4 Strategies for a Successful Business Sale

Mergers and sales of companies are accelerating at a significant pace, and it is not just at the mega-merger level. Small and mid-sized companies are being swallowed up by larger companies flush with cash and ready to take advantage of the growing economy. Prices paid for companies are up 30 percent over just three years ago and with prices so tempting, many family businesses and small companies are considering a business sale.

Be prepared with a strategy to explore and seriously consider the “deal that may be too good to pass up.”

1. Analyze the Option to Exit

Private companies considering an exit should be prepared to analyze the full range of options from all relevant perspectives including financial expectations, time horizons, risk appetite, and tax issues for the Board, investors, managers, and other stakeholders.

A key issue to expect: stakeholders may not have the same time frame for a transaction. Some stockholders might have tax issues if a sale is structured as a taxable transaction.

Steps to improve a company’s business enterprise value preparatory to a sale include:

• Assess whether the company has the resources to create a deal team to manage a 24 x 7 transaction process.
• Consider the basic parameters of a potential exit, including the desire of the current owners to retain a stake in or control of the business.
• Anticipate issues that are likely to be raised in due diligence and fix as many problems as you can.

2. Assess Transaction Readiness

If there is initial interest in pursuing an exit, companies must determine if they are prepared to execute a transaction. Consider having an outside advisor provide a preliminary valuation of the company to manage the owner/investors’ expectations. Be ready to define the current state of the company’s readiness to execute a transaction and

• Address availability of basic collateral to support a sale, such as material for a “book.”
• Consider the readiness to respond to the key criteria that will drive buyers’ interest in a transaction and the price they will pay, including: predictability and consistency of the company’s revenue, profit and cash flow, customer base and its loyalty, pricing power, concentration issues, and incentives to keep key employees and executives.
• Consider differentiation and market positioning relative to competitors.

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3. Consider Buyer’s View of the Company

Successful companies do not face their customers unprepared. All the more so when it comes to facing a buyer. Be ready to address the concerns of prospective buyers of the company. Expect them to ask about the following:

• Capital investment and operating improvements they would need to do after the acquisition to realize the value they are targeting.
• How quickly and well a strategic acquirer would be able to integrate your operations, customers, and culture.
• Drivers of sale value such as intellectual property, R&D, technology and updates to products, and human talent. Some of these can be improved before negotiating a transaction.

4. Create an Exit Plan

Key steps to an exit are often tax driven. Mergers can be fully or partially tax free and can generate capital gains or ordinary income, depending upon how the transaction is structured. Most sellers will want a stock deal while most buyers will want an asset deal to avoid any contingent or undisclosed liabilities.

• Consider the full range of options for the transaction, including refinancing, sale to insiders/ERISA, sale to a “benevolent” acquirer, or a transfer to heirs.
• Understand the ramifications of each transaction scenario. A private equity deal will close off other funding options and involve an aggressive exit strategy.
• Develop the preliminary “story” about the business to give an acquirer a compelling vision about prospects to grow the business and earn a return on their investment.
• Integrate into the operating metrics and analytics that you use to run the company the model that you think potential buyers will use to put a valuation on the company.
• Prepare information memoranda and related presentation material.
• Create a presentation to investors and be ready to respond to their concerns.

You have worked long and hard to build a company. Take the time and devote the focus required to exit it successfully.