Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

September 15, 2019

Five Things To Know Before Selling A Company

By Jeremy Albelda

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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, 3rd 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.

  1. 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.

  1. 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.

  1. 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

  1. 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.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

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“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer

“I utilized A. Neumann & Associates to assist in an M&A process. They are VERY thorough in using their time-tested process to calculate the value of investment opportunities, a process which provided a very detailed explanation for the value of the potential opportunity. Additionally, they also went above and beyond to extend other services including connecting with others who specialize in your industry and can assist with necessary steps including legal and accounting. Highly recommended!”

Edward Lane , Business Owner

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Achim, who explained the process in detail. He had his colleague Gary come to my office in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using when the time comes for me to sell my business for max value. They gave me great insight into the steps I need to take now to get the best deal in the future. I highly recommend this firm to anybody who wants to sell now or down the road. They not only know their stuff, their actually just real nice guys.”

Robert Kardane, Business Owner
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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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