Over and Above the Numbers

The following is an excerpt from CBI's The Privately Held Company Newsletter:

A close review of the financial statements is always in order when considering the acquisition or merger of a company. However, that is only part of what a buyer is acquiring. Other important assets are:

• Repeat customers or clients
• Patented product, government approvals, profitable copyrights
• Broad customer or client base (diverse & growing)
• Long-term contracts
• Recognizable brand or product name
• Experienced management team and trained work force
• Valuable intellectual property
• Proprietary products
• Profitable alliances
• Contracts/non-competes with valuable employees

Considering Selling? What's YOur Objective?

The following is an excerpt from CBI's Privately Held Company Newsletter:

While every seller wants the highest possible price for his or her business, there are other factors that will vary in importnance from seller to seller. What's your objective in selling?

Highest Possible Price
This is the submarine commander who directs the crew to "Damn the torpedoes, full steam ahead." The seller wants the top price - regardless of employees, moving of the business etc.

High Price, but with Other Considerations
One example of an "other" consideration is that the business not be moved. Whatever the other considerations may be, the seller only has one or two, and beyond those, the top price is the main consideration.

Good Price, but Only Willing to Accept Some Risk
A large competitor would most likely overlook weak or retiring management along with a fair price. The downside is that the competitor will learn a lot about the business, which creates problems if the deal subsequently craters.

Good Buyer, even if Lower Price
A financial buyer, for example, may not pay the highest price, but will focus on increasing profitability. The intent is to build the business, then sell it, hopefully, for a substantial profit. The owner and management may also profit from this new sale.

Management Buy-Out
This may not bring top value to the owner(s), but if there is significant customer concentration or dependence on management, this might be the safest and easiest way to sell the company. In many cases, the seller will have to finance a portion of the selling price, but the opportunity for additional funds as a result of an earn-out or dividends is possible.

Seller Wants to Remain with the Company OR is Ready to Retire Completely from the Company
The seller may receive a top price by agreeing to remain with the company for an extended period of time. Many sellers want to take the money and run. Many buyers want the seller to remain with the firm and, in some cases, even maintain equity in it.

Some "To-Dos" Prior to Selling

The following is an excerpt from Privately Held Company Newsletter.

• A decision to sell is not set in concrete, but should be awfully close to it. If the business is a family business, all of the family members should be in agreement. The same is true for all of the stockholders.
• The decision on who is going to be the ultimate manager of the selling process shoul db emade prior to going to market. It may be the largest stockholder or the CEO, but a single person should be appointed.
• Timeframes should be established prior to selling and milestones set for creating/completing items such as the selling memorandum, list of buyer contacts, letter of intent, closing etc.Deals that drag don't close.
• Recognize "on and off" balance sheet items such as work-in-progress billing, customer or client prepayments, contractual obligations, legal threats, etc.
• Negotiate key employee agreements or stay agreements. Stay agreements should be at least two to six months.
• Create a special place for all of the relevant documents and information a buyer or due diligence team would need to see.
• Keep in mind that complexity is a deal killer. The more complicated the deal, the less likely it is to work.
• And, finally, don't negotiate directly. Use an intermediary who can mediate, act as a buffer, and carry on "sidebar" conversations. Don't let time elapse between meetings with an interested buyer. Once the process starts, do all you can to keep it moving, or the process may lose its momentum and affect the business-as well as the morale of the employees. These are additional reasons to have an intermediary involved from beginning to end.

Thinking of Selling?

The following is from The Privately Held Company Newsletter



Thinking of selling now or in the not-too-distant future? Here are a few things to do that will definitely help - and, if you decide not to sell, they are items you should do anyway.

• Develop an Operations Manual and an Organizational Chart.


• Remove personal assets and expenses from the business.


• Resolve any pending litigation or regulatory issues.


• Finalize any copyrights, patents or trademark issues.


• Sell off any non-producing assets or equipment.


• Make sure financial records are clear, concise and current.


• Get Employment Agreements and Non-Disclosure Agreements with key employees.


• Build a detailed customer/client list and obtain contracts with them if possible.


• Formalize agreements with suppliers and vendors if possible.


• Make sure your website is current and really impressive.

Family-Owned Businesses Do Have Choices

The following is from "Buying & Selling Companies," a presentation by Russ Rob, Editor, M&A Today.

Family-owned businesses do have some options when it comes time to sell. Selling the entire business may not be the best choice when there are no other family members involved. Here are some choices to be considered:

Internal Transactions

• Hire a CEO-This approach is a management exit strategy in which the owner retires, lives off the company's dividends and possibly sells the company many years later.
• Transition ownership within the family-Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
• Recapitalization-By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
• Employee Stock Ownership Plan (ESOP)-Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset. ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

• Third party sale-The process could take six months to a year to complete. This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after closing.
• Complete sale over time-The owner can sell a minority interest now with the balance sold after like five years. Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
• Management buy-outs (MBOs)-Selling to the owners' key employee(s) is an easy transaction and a way to reward them for years of hard work. Often the owner does not maximize the selling price, and usuallly the owner participates in the financing.
• Initial public offering (IPO)-In today's marketplace, a company should have revenues of $100+ million to become a viable candidate. IPO's receive the highest valuation, but management must remain to run the company.

Does Your Company Have Pricing Power?

The following is an excerpt from The Privately Held Company Newsletter

If Starbucks raised the price of a cappuccino, sales most likely would not be affected. If your attorney raised his or her hourly rate, would you switch law firms? If a company or service firm does not have pricing power, then its value is less than it should be. Here are a few ways to develop or increase pricing power:

• producing a discernible branded product or service


• innovating with patent production such as Apple's i-Pod


• provinding such exceptional service that competitors are not able to replicate it

An interesting question for company management is - how should they set their prices? Sometimes the answer is that management figures out at what price the item can be sold and then works their costs backword. The more traditional way is to add up the cost of labor, material, and overhead plus an acceptable profit. But times have changed, and in many cases, the power of pricing has moved from the producer to the customer. Today, Wal-Mart tells most of their vendors what they will pay for certain items, and Ford tells their suppliers the same. On that basis, many companies are beholden to the Wal-Marts and the Fords of the world and do not have the benefit of pricing power.

Improving Your Prospects for Selling

According to a Price Waterhouse survey of more than 300 privately held U.S. businesses that have been sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market, include:

• Improving profitability by cutting costs
• Restructuring debt
• Limiting owners' compensation
• Fully funding the company pension plan
• Seeking the advice of a consultant or intermediary
• Improvign the management team
• Upgrading computer systems/processes