5 Essential Secrets In Selling A Business

This month, we will touch upon five essential secrets to make a business sale to a new owner successful.

“Needless to say, there are many ingredients for a smooth transfer, “says Achim Neumann, President, A Neumann & Associates LLC, a New Jersey based Mergers & Acquisitions advisory and Business Brokerage firm, “but a few key issues have resurfaced again and again in the past 15 years for successful transitions.”

#1 Urgency or Deal Motivation

One of the key ingredients for a successful business sale is urgency – for both parties, seller and buyer. A famous mantra in the M&A profession is ‘no motivation, no deal’, and it rings true quite often.

Typically, business buyers look at many businesses for sale and investment opportunities before deciding on the “right one”. Unfortunately, they have been misled in the past by business sellers not ready for a sale during this process.  Usual telltale signs for hesitant sellers include delays in accepting a full-price offer or referring all matters to the attorney thereafter. Buyers are very sensitive to such indicators, and they will avoid everything not to spend $15,000 in accounting or legal fees for due-diligence and three months of wasted time – for a seller who ultimately does not want to execute a transaction.

Reversely, there are buyers, often among the Private Equity (PE) investment community, who issue many letters of Intent (LOI) to see which LOI will ‘stick’. A favored strategy is to low-ball the offer and terms to “sort out” desperate sellers. Worse yet, more often than not, the LOI is written in such vague terms that even upon acceptance by the seller, the seller then finds themselves tied down for an extended period of time with little results to show at the end.

Thus, the objective for the M& Advisor needs to be to consistently ‘probe’ the motivation on both party’s ends and consistently make both parties aware of the urgency to close the deal.

#2 Established Management Structures

The most significant challenge in purchasing a business is to ensure continuity in the business operations during the immediate six to twelve months past transaction closing. The new owner needs to ensure that customers stay with the company, employees don’t leave and suppliers continue to provide products and services. As a matter of fact, studies have shown that in less than five percent of mid-market transactions a buyer himself/herself won’t make any significant personnel changes in the first 12 months of ownership.

The best ‘insurance’ is to have a capable, well-experienced management team in place to facilitate such continuity. Thus, the management team is key – and part of the “goodwill” – and every buyer wants to ensure this is in place.  A business owner ‘who does everything’ is of little benefit to a buyer.

Thus, the implication from an owner’s point of view has to be the positioning of the right professionals well in advance of the contemplated transaction date. The lack of a well-versed management team will most certainly delay a deal, in the best case, or most likely not facilitate a deal at all.

#3 Growth Perspectives

Not a single Investor will acquire a company for its current performance, but all buyers want to see that a company has growth potential.  Thus, it is absolutely essential that a seller steps back and thoroughly defines all potential growth paths for the company, including the underlying capital infusion required to execute such growth plan.

Such expansion can encompass a variety of different approaches, such as geographical expansion by opening offices in new regions, synergistic product or service line expansions either by way of organic growth or by acquisitions, the bolstering of human resources by hiring additional personnel – just to name a few.

Rest assured, every business has growth potential. Naturally, the current business owner – most familiar with the business – is the most qualified individual to provide guidance for such growth, but sometimes said owner is tired after all the years of running the business and it might take an external consultant or business coach to help define such growth and to formulate a plan. Money well spent!

Business buyers are motivated by positive, consistent cash flow with good company growth projections. Obviously, a qualified M&A advisor needs to document such in the confidential memorandum for the company to entice the buyer to make an offer.

#4 Consistent, Superior Marketing Presentation

The market for ‘companies for sale’ is very competitive, to say the least. There are thousands of companies for sale at any given time, there is great ‘market transparency’ with the Internet and with the impending demographic shift, there will be many more ‘baby boomers’ to sell a business than to buy a business. Worse, the subsequent generations have been exhibiting a significant degree of ‘risk adversity’ in running – and acquiring – a business.

The implication is that investors will need to find concise, convincing information to explore an acquisition. The most critical marketing documents in this process are the Blind Profile, Confidential Memorandum (CM), and an accredited business valuation by a third party.

The blind profile should give an approximate synopsis of the key metrics of the company – assets, employment, cash flow – but should not divulge the company name, specific operation, or address.

The CM – to be obtained by the investor after pre-qualification – should include a detailed asset listing, tax-return-based financial information, growth projections and current and projected EBITDA with normalized Sellers Discretionary Cash Flow (SDCF) – including an explanation how it was developed. For example, discretionary personal owner expenses being run through a business should be indicated. In addition, the company’s competitive advantage needs to be illustrated, revenue streams explained, company org charts shown and so forth. Essentially, everything an investor needs to make a decision should be truthfully disclosed.

Moreover, the financials need to be consistent, for example, past tax returns can’t be on an accrual basis, while P&Ls for the current and future years are on a cash basis – never mind that all financials should be current.

In short, the Confidential Memorandum should represent putting ‘the best foot forward’ by the business owner in selling a business. Neglecting such, or simply relying only on a valuation, will significant reduce the transaction price or jeopardize a sale altogether

# 5 Qualified, Professional Legal Representation

Finally, one aspect neglected and overseen by many sellers so often, is the selection of good, professional legal support.  Rest assured, the investor will have a very sharp attorney with extensive transactional background on his team, and this is not the time for the seller to be under-represented – by his familiar attorney having handled all the seller’s affairs in the past, except transactions.

As a matter of fact, the most frequent cause for terminated deals is a sell-side attorney who is not familiar with the “ins and outs” and having to “read up on” it.  At best, such situation results in a much-delayed transaction, at worst, both parties will ‘dig in their heels’ and the transaction will fail in the end.

In sum, these are the five essential secrets for a smooth transaction. Addressing these issues will have all other adversity appear as small. Naturally, having a well-experienced, professional Mergers & Acquisitions Advisor on the team will exponentially faster execute a deal.