many deals that fail, do so because the buyer
discovers an unexpected problem during due diligence. Incomplete
accounting, poor record keeping and lingering liabilities can take
the momentum out of a deal. Before entering into the sales process
you need to do due diligence on your company. Principal areas to
focus are:
Accounting - incomplete or inaccurate
accounting along with poorly organized records will undermine the
confidence a buyer has in your business. Inventories should be
properly reflected. If a physical inventory has not been taken in
the past year, it should be done soon. Liabilities such as service
contracts, warranty obligations, vacation pay, and other accruals
should be reviewed by your accountant and properly reflected in your
financial statements.
General Housekeepinq - items important to
your business should be checked to insure that they are up to date
and well documented. If possible, verbal contracts, or written
contracts that have expired, with important customers, vendors or
technology licenses need to be documented. Trademarks and patents
need to be filed. Tax returns and other government reports need to
be filed. Environmental compliance records need to be up to date.
Conflicts - if possible, lawsuits, vendor
disputes, customer billing/returns discrepancies and other conflicts
should be resolved. A buyer will more likely be worried about a
dispute than you.
That said, no business is entirely free from
defects. Our experience is that problems that are disclosed early-on
in the sales process can be explained and overcome. However, those
that are uncovered during due diligence can significantly slow or
even stop the sale. Undisclosed problems cause distrust and
embarrassment for both the buyer and seller.
Run Your Business Well
Buyers want to purchase a 'clean' company. They do
not want to inherit personnel problems, obsolete inventories or
programs that have not produced results. It is not unusual for a
business owner to hold onto inventories in hopes that they will some
day turn into cash, or continue on with products or employees that
are producing lack-luster results. Not only will most buyers not pay
for unused capabilities, they will often reduce the selling price or
abandon the purchase of the company if there are too many issues. A
seller will greatly enhance his chances of completing a sale if
business problems have already been addressed and solutions are in
process.
Conclusion
The sales process can take months and absorb a
substantial amount of time and energy. Selling a business on your
own is a full time job. It is also a highly detailed and technical
task that will take the advice of experienced accounting, tax, legal
and mergers experts to get your best result. Many companies hire an
outside party to sell their business for them. This allows the owner
time to continue to run the day to day affairs of the company. It
also allows people with significant deal experience to make sure
that you are getting the best agreement that meets you personal
objectives. |
Honolulu, HI
