While some business owners put a lot of thought into the decision to put their company up for sale, others do not. In either case, there are a number of threshold questions that should be considered before discussing the actual sale process.
I usually start at the end. What is the seller trying to achieve in putting the business up for sale? What would define success? Typically, the answers are a result of where the owners are in their own lives, a lack of succession and the need to diversify the concentration of net worth from that single asset.
Another consideration often is a lack of appetite or capacity at this time to take the risks necessary to grow the business. It could be that a meaningful investment is necessary to remain competitive and, while feasible, the owner is not willing at this stage of life to take that risk. All are good reasons.
The next questions that we tackle are expectations and needs. Are pricing expectations realistic given the market? And assuming liquidity at that fair value, does that result accomplish the goals of the seller and his/her family. Pricing in today’s environment is strong and competition among buyers for good opportunities is fierce. Multiples of cash flow (EBITDA) are high, although they do vary depending on size of business and industry. A qualified investment banker/financial adviser can help establish reasonable expectations and elicit favorable pricing through a competitive sale process.
For most sellers, this is their first and last sale and the process is not clear. The question at this point is: What now? Sellers may come with a short list of likely buyers (not to be dismissed), but not with knowledge of how best to proceed and with what universe of buyers.
Today, depending on size of company and earnings, the universe of buyers varies among strategic and financial buyers, with the latter group including private equity funds and, increasingly, family offices (professionally run offices of families that have substantial means to invest in and lead deals).
Sorting this out with the right team takes the mystery and much of the stress out of the process. The team will advise on likely pricing, timing, how best to tell the story of the business through development of a written confidential memorandum describing the business, and importantly, the opportunity to the potential buyers.
In-person management presentations to a select group of likely buyers are also important to managing the process. These conversations will result in alignment as to how to shop the deal — what kind of buyer, how broad an auction does the seller want to run and how and whether competitors will be approached (taking into account the risk associated with that decision).
The sales effort
At this point, we have the team in place and have decided to go to market. Part of the process is determining what advance work should be done to prepare for a sale.
How should the seller organize to prepare for the buyers’ diligence? What third-party help should be engaged to anticipate the diligence and questions that most buyers have? What’s the best way to position this process for success, as well as the optimal way to structure the purchase agreement so as to minimize a seller’s risks of liability after a transaction is completed?
With the proper process and preparation, the sale process can be demystified and structured in a way that enhances the likelihood of a successful outcome. We will discuss what is involved in the sales effort, as well as the important elements of a purchase and sale agreement, in the next articles in this series.
Ira Kaplan is executive chairman and former managing partner of the Cleveland-based law firm of Benesch, Friedlander, Coplan & Aronoff LLP. His practice focuses on M&A as well as public and private debt and equity financing.