Finishing Strong: Time to Buy or Sell
This resource will discuss the reasons around whether it is time to buy or sell a company. We will further explore the needed preparation and typical process to undertake a transaction of this nature.
Key Decision Factors in Selling a Company
There are many reasons why an owner may choose to sell their company. Some of the most common reasons are the following:
- Exhaustion factor: Whether the company was in business for five years or sixty-five years, owners can reach a point where they no longer derive enough satisfaction from ownership. This may come from a lack of revenues or profitability, or perhaps they are simply ready to retire. The result is the owner can be tired and stop driving the business. The business then begins to decline, sometimes to the point of failure.
- Lack of Scale: When beginning the company, a grand vision is often set forth for growth. At times this growth may be needed to meet the owner’s financial expectations, but is not attainable for a number of reasons. Also, some owners prefer not to scale the company beyond a certain size and add the responsibility of managing a large staff.
- Economic Pressures: Whether in the start-up phase or enduring an economic slowdown in their industry, companies may encounter capital problems. Some owners prefer to sell immediately rather than attempt to weather the storm. The stress that economic pressures bring to an owner cannot be underestimated in making this decision.
- No Succession Plan: As the owner reaches retirement, the lack of a strategic exit strategy causes the value of the company to decrease. If a successor is not found within the company or if plans to sell at the right time are not made, the value and owner’s investment often erode.
Key Decision Factors in Buying a Company
The main reason why an individual or company chooses to acquire another company should be that it addresses strategic issues that the company is encountering. Perhaps the acquisition may allow the company to broaden their product mix or increase their customer base. It may also allow current or new platforms to be leveraged to increase overall revenues while adding few operating costs.
It is important to note that the decision to acquire another company should not be based solely on the availability of cash or decreased prices in a stressed marketplace. While market stresses create leverage for companies in good cash positions, the primary purpose must be to achieve the company’s strategic plan.
Transaction Process: A Seller Perspective
- Buyer Identification: As part of the ongoing company exit strategy, the owner(s) should have in mind who might be an ideal buyer for their business. This could be a competitor, a supplier, or another company with strong synergies. With companies under $5 million in annual revenues, we do not recommend “shopping” the company around even via a broker. The pain and expense of the process are typically too draining and disruptive to the company.
- Determining the Value: In order to establish a reasonable price for the company, it is important to understand the buyer and the value of your company to them. In the September 2009 issue of The New York Enterprise Report a recent survey indicated that 40% of respondents believe that their business has increased in value from a year ago. However, according to Inc’s data the median sale price for a private company fell 27 percent in 2008. The true worth of your company is really what the buyer is willing to pay, not what the seller believes it to be worth. The alignment of these expectations is critical to a successful transaction. A seller needs a value that is within the realistic range the identified buyer can and will pay.
- Approaching the Buyer: How the buyer is approached can make the difference in whether the deal is completed. A good understanding of the buyer and their business will allow an accurate approach. For small companies, the approach is usually completed in several phases:
- Initial conversation between buyer and seller.
- Signing of Non-Disclosure Agreement.
- Full presentation of the company for sale.
Following the signing of a Non-Disclosure Agreement, both parties should meet for a full presentation of the opportunity by the buyer or their representative. As this is a key phase in a successful transaction, we recommend hiring a consultative third-party to assist in this process. Particularly in this environment, buyers want to understand quickly how much their bottom line will be increasing with this acquisition.
After the full presentation, the potential buyer has the opportunity to perform any further due diligence desired, as well as to consider their desired terms for a successful transaction. Beyond financials, this due diligence will likely include a hard look at client diversification and other potential risks to consistent revenue and company viability.
- Price Agreement: For small transactions, we recommend that the seller present the desired price rather than waiting for the buyer to complete due diligence and try to determine a fair price. The desired price should be introduced following the full sale package, including potential synergies for growth and hard financial data.
- Payment Mechanics: Although some buyers may have the cash to pay the desired price up front and the willingness to do so, in the current transaction environment we are seeing a higher amount of deferred pay-outs or earn-outs. While the seller may still get their desired price, it may be paid by the buyer over an agreed upon period of time. Depending on the transferability of the business, especially in small deals, owners may be asked to remain with the business for a specific period of time and take part of the sale price out of future revenues or profits, or as compensation.
Please note that the following transaction points have not been addressed in this resource.
- Tax strategies.
- Due diligence.
- Legal documentation.
- Negotiation and closing process.
- Post closing transaction and integration process.
In the public company arena over 80 percent of deals are deemed unsuccessful. Part of the reason for the above outline is to help minimize the risks, but our view of the two key reasons for failure in small business are a) price and b) post integration. Establishing a price that works goes to due diligence and proper evaluation in the pre-deal planning. Failure in post-acquisition integration relates more to management effort following the close of the deal.
Action Items
- Review your company’s exit strategy.
- Consider who might be the optimum buyer for your company.
Articles for Further Reading
- McCarthy, Ryan. “A Buyer’s Market: What is your business worth now?.” 01 June 2009. http://www.inc.com/magazine/20090601/a-buyers-market-what-is-your-business-worth-now.html. This article addresses the fall in company values in the current economic environment as well as how to get a deal done.
- Kelly, Nathan. “6 Reasons Businesses Don’t Sell.” http://www.ozsmallbiz.net/6-reasons-businesses-dont-sell/.
- “How to Find a Business Owner Who Wants to Sell.” http://guides.wsj.com/small-business/buying-and-selling-a-business/how-to-find-a-business-owner-who-wants-to-sell/.
- Business-buy.com offers a listing of business for sale resources and buying directory. BizBuySell.com offers a listing of small businesses for sale with the opportunity to see the asking price along side of the cash flow, location, description of business, etc.
