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How long does it take to find a company to buy?
A lot depends upon how specific you are with your buying criteria and the number of companies that are a fit. The more narrow your criteria, the fewer potential prospects. Also, you should not limit your search to companies on the market. They say, “Everything is available for the right price.” If you find a company you like, find out if they could be for sale.
If the “numbers” look good but I still don’t feel good about a deal, should I just trust the numbers?
Anytime you don’t feel good about a transaction or about the overall deal, walk away. Better to have missed what might have been a wonderful opportunity than to give yourself ulcers or start off with serious doubts. Even if you have the best advisors in the world, remember that they don’t have to run the business after the purchase. You do. Besides, numbers represent facts. There are always lots of facts. The truth is another matter, altogether. Find your truth and you will be off to a great start.
How can I determine the true worth of my business?
The bottom line is that your business is worth what you can get for it. Its value to a strategic buyer, that is, a buyer who needs the markets, market entry, technology, or people you have is very different than its value to an economic buyer, who wants a bargain. Frito-Lay, for example, engineered a stock purchase of the Cracker Jack brand from Borden for several times its asset value and more than twice its sales -- by any measure an astounding price. As a powerhouse in snack foods, this purchase filled out Frito-Lay's product offerings. I can’t imagine that any other buyer would even consider approaching this price.
That said, there are many ways to determine the approximate value of your business. Valuations come in many packages. There are industry norms, say a certain multiple of EBIDTA (earnings before interest, depreciation, taxes and amortization), discounted cash flow models, econometric models and comparable sales of public companies. Each method has its strong and weak points, depending upon the capital structure and asset value of the business and its unique competitive advantages. Valuation is only one consideration. Determining your strategic need always comes first.
I have been approached by an investment banker (or broker) who wants me to sign an exclusive agreement to find a business to buy (or to sell my business). Are exclusive agreements in my best interest?
Not in my opinion. There are so many opportunities in the marketplace that nobody can possibly know all of them (particularly those that are not officially on the market). Find a representative who is willing to work a non-exclusive deal (both exclusive and non-exclusive deals should cost about the same in terms of contingent fees. Earned fees for certain activities (such as valuation services, some due diligence costs, travel at cost to evaluate possible deals) are usually extra and are often a good investment, but they don’t require an exclusive agreement either. Negotiate a reduction in fee if you find the buyer but use the representative to handle due diligence and negotiation. Make sure the representative is willing to co-broke the deal with a representative of the other side in the transaction. Your team will usually consist of your representative (usually a consultant and/or investment banker/business broker), your CPA, your financial planner and your corporate attorney. Make sure the team can work together before you sign any agreement. (See more on your team below)
Is it possible to buy a company largely with its own assets and/or someone else’s money?
It’s possible with smaller deals, or when a company is in trouble, but your commitment to the purchase will be measured both in terms of how much of the purchase price you put up and how much you guarantee. Partners, lenders, investors and venture capitalists all want to see the principal fully committed and with enough money to guarantee a good likelihood of success. You may get in cheap, in terms of monies up front, but you will normally be on the line for a whole lot more.
How long does it take to sell a company? There is no easy answer to this question. If somebody wants it (an internal or external buyer) it can usually be sold in 60-90 days – the time it takes for both sides to complete their due diligence, negotiate terms, draw up the documents and confirm the financing. Some deals go faster, most take a lot longer. Some deals take years to get the right buyer and terms. Before you put up a For Sale sign, commission a valuation to find out, in rough terms, what the business likely to be worth in the marketplace. If it is worth less than you need to get out of it, and your circumstances allow you time to build its worth, pull back, build the value then start looking for buyers.
Will insiders pay more than someone from the outside? Often an inside person, or persons, will see more potential in the business than an outsider, particularly if they feel they can do a better job than you have done. If so, they will be willing to pay more, but often don’t have the full purchase price. They will need financing, often from the Seller, to make the deal work. If they are successful, you win. If not, you may have to take a write-off or take the company back at some future date.
I want my family to continue the business but they don’t all want it. Is there a way to make it happen fairly?
There are many positive things about keeping the business in the family. There are also many potential problems. In structuring a deal that is fair to all and most likely to succeed, start by separating equity and performance issues. Inheritance is an equity issue. Determine who is to inherit, what is to be inherited and how you are going to divide the inheritance. If some want money, structure their share outside the business. For those who want the business, tie the shares to equity. You are passing the goose that lays golden eggs to the next generation. You are passing ownership, not jobs. Those running the company may, or may not, be shareholders. What they need to be are people who know how to nurture the goose and produce the maximum number of golden eggs. If family members can do the jobs, great. If not, don’t jeopardize everyone’s golden eggs (their inheritance and your buyout) just because they are family. Some key questions to consider include: Are there clear distinctions between performance and equity rewards? Are the new family leaders experienced and up to the challenges that face the business in the future? Are they in agreement on the parts they will play? Are non-family leaders rewarded properly and is their authority free from family influence? Do any family members with significant shareholdings hold deep-seated resentments against the current family leaders or against the impact the business has had on the family over the years, real or perceived? Does the next generation have sufficient wealth to allow the current generation to take significant equity from the business without jeopardizing its future, or will the current family members be required to keep assets in the business or continue to guarantee the company's debt? There are many factors to consider, including tax implications and the benefits to the family of divesting a business altogether to preserve its wealth or distribute it over the generations. All that being said, it all comes down to the reality that if you protect the business (goose and golden eggs) you will strengthen the family.
What’s a reasonable period for a buyout?
The actual transaction period can be brief, particularly if the company is cash rich and the deal strictly relates to assets. In a situation where the value of the business must be built prior to sale, or when the owner wants to make the change "sometime" in the future, or when the deal is leveraged, the time can stretch over a period of years. We worked with a company, in fact, where the deal took two years to put together and established a transition/payout period of 15 years thereafter. The new owners accelerated the process, escalating the payout to the owner in the 7th year. The important issue is not how long but how to get as much of you want as is possible from the deal.
I want to sell my business but have key executives I want to provide for. Should I use compensation, stock or some form of "shadow equity"?
There are many ways to reward those who have helped create wealth in the business. Each has its plus and minus attributes. As owner, you have to be attentive to promises you have made, both real and implied, to your key employees. You also have to consider how a prospective buyer will value the business if key executives are not locked into some form of "golden handcuffs." The implications of using stock or cash or some hybrid are many. What, for example, is your basis in the company's value? From a tax perspective, it might make sense to share some of the gain with key employees, or it might not. In a recent situation, preparing a company for sale, the owner decided he wanted to share equity prior to the sale. Working with him, his attorney and CFO, we crafted a stock ownership plan for key employees with a multi-year vesting period to minimize the tax implications on the employees and reflect their minimal cash infusion, while at the same time tying their performance solidly into future earnings. Your goals, along with any prior promises, will guide your decision-making.
How many ways are there to cash out?
There are truly many options in selling your company. Your goals will determine just which options to consider and your advisors will help guide you through the process. The more successful your company, the less dependent upon your personal input, the stronger your personal balance sheet, the less dependent you are on the amount you need from the sale of the business and the stronger your bargaining position in any proposed transaction. A tax-free exchange of stock, a sale of assets, an installment sale, a leveraged buyout, a merger, are but a few of your options. No one-way is right, or wrong.
If I sell with a multi-year performance plan, should I secure my interests during the period?
Protecting yourself and your assets during any buyout period makes good common sense. The corporate landscape is littered with the remains of owners who didn't take adequate care to protect their interests. Keep in mind every step of the way that you are not out of the woods until all contingencies have been met. Having a strong team of advisors is critical not only in preparing to sell, through the transaction and during the payout period but also in being mindful of unanticipated problems. One unfortunate owner, whom I met after he had sold his company, was eventually forced into bankruptcy when the company failed and his advisors neglected to ensure that he had been freed from all obligations prior to the sale. Other owners have not gotten full value from the sale of their businesses, particularly service businesses, when (through no fault of their own) the new owners defaulted on the transaction. Both seller and buyer must beware.
What kinds of expertise do I need on my team?
Your first need is strategic. You need someone to advise you on business decisions (including the personal implications of those decisions). An experienced succession-planning consultant who has had experience like you have had is your best bet here. You also need input from your accountant (and your tax advisor if your accountant doesn't advise you here), your corporate attorney and your financial planner. Those are the key advisors you need for your team. People you should not include in your planning until you have made your strategic decision to go forward with the plan are: your banker, your customers and your suppliers. Individual strategies for each of these groups are critical to the plan but prior knowledge could interfere with your business if they are prematurely advised. I have a franchise, dealership and/or distributorship. Are there special concerns I need to be aware of?
Absolutely. Owners of franchises, dealerships or distributorships and their advisors must pay special attention to the Franchise Agreement, the dealership and/or distributorship agreement and any other contractually related items as part of the initial planning process. Companies who use channel distribution often have very restrictive agreements with their dealers/franchisees. Many today are under significant competitive pressure. A dealer or franchisee that announces to his/her channel partner a desire to sell the business may risk losing the relationship, or be required to get the transaction blessed, or lose the relationship. Some newer agreements, with annual, or bi-annual renewals, may not be renewed and your business transferred to a competitor. Furthermore, a buyer may make retention of the dealership a contingency of the sale. Each prospective seller must tread carefully.
For more information about Advent’s Merger & Acquisition Services, call 1.800.726.7985. |
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