One of the most frequently asked question by a seller to Corporate Investment: What happens when I decide to actively pursue the sale of my business?
There are several major components of the selling process, each of which can have several stages:
Introduction to the Business. Our first step is to familiarize ourselves with the business and business owners. This process generally involves direct discussions the Owner/Seller, a visit to the business site and a review of marketing materials and corporate website, if applicable. Off-site arrangements are made based on necessary levels of confidentiality. The relationship between the Owner/Seller is critical and requires mutual understanding and sharing.
After the initial meeting (if we have mutually decided to take the next step together), we will provide a list of initial information requirements. Most important among these requirements will be our review of your financial information
A Review of Financial Performance. For closely held businesses, an important part of the financial review will be the calculation of the seller’s discretionary income. Closely held companies focus financial efforts on tax minimization, hence lower earnings. It is usually necessary to “normalize earnings” through an analysis of the company’s income statement, for example, by adding back excess salaries and benefits paid to owners. What the business actually generates for the owner in compensation, fringe benefits, etc. is an important factor in determining the marketability and probable market price range.
Our review of the financials, discussions with the owners, analytical review of the industry and market will result in an informal assessment of the price range that we feel the market will respond to. If the Seller’s asking price is compatible with where we see the market, we have a basis upon which to move forward; if, we are too far apart and cannot narrow the gap, we will not proceed together.
The Broker Agreement / Letter of Engagement. Assuming we are in accord at this point, we will enter a formal Brokerage Agreement. There is no obligation on either party until that time. The Brokerage Agreement provides Corporate Investment with the exclusive right to market and sell the business for a specified period of time (generally 6 to 12 months dependent upon size of transaction).
At the time the Engagement is formalized, the seller and intermediary must set realistic expectations for not just the market price, but the terms that are and will be acceptable by the seller. While the ideal situation may be an all cash or predominantly cash transaction, these are uncommon—largely the exception, not the rule. When an all cash transaction is suitable to the buyer, the price will require discounting.
Note. Corporate Investment intermediaries are engaged by you for the packaging, marketing and sale of your business. We cannot and do not provide legal or tax advice. You will be required to involve your CPA, Tax Advisor and attorney at various points in the process. Often, the sooner they are involved the better. Your tax advisor can provide valuable insight into the after tax consequences of the sale and may provide valuable input as to the best structuring of the sale from a tax perspective. Your CPA will be directly involved in the due diligence process. Your attorney, in the drafting and/or review of appropriate documentation of the sale.
Preparing to Go to Market
Definition of Ideal Circumstances and Buyer. Corporate Investment will work closely with the seller/owner to profile the capabilities, both financial and experiential, of the ideal buyer. This will often include an analysis of the strengths, weakness, opportunities and threats to the existing business. This, in turn, will aid the development of a business review and guide our qualification efforts of interested parties.
The Business Review. Corporate Investment will prepare a Business Review, the size and complexity of which will be dictated by the size and complexity of the business being marketed. The Business Review provides a prospective Buyer with the first in depth look into the company to be acquired. This package has been prepared according the most critical elements that an acquirer will need to review. Our business review process analyzes your business in three ways to create a unique approach in positioning your business to the market:
- Drill Down and Case Building - Illustrating and Supporting the Value
- Competitive and Market Analysis – Highlighting the competitive advantages, their sustainability and the future market potential
- Performance and Results Report - Discussion of the achievements, financial performance and potential of the business.
The objective is to provide as deep an insight into the business as possible before involving the owner in direct discussions with the buyer. This process allows us to eliminate buyers where there is no match or where certain qualifications are missing. Additionally, this enables Corporate Investment to limit the seller's initial involvement in the qualification process.
Actively on the Market
Active marketing of the acquisition opportunity. Our marketing may include review of current buyer profiles, networking, internet or classified advertising, and/or various direct marketing efforts. Note that confidentiality is vital. We strive to maintain it at the highest possible level throughout all phases of the process.
Interested Parties. Once interest is generated with a buyer through “generic” data, the prospective buyer will be required to sign a nondisclosure agreement (NDA) as their commitment to keep all information in strict confidence, including the name and location of the business and the very fact that it is for sale. Prospective buyers also complete a buyer profile application that gathers experiential and financial qualifications. All qualifications must be satisfactory prior to release of any confidential or specific business information.
Release of the Business Review. Upon receipt of the signed NDA, we will provide the prospective buyer with the Business Review that will include summary financial information. Dependent upon the complexity of the business and the difficulty in maintaining strict confidentiality, there may be different levels of Business Review with varying amounts of information provided.
If the interest continues and the prospective buyer appears qualified, we will arrange a direct meeting with the Owner/Seller and the Prospective Buyer. The rapport and credibility between buyer and seller is essential to the transaction. Properly presented the Business Review has established a penetrating look into the business but it is only the first step. Further key considerations:
· The Seller is an important part of the selling process. It is often the belief in and the seller’s passion for the business that “sells” the buyer, particularly in small and mid-sized businesses that are the embodiment of the owner/entrepreneur’s vision.
· The reason for sale is another important consideration for the Buyer. There are many reasons for a business owner to sell a business. If the reasons are all negatives, the business may not be marketable or its valuation may be lower than the market average. It is important to point out the bad with the good. Full disclosure from day one is required to build and maintain the trust and confidence needed on the part of both buyer and seller.
Although it is not often the case, sellers must recognize that the best time to sell his/her business is when things are going well, both for the business and for the particular industry. This is when the business is at a premium and is most desirable.
Letter of Intent to Due Diligence
If discussions continue, we will reach a point when the prospective buyer will make an offer via a Letter of Intent or Term Sheet, putting forth their offered price, terms and conditions. We will present the offer to the owner/seller and review it with them; and, will handle the negotiations, if and as necessary.
Once an agreement is reached, i.e. the substantive issues have been agreed upon, the parties must involve their attorneys to draft appropriate contracts formalizing the transaction.
The prospective buyer is entitled to a Due Diligence review of the business during this phase of the process. The due diligence will focus highly on the financials and representations thereof but can extend into many operational segments of the business.
Closing the Deal
The Closing. It’s been a long hard road but we traveled it together and reached our destination!