If I was selling (Part Two)
In Part One I left off with the dealer or seller having determined that they are financially ready to sell, and at the same time they have determined that this is a good time to sell. With the recent changes to taxation of small businesses, this is even more important today.
The next big step is to decide whether you want to use an intermediary or M&A advisor to help you sell, or if you want to try selling your company yourself. I have an obvious bias towards using an intermediary but I think it is based on some sound reasons:
• It takes a lot of time to sell most companies — more time than a typical owner/operator can take away from running the business.
• Selling a business takes experience in selling businesses.
• A good broker should know two key things — how to value your company and how to find most of the better potential buyers for it.
• It is easier to keep the selling process confidential if all the paperwork and back and forth with buyers is handled off-site at a broker’s office.
• Data shows that owners who use an intermediary have a better chance of getting a deal closed and at a higher price.
The next step is to get a valuation done on your company, whether you use a broker or not. Some small business owners unwisely skip this step and just arrive at a ballpark value as to their worth.
The problem with this is you could be leaving money on the table. A word of caution, however, is also in order for those who seek out a proper third-party valuation. Be careful who you get to value your company. Many Certified Business Valuators whose work I have seen do not do a good job of valuing recurring monthly revenue.
Also, it is important to understand that whoever is valuing your company is only giving you the most probable selling price, not what your business will actually sell for. Overall, valuing small businesses is probably trickier and more imprecise than valuing bigger, more established businesses. Next, you should get an attractive “selling package” done, which can be shown to prospective buyers. This describes the company from the point of view of what a buyer would want to know. These are known as a Confidential Business Review.
Once the selling package is done, it needs to be circulated to prospective buyers. If you want to be sure of getting the best all around deal for your company, again the statistics all show that a “teaser” (usually sent out before the package) has to be shown to several, if not many, potential buyers. From the teaser you hopefully get several worthwhile interested parties who will get the full package on the company for sale. Obviously this “shopping” of the company has to be done carefully and under non-disclosure agreements. I personally like to try to create a “mini-auction.” This auction process does not go on forever. Bids have to be in by a certain date and cover certain important details.
Once the best offer has been chosen — and sometimes this decision is not as easy as you might think — the much preferred route is to get the best bidder to draw up a non binding Letter of Intent (LOI) laying out all the terms they are offering. I have read articles that say a LOI is not necessary in the sale process. I flatly disagree. If the buyer wants the seller to stop negotiating with others then the seller needs a formal LOI.
Once the LOI has been signed, most buyers will want to do some due diligence on the company they are buying. Sellers simply have to be ready for things like:
• Having their financials scrutinized even more carefully.
• Having a legal, background and credit check done on their company.
• Having to turn over accounts receivable aging reports.
• Giving the buyer a breakdown on inventory.
• Disclosing details on leases that their company has for vehicles or anything else.
• Disclosing details on employees — what they are being paid and how long they have been there.
There is also the issue of if and when a seller discloses bad news. Most brokers will suggest it is better to get the bad news out up front. Even if the buyer misses finding the bad news in due diligence, it is likely they will find it sometime after closing and it can destroy good will down the road.
The other issue that often comes up in due diligence is how much of its customer base should the seller disclose. I suggest proceeding with caution and not disclosing too much.
I always advise buyers and sellers that as soon as they start the due diligence phase, they should at the same time get their lawyers working on the Purchase and Sale Agreement and any other closing documents like a Non Competition, Employment or Vendor Take Back agreement. The process of getting agreement on all these documents will likely mean going back and forth between the lawyers for the seller and buyer. The process can take forever. Sometimes it pays to get the buyer and seller together without the lawyers and hammer out the issues on their own.
Believe me when I say in my years doing deals in the security industry, every deal took longer to close than I first thought and certainly longer than most sellers would like.
Overall, as an intermediary, I have learned that closing almost any deal takes persistence, patience and the ability to stay open-minded and flexible.
This article originally appeared in the April 2018 issue of SP&T News.
June 19-22, 2018
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