|
BY
JULIE GARELLA
f
all of the comments I most frequently hear when
talking to entrepreneurs about their business, "my
company is not for sale" gives me the most cause
for pause. While you may have no immediate intention
of monetizing your biggest asset, I believe that
there are two key reasons you should operate with
the mindset that "I'm always for sale."
Reason
#1: Timing is Everything
First, the best time to sell is when you don't
have to. This means a time when neither you nor
the company is under any financial pressure to sell
or borrow money, you are experiencing peak earnings
growth, and next year looks just as strong as this
year. Things are going so well, why even think of
selling right?
Well,
as rosy as the picture looks today, here are a few
questions to consider:
-
Are you in a cyclical business, and is that
cycle nearing the top?
- Given
your personal time horizon, will you be able to
increase your company's value significantly over
the coming years, or are you now seeing the benefits
of all your hard work?
- Is
the value of your company rising because of external
factors, such as a climbing stock market?
Several
years ago, I worked with the owner of a company
that did business in manufacturing and distribution
of packaging products. For eight years, the world
was her oyster, and she grew her company's annual
sales from $15 million to more than $50 million.
Things
were going so well that she even traded her largest
West Coast competitor for all of his East Coast
plants, meaning she now had a lock on everything
east of the Mississippi. With a broad base of clients,
many of them from Fortune 500 companies, she started
giving serious consideration to growing through
acquisition.
When
her West Coast competitor called to discuss the
possibility of a merger, my client replied, "I'm
not for sale." The competitor called back. He said
he understood her position, but his company was
really serious and was prepared to pay top dollar.
Again, "not interested" was her answer.
Well,
that was three years ago. Where is this woman today?
In trouble, not because of anything she did wrong,
but because the competition from China is now killing
the industry. It is not a question of how good her
company is or how well her company treats its clients;
external factors have changed the landscape for
her business, and she now realizes she missed her
golden opportunity.
Reason
#2: You Cannot Control the Pace of Your Opportunities
The second reason I advise clients to always
be prepared to sell is that you never know when
a great opportunity may present itself. Even though
you may not officially be for sale, you could be
just what a buyer is looking for.
Maybe it's geographic diversity. Maybe it's
your product lines, or your client base. Maybe it's
your sales force. Perhaps they prefer to buy, rather
than build, in your markets. Whatever the reason,
it never hurts to "do the dance" and see what kind
of number a buyer is willing to put on your business.
You may be surprised!
Simply
ignoring the opportunity could mean that you're
missing out on the best chance to reap the most
money for all your hard work - and again, timing
is the big factor in this scenario. You may not
play such an important role in someone else's strategy
two or three years later.
Being
Proactive
The other side of the coin is the business owner
who decides she really does want to sell. What can
she expect, and how does the process work? There
are basically three approaches to selling a company:
- Targeted
process:
In this scenario, you would approach three to
five likely buyer candidates. Usually, these are
names that have contacted you previously and expressed
an interest in your firm. While this is the best
method for preserving privacy, it doesn't allow
competition, which can hurt the sale price.
- Shot
gun or full auction process: This scenario is
most suitable for larger companies ($50 million+)
that have solid operating histories with wide
appeal. In this scenario, you would contact 100
or more names to determine whether they have any
interest in the company. This process ensures
multiple bidders, but it also ensures that everyone
will know your company is for sale.
- Modified
auction process: Under this scenario, buyers are
ranked according to their ability and perceived
level of interest. Once three or four suitors
have emerged, a definite deadline is set. This
type of approach is the most suitable for the
majority of small companies, because it allows
the banker to keep a tight rein on the process.
Dressing
Up for the Dance
Once you've determined the best path for you,
it's time to begin to pull all your documentation
together. Preparing a company for sale is a little
like getting dressed up to go to the dance. You
have a good idea of whom you want to meet. You even
may have talked to them beforehand, but now you
want to look your best.
Putting your company in the best light is what
the selling memorandum - often called an OM (offering
memorandum), CIM (Confidential Information Memorandum),
or Prospectus - is all about. Although selling memorandums
are customized for each particular type of company,
there are some common factors among them. Each includes:
- An
executive summary:
This is a hard-hitting summary of the most important
points you want the reader to know. Much of what
you say here will be discussed in greater detail
in your industry discussion later in the document.
- A
company description:
This will outline the terms of ownership and the
reason for the sale. It also will provide a history
of the company, describe the product line and
markets, list key events, outline sales history
by product line, discuss strengths and weaknesses,
and explain the company's unique success factors.
Your business strategy will be an important component
of the discussion in this section.
- An
industry discussion: This section will describe
trends and changes taking place within your industry.
Here is where you begin to touch on the future
of the industry and how your company is poised
for profitability. The size and growth of the
industry will be discussed, along with key customers.
Industry research also is important, because third-party
validation is much more credible than an owner's
or banker's opinion.
- A
discussion of personnel: Your organizational
chart, the biographies of your key management
employees (including their roles and responsibilities,
their length of time with the company, and their
remuneration) make up the majority of this section.
You also should include a description of your
marketing and sales organization and your administrative
process.
- Projections:
This should include your five-year plan and the
specifics of how you will get there, as well as
any risks and assumptions that should be taken
into consideration.
- Financials:
To provide an accurate picture of your financials,
you should include three years of audited or reviewed
financial statements, with month-to-month and
quarterly graphs. Your also should include adjusted
an income statement, with rationales for adjustments
and documentation. Five-year pro-forma projecting
should be presented, as well. All must be credible
and tied to the five-year plan.
- An
appendix: Components of this section typically
include company financial statements, literature,
asset lists, and appraisals. Maps, photos, and
anything else of relevance also may be included
in the appendix.
Evaluating
the Level of Interest
Once you've completed the offering memorandum,
you'll need to prepare a short version of the executive
summary that does not contain the company's name
or any data that could "tip off" a potential suitor.
These documents are then circulated to the potential
buyers.
If
potential buyers show interest, they will be asked
to sign a non-disclosure agreement (NDA), also referred
to as a confidentiality agreement (CA).
When
the CA is signed and returned, the offering memorandum
will be delivered. Should the potential buyer have
interest in the company, the discussion and due
diligence process will begin. If the company does
not have an interest, all material will returned.
Answering
the Buyer's Questions
Smart buyers are going to investigate you and
your company very carefully. They have read the
documents you have prepared, but they are now looking
for more information. For instance, they'll want
to know:
-
What your financial statements can tell them:
Have you deferred repairs? Are your reserves adequate?
Have you used correct accounting methods? What
is the story with receivables? You must be as
straightforward as possible when buyers ask these
questions in order to instill trust and respect,
both of which will be needed to close the deal.
- Inventory
valuation: Is everything here stated correctly?
What happens to overruns? What's going on in new
product development and with those products becoming
obsolete?
- Other
areas of interest: Contracts, insurance, unrecorded
liabilities, tax contingencies, customers, sales
management, pension funds, any related party expenses
and marketing - all will come under scrutiny.
Having well-thought-out answers and presenting
the facts correctly the first time will go a long
way toward getting the transaction done.
Answering
Your Questions
While your prospective buyer is giving you the
once over, you will be investigating whether or
not the fit is right to capitalize on your company's
strengths. If the terms of sale include your remaining
with the company or even financing a portion of
the sale (commonly called an earn-out), you need
to feel very comfortable with the buyer.
Ask
yourself: Is the chemistry right? Does the buyer
have the financial wherewithal to pay for the transaction
or execute the growth strategy? If the buyer is
a publicly traded company and you are taking back
their stock, how strong do their prospects look?
These
are just a few of the questions you should examine
as you move through the transaction process.
Remember:
There Is Price, and Then There Are Terms
It is important to take a minute to consider
exactly what is important to you in the transaction.
Make
a list that includes such items as the length of
time you will be expected to stay, your salary,
and whether you will be asked to carry any financing.
Determine the tax implications of different sales
mechanisms, such as cash, stock or installment.
Try
to rank your concerns so that in the negotiation
process, you are clear on which ones you can readily
give up in exchange for keeping the transaction
moving.
It
pays to remember that nothing kills a deal faster
than saying that something is non-negotiable.
Getting
It Done
The take-home lesson in all this? Simply that,
at the end of the day, there is no substitution
for preparation. Understanding what you are worth,
how the process will work, and what your role will
be post-sale are the first steps toward making sure
this deal -any deal - is right for you. And that
means peace of mind.
JULIE
GARELLA is co-founder of McColl Garella LLC (www.mccollgarella.com),
a Charlotte, NC, investment banking firm specializing
in women-owned businesses and serving clients nationwide.
She can be reached at 704-333-0183 (e-mail: jgarella@mccollgarella.com).
|
