Five Things To Know Before Selling A Company

Many business owners think they know what their firm is worth – or worse, don’t think it is very important.  Unfortunately, both perceptions are equally disastrous.  You only get one chance to sell your firm and it must be done correctly in order to maximize the financial return.  The first and most important step is to know exactly what the organization is worth as an ongoing concern and how it will be perceived by the buying community.

Starting with this key issue, here are the five most important things that every business owner should know and realize before attempting a sale of their firm:

1. Industry ‘Rules of Thumb’ Regarding Valuation are Essentially Meaningless

These type of “cocktail party” value approximations might be comforting to the business owner, but have little basis in analytical fact finding and should certainly not be used as the basis for a sale decision.  Even if an owner (or their very qualified CPA) thinks they can determine the valuation correctly, their opinion does not carry much weight in the eyes of the people who ultimately matter – namely the buyers and the banks financing the transaction.

An independent, 3^rd party, accredited fair-market value appraisal is the key component and sets the stage for maximum financial return and an efficient transaction.

“Without this multi-dimensional analysis in place”, says Achim Neumann, President of A Neumann & Associates, New Jersey “the buyer will almost always request their own valuation which is a seller’s nightmare as this is done prior to the seller having an offer in front of him.  Even if the buyer doesn’t do the valuation, then the SBA most certainly will request one as a prerequisite to obtaining funding for the transaction.”

It is to the business seller’s great advantage to have this vital appraisal report in place prior to entering the market – full value is obtained and a quicker closing is achieved.

2. A Local Competitor is NOT the Most Likely Buyer

Another common misconception is that a major competitor will be the ultimate buyer.

“Over the past 10 years, the sellers have actually previously known the buyer in less than 10% of all our closed transactions over 450 offices nationwide” adds Mr. Neumann.  There are many displaced individuals who are sitting on large sums of cash or richly funded 401k/IRAs looking to put that money to work and to forge a second career as an entrepreneur.  This is a very powerful segment of the buying community and should not be overlooked – they are motivated and often move much quicker than larger organizations.  For a seller to enter into the market with a preconceived notion as to who the buyer will be only limits the market and the resulting opportunities.

3. Cash Flow (and Not Tangible Assets) is King

Assets are nice, but cash flow is king!  “Sellers Discretionary Cash Flow (SDCF)” – in short, the total profit, compensation and benefits paid to the owner – is the driving force for market valuation.  If total tangible assets outweigh the ongoing concern value of the business, then a liquidation sale will yield a higher sale price.  “The most desirable situation is for a company to have a solid asset base and have that base generate high profit margins which translate into significant cash flow to ownership,” says Mr. Neumann.

Once again, the independent valuation process will properly determine and itemize the components of SDCF and ensure that the business is presented at its maximum value.  A key component to any meaningful valuation is the determination of a buyers “return on investment” in the first year of operation – a seller must know that a buyer is expecting a certain level of free cash flow to mitigate the significant risks of owning a small business.  When positioning a company for sale, it is very important for the marketing documents to show every possible dollar making sure of accuracy and supportability.  There are NO ignorant buyers and any deception will surely be brought to light in the due diligence phase prior to closing.

4. A Letter of Intent is a One-Way Street

 “At A Neumann & Associates, we only deal with firm Offers to Purchase” stresses Mr. Neumann.  “The reason is simple, really.  A weak Letter of Intent only binds the seller and literally takes the business off the market while the buyer contemplates more.  This is simply unacceptable for any serious seller.”

A formal Offer to Purchase (OTP) provides a strong deal framework and is usually accompanied by earnest funds deposited into the seller attorney’s escrow account.  Most importantly, the OTP (signed by both parties) outlines specific contingencies and date deadlines for financing, definitive agreement, due diligence and closing.  All contingencies (such as lease agreements, non-compete agreements, consulting arrangements, royalty streams, etc.) are fully itemized and negotiated at this stage.  Because this document is so strong it ultimately reduces legal fees and shortens the timeframe to a successful closing

5. Selling a Business is Not a One Person Job

As a business owner, it goes without saying that your primary focus should always be on the performance of the company.  This is never more vital than when trying to sell the company as the most recent performance will be scrutinized most heavily by any potential investor.  Without a professional team in place to properly value and market the sale transaction, the business owner is left with performing both tasks. The usual result is both efforts suffer greatly and nothing gets done.

Proper valuation, comprehensive marketing package, market reach, marketing strategy, buyer qualification, confidentiality, deal structure, tax implications, deal negotiation, financing, due diligence, legal support – these are among the many ingredients to an efficient business transfer.  A professional M&A advisor along with a trusted CPA and legal council is the proper team to handle this mission.  A well-positioned intermediary working on behalf of the seller allows the business owner to fully concentrate efforts on the performance of the company.  The task is challenging even with that team in place – almost impossible without.

In conclusion, time is the enemy of every deal.

These issues and suggestions are all designed to help the business owner know exactly what goes into the process and the importance of correctly managing the numerous landmines along the way.  If done properly, an efficient transaction is possible – one that quickly maximizes profit in a confidential manner and meets the ultimate goals of the business owner.