The first time that many sellers meet the potential buyer of their company is during due diligence when the buyers attend a presentation by the company on its strategy, plans and performance. At these events, the potential buyers are seeking to learn about the company and gain insight into the “human” side of the business, in addition to the Information Memorandum that they have been supplied.

A key factor in determining the demand for a company, and thus the price realized, is the involvement of the management team in the day-to-day operations of the company and the execution of the business plan.  If the management team does not fill these requirements, then the owner is basically doing everything and the management team is  management in name only…in reality they are just employees who perform but don’t lead or manage. As I tell potential clients, “You can sell a company, but you cannot sell a job!”  So,  if the management team doesn’t manage, then in reality there is no company and the owner just has a job.

In addition, most owners are looking to exit the business within a reasonable time of selling. In order for any buyer to allow the owner to exit, the owner needs to have a management team that can run the business in his absence and thus be a redundant cog in the company.

Given that perception is reality, when meeting the management team the key requirement is for the management team and owner to create the impression that the owner is redundant and that the management team can operate the business effectively without him. To that extent, it has always been our advice to clients that the owner’s sole role at the management presentation should be limited to welcoming the potential buyers, informing them of the agenda and procedure for the meeting. After that, the owner should sit down and allow his management team to present and answer all questions. The better the management can handle this process, the greater the confidence the buyer will have in them and their ability to run the company in the absence of the owner.

Posted by Marc Borrelli.

Divorcing – Maybe selling some of your company to an ESOP is an efficient solution.

Divorce is never pleasant, but once that decision has been made, dealing with the split of martial assets should be done in as efficient manner as possible, aside from emotion.  In most cases if one the parties (we shall call the spouse running the business “X” and the other “Y”) owns a business that was started during the marriage it is considered marital property – so in the divorce settlement it is valued and X pays Y 50% of its value and retains total control of the business.  Is this is an efficient settlement?

Many would say yes, but it can be shown that there is a more efficient financial solution in some situations.  Pass 50% of the company to Y with an agreement that Y simultaneously sells their entire interest in the company to an ESOP.  The ESOP is established with an expected life of 3-5 years at which time it will be unwound and X will buy back the 50% interest they don’t own. As said above, financially this can be better decision¹  especially if capital gains taxes rise,  but in addition it has a number of other positive benefits.

•    Grow the company.  Divorce affects performance!  A headhunter once told me that they would never select anyone going through or having just gotten divorced as they are ineffective for a year.  This is true for all of us, regardless of what we think and perceive.  So during a time like this, it would be an ideal time to motivate your management team and employees to drive the company.

•    Independent Valuation.  By selling to an ESOP, an independent third party valuation is established for the company removing some of the fight between the parties.  Since the ESOP also has to get funded, it further emphasizes the value in terms of market conditions.

•    Use the Federal Government’s Fund.  The ESOP pays no income tax and so this subsidiary from the Federal Government effectively allows the ESOP to raise the money more efficiently and give a bigger bonus to your employees.

•    Capital Gains Taxes. It allows Y to pay capital gains tax on their share, rather than X paying everyone’s tax. Furthermore, if the ESOP is unwound by X buying it back, X get’s a new basis in the company which reduces X’s capital gains tax on sale.

•    Efficient use of any available liquid assets.  If X has liquid assets, X can lend them to the ESOP to fund it and earn interest, rather than just paying them to Y.

Please contact us if you wish to consider such an option for yourself or your client.

₁ To view the divorcing analysis, click here.   You are welcome to change the highlighted fields on the spreadsheet so that the analysis is more meaningful to you.

I hear from many people and have experienced clients saying “Why did the buyer reduce the EBITDA multiple after we signed the LOI?” In many cases, the perceived fall in the multiple has led to the seller withdrawing from the process at worst and bad feelings at best. In many transactions, the multiple offered falls during due diligence as the buyer learns more about the company, but this can managed if the company is prepared for sale. There have been many things written about preparing a company for sale including a good piece by my colleague Eduardo Berdegué.  But one of the items that doesn’t get much discussion is quality of the financial statements.

Many privately owned companies only ever prepare tax returns and in some cases even keep their books on a cash basis. When a buyer makes an offer, they base their multiple on audited GAAP prepared financials. Without going into many of the details, GAAP financials impose stricter requirements for revenue recognition, bad debt right-offs, receivables, payables and inventory. When preparing financials under GAAP many of the earnings numbers tend to go down, which tends to reduce the level of EBITDA from that calculated by the company when preparing its tax return.

When sellers look at the final offer they believe the buyer has reduced the EBITDA multiple, when in reality it is the level of their earnings. In order be more prepared for what the real offer will be and stop disappointment or a lost transaction, potential sellers should have an audit done prior to going to market.

Posted by Marc Borrelli.

Subscribe to the Capital Ideas Newsletter.

I just returned from CFA’s Summer Conference in Chicago. One of the highlights of the event was a panel of Private Equity experts talking truths about the state of the middle market M&A industry from their perspective….that of the financial buyer.  In cutting to the chase…if you own a successful middle market business and you have a need to sell all or part of your business…now may just be the perfect time to go to market. Read more »

“I’m ready to sell my business now, so what is my first step?” is a question we often hear from private business owners.  A better question might be, “I’m going to be ready to sell my business in 12 to 24 months, so what should I be doing to better position my business for maximum sale price?”  There are some smarts steps you can take today to prepare your business for a sale that may reap significant rewards down the road.

The key to a successful positioning strategy is to plan ahead.  Give yourself sufficient time, not only to implement the strategy, but to see it working.  For more detailed information on steps you can take to position your business for sale, read my article.

Posted by Marc Borrelli.

Sign up for CFA’s Capital Ideas Newsletter: Capital Ideas For Private Business.

The financial crisis has reduced the number of potential buyers, thus reducing demand. Strategic buyers are far more focused and private equity groups have been forced to put more equity into transactions. In addition, many business owners have delayed the sale of their business waiting on the recovery. But three years on, many business owners cannot continue to delay their exit much longer and will look to sell, increasing the supply of businesses on the market.

Supply currently exceeds demand, and typically when there is excess supply in a market, prices fall to restore market equilibrium. However since businesses are not a homogenous product, demand for the best businesses remains strong and they will be sold at good EBITDA multiples, but the rest may languish without a buyer. What makes a business the best?

It is not about you!

Buyers want to know what is in it for them. As marketers know, the key to good advertising copy is to tell a story. Don’t just describe the business with facts and figures, wrap a narrative around it that is a captivating story which tells value proposition and benefits to the buyer. With many companies for sale, you have only a few minutes to capture the buyers’ interest and hold it.  Remember – the first impression is the only impression. A good example of using a story to sell a product - Would You Buy A Wetsuit On eBay From A Bear At A Urinal?

As transactions usually require final approval from a committee of the buyer, the key to a smooth process is to make the committee’s job as easy as possible. How?  By making sure that (i) the business is easy to explain; (ii) your strategy is simple and executable; (iii) due diligence requests are quickly and properly answered; (iv) there are no issues that require long complex explanations; (v) there are no large unquantifiable liabilities; (vi) your business can operate without you; and (vi) the personal risk to them from promoting the deal is minimal.

Perception is reality!

Everything about the business must reinforce the perception that it is the best of the best. Get rid of clutter, make repairs, paint if you have to, increase curb appeal. All your books and records need to be in order and correct – if simple record keeping is incomplete, buyers wonder what is missing that they can’t see. A couple of years ago, while advising on the sale of a high tech engineering company, the company’s name was on the wall of its headquarters in 8’ letters. However, two of them were missing – the perception is that if they don’t care about how they look, what else is not up to quality?

Posted by Marc Borrelli.