Selling a business is not like selling real estate. It is a complicated endeavor requiring significant planning and preparation by the Seller. Similar to the creation of a commercialization plan used to launch a business, selling a business requires a comprehensive game plan and a team of professionals to guide the sale to closure. Effective teams generally consist of a broker, CPA, attorney, appraiser and personal financial planner.
Obviously, this is not a simple process. It can take several months and require high-levels of confidentiality, which is crucial because suppliers, customers and employees are often unaware that the business is for sale. The Seller can keep it moving though, through thorough preparation. Notably, negotiations most often break down because the Buyer and Seller cannot come to an agreement on the value of the company for sale, which is typically the result of unrealistic valuation expectations from the Seller. The business should be valued from two perspectives:
A realistic valuation of a company should be determined early on with decisions made concerning the asking price and terms, the expected price and terms, and the walk away price and terms. These decisions should be made before getting caught-up in “deal fever.”
With so many unknowns to consider, especially in the current economic environment, the risks in making a corporate acquisition are significant. To mitigate the risk, the acquiring group will conduct due diligence, which is the information gathering process Buyers conduct prior to committing to the purchase of a business. The Seller is expected to provide thorough information. Not doing so can be construed as an attempt to conceal potential liabilities and open the door to future litigation.
Preparing the materials for due diligence will take time. Anticipating the types of information that may be requested and planning ahead will keep the momentum of the deal going. Advanced preparation also gives the positive impression that the business is run in a professional manner. This raises the face value of the company in the eyes of the acquirer and could lead to a higher sale price.
The following 11 items are necessary in preparation for due diligence.
A comprehensive financial review is critical. Accurate balance sheets, earning statements, and cash flow statements, going back several years will be requested by potential Buyers. Most Buyers will also want to discuss pricing policy and marketplace position. Audited financial statements for the current year to date and the three prior years are generally required unless the company has revenue under a few millions dollars. It is also common for a Buyer to request reports of a mix of sales by business/product segment over the prior three years with the associated gross margin. Because asset values represent a significant part of the asking price, Buyers will want to inspect the business property/equipment to understand the rationale behind the valuation process.
A list of expenses that will not be considerations for a Buyer, including the current owner(s) take out of the business and any related expenses.
A basic timeline of significant company events/milestones starting with the creation of the company and continuing to the current day.
An organizational chart that includes supervisory levels and the number of their employees. The exception to this is for Sales and Engineering functions where all employees should be shown. In addition, a Seller should also:
Documentation on Intellectual Property (IP), patents, inventions, invention studies (whether patentable or un-patentable), designs, copyrights, mask works, trademarks, service marks, trade dress, trade names, secret formulae, trade secrets, secret processes, computer programs, algorithms, confidential information and know-how, including:
The new owner will approach operations in their own way, however they will need to understand current processes and procedures, vendor relationships, ordering procedures, inventory management, management systems and customer relations. Everything that relates to the day-to-day operation of the company is fair game in the due diligence process.
The acquirer could request a customer list, from the last three years, for 80 percent of the business. Due to the sensitive nature of this request, it is typically acceptable to indicate the total number of customer accounts and the number of customer accounts that comprise over five percent of total business sales.
A profile of the percentage sales from key industry segments will be expected. List 80 percent of the sales by industry group, with the remaining listed as “Other.”
A summary of the marketing program and a list of the sales tools/support with a brief description of what the company does for:
Legal and liability issues are a very strong concern of the due diligence process. Prepare a list of:
The following HR issues will be of particular interest to any potential Buyer.
All parties want the due diligence process to run smoothly. While preparation for the sale requires a lot of work up front, it is the best insurance against a drawn out sales transaction, which can cause high levels of frustration on both sides of the negotiating table and may not lead to a favorable outcome for either side.
After doing all of this work, it is to the seller’s advantage to focus efforts on interacting with a strategic buyer. A strategic buyer is one who can do more with the business than the seller could if it remained as a stand-alone company. These synergies are often the reason why the strategic buyer is interested in the acquiring company. Synergies have a value and can come in the form of sales growth (they can grow the sales faster than the acquired company can do itself), cost savings (eliminate duplication of resources or leverage better purchasing power), and financial synergy (lower cost of capital, taxes, debt capacity).
Evaluating the potential synergies the buyer sees in the business should be part of the seller’s due diligence process when entering into negotiations. Do not expect the acquiring company to openly reveal these synergies due to the natural tension between a buyer and a seller. Obviously, the seller wants to receive from the buyer an amount that includes the synergies in the valuation and the buyer only wants pay for what the business or technology would be worth if it continued as a stand-alone business.
The seller needs to make an assessment of the company’s baseline value as a stand-alone company and then value it again from the viewpoint of the acquirer, with the realization of potential synergies. It works to seller’s benefit to understand the magnitude and importance of synergies to the acquiring company. If they are important, then the seller is in a stronger position to negotiate a value that takes into account a portion of the synergies—increasing the selling price above a stand-alone value. If purchasing the company only plays a small part in realizing the buyer’s synergies then the seller is in a weaker negotiating position. Knowledge is power, and adequate due diligence will prepare the seller for these negotiations and will likely provide a better overall outcome for the final sale. ♦
Just as selling your business is a little more complicated than selling real estate, marketing your company for sale requires a little more leg work than marketing a widget does.