Posted by peakstone on October 30, 2009 under M&A Insights | 
Selling a company can often be the largest and most important deal of a business owner’s career. To help ensure a successful and efficient sale process, shareholders and business owners should begin the process of preparing their company for a potential transaction long before reaching out to potential buyers. Although each situation is different, it is often suggested that business owners start preparing at least one year prior to initiating a formal sale process or monetization event.
Among the most critical due diligence items for any potential buyer will be assessing the company’s historical and projected financial performance. As a result, business owners should be focused on obtaining audits of the company’s historical financial statements and developing a credible 3-5 year financial forecast. Since audited financial statements are typically required by potential buyers and their financing sources, preparation in advance of a sale will save time and keep the process on-track. Buyers will also carefully scrutinize the detailed financial projections that illustrate the company’s growth potential. Therefore, business owners must ensure that they can effectively support the company’s financial forecast in order to maintain credibility and maximize value.
Also, business owners will need to examine, standardize and document all company transactions and records. By reviewing supplier and customer contracts, owners can confirm that the terms, conditions and renewal provisions will not be a hindrance to a sale transaction. Now is also the time to catalog all company assets, collect relevant industry reports and market data, eliminate unprofitable contracts, formalize any verbal agreements in writing and analyze real estate & equipment lease agreements. It may also be helpful to update any critical information technology systems that could be considered obsolete. If necessary, current owners can also create a manual on company policies and procedures in order to minimize disruption after the sale has been completed.
Ideally, owners should also have a complete management team in place prior to exiting the business. A business owner who is also the company’s key sales or operating executive should fill these critical positions with other qualified employees prior to launching a sale process. Otherwise, buyers will be forced to address these management gaps, which can result in a delayed sale process and, potentially, a valuation discount.
Finally, business owners must also focus on employee retention. Open communications with staff regarding intentions to sell the company guarantee that employees don’t hear about the process from another source. Specific employees may be crucial to the continued success of the business, so it’s also important for an owner to determine which employees are prepared to stay with the company over time. Since the loss of a critical employee could jeopardize a deal, business owners should also have the appropriate retention agreements or employment contracts in place for key individuals.
By preparing a company for a sale, business owners can meet the rigorous demands of the process, anticipate the needs of potential buyers and help ensure a successful transaction.
Eric Dziedzic – Managing Director
eric@peakstonegroup.com
Posted by peakstone on October 14, 2009 under M&A Insights |
Most if not all business owners believe that their company is highly valuable – as well they should, given the time, effort and resources committed to building the company. But how would the market value the company? And what price should a seller expect to receive from a buyer for the company? The most common M&A axiom regarding value is that a company is worth what a buyer is willing to pay for it, and that is certainly true in today’s market. But how can a seller arrive at a reasonable expectation for value?
The most common way to calculate a “theoretical” value for a business uses the methods taught in most business schools – discounted cash flows, multiples of sales/earnings based on comparable companies and transactions, leveraged buyout model, etc. But the reality is that valuation is more art than science – since no two businesses are exactly alike, most cases involve judgments based on current market conditions, past transactions and other subjective information about strengths, weaknesses and risks in a particular business. While just about anyone can crank out a DCF (which is also limited by the quality of the financial projections and assumptions used as inputs), a realistic valuation requires experience and nuance in most cases. Any credible valuation estimate uses a combination of all these methodologies as well as a view on market conditions and “scarcity value” of the business. Like any asset, a business that interests multiple buyers (strategic or financial) may attract a price that exceeds the theoretical value because of the competitive situation. This scarcity value may result from a unique product or customer base, attractive industry fundamentals and market position or even preventing another competitor from owning the business. This suggests that owners should not underestimate process in achieving full value for their business – the ability to attract multiple parties to bid on an asset can overshadow business fundamentals in many cases.
To begin to determine a value for his own business, an owner should at a minimum have a reasonable idea of the company’s revenue and cash flow projections for the next 3-5 years (with particular emphasis on years 1-3) and how this translates into a theoretical value using traditional valuation methods. This will provide a basis for making an informed (albeit subjective) judgment of a realistic value of the business in today’s market.
Todd VanderMolen – Managing Director
todd@peakstonegroup.com
Posted by peakstone on October 8, 2009 under M&A Insights |
The first reaction from owners to a potential sale of their business today is “Why would I sell my business in one of the worst M&A environments in a generation?” It is a fair question – especially for an owner whose perceived value of his company is still based on 2007 market conditions. Unfortunately a return to pre-recession purchase multiples and credit conditions may require a very long wait, if they return at all. While this is certainly far from an ideal time for many owners to consider selling, there are many ways to structure a “sale” that may make sense even in the current environment.
For businesses that have near-term issues that are in part caused by the recent economic meltdown, there are M&A solutions that can solve those issues without committing to fully selling the business today. For example, many businesses that took on debt during the halcyon days of the leverage markets (2005-2007) are now pressured by not only the terms of the debt but also reduced earnings and cash flow to service that debt. One alternative to facilitate a de-leveraging of the business is selling a minority stake or receiving a minority investment from a third party, allowing the owner to reduce debt while retaining control of the business – thus selling only a portion of the business at a potentially less attractive valuation. While this kind of transaction must be structured properly to protect the owner, it can free up the business to pursue growth opportunities and may even provide additional support in the form of expertise and/or future capital depending on the investor/buyer.
Another example would be an owner who is close to retirement, would like to sell but does not have the ability to wait out a full return of a robust M&A market. In this case, a sale transaction can be structured to take place over time that would provide the owner some liquidity today while selling the majority of the business over time using metrics based on performance and improved market conditions – allowing the owner to benefit from improvements in both the business and the overall economy. This also may allow for a more orderly transition of the business over time.
While in most cases these alternative transactions will not achieve the value that a business may have garnered 24-36 months ago, they do provide solutions for business owners today and may be more compelling to an owner versus an outright sale.
Todd VanderMolen – Managing Director
todd@peakstonegroup.com
