By: Patrick Ungashick
In Part 1 of this series, we examined how to handle the stream of inquires that you may receive about potentially selling your business. We also discussed how to conduct an introductory call with an inquirer if you decide to investigate a specific opportunity, including important mistakes to avoid and information you should gather.
In Part 2, we explored how to prepare your company’s initial financial statements to share with the potential buyer after signing an NDA, once reviewed by a specialist mergers & acquisitions (M&A) attorney. We also provided two educational resources created by our team at NAVIX to help you evaluate if you are ready to sell your company (Download our white paper “Top 10 Signs You are Not Ready to Sell Your Company”), and to help determine if this potential buyer might be the right deal (See our webinar "Knock Knock!...How to Know if the Potential Buyer at Your Door is a Waste of Time or the Opportunity of a Lifetime") for you.
In this final part of the series, we will explore the importance of putting together an advisory team if you intend to pursue a sale of the company.
If you have reached this point this article series, that means you have been contacted by a potential buyer to acquire your business, and you have taken the first steps of speaking with that party and providing them with company financial statements properly prepared for outside review. To proceed further, it is time to convene an advisory team to guide you and your business through this process. Let’s explore who needs to be on your team, and the role that they will play.
We will start with perhaps the most obvious advisor that you will need—an accountant. Most successful business owners have an existing relationship with an accountant or accounting firm for tax and perhaps audit services. Therefore, you probably do not need a new accounting relationship to assist you with the potential sale of your company. But you need to make sure that your accountants are informed about your situation and qualified to provide the required advice and services.
Share your situation with your accountant at the earliest opportunity. Verify that your accountant has extensive experience assisting business owners with the tax, accounting, and transaction issues that come with the sale of a company of your general size and characteristics. There is a good chance that your existing account is fully qualified in this area. If not, often your accountant has a colleague that they can introduce into the situation.
You will need your accountant to advise and assist you with some to all of the following issues associated with the sale of a company:
- Tax planning: evaluating the tax impact of a sale and recommending any potential tax-saving strategies and tactics
- Tax compliance: making sure that your company is current and compliant on all tax issues including: federal, state, sales, and payroll taxes
- Assistance preparing the company for due diligence and sale, including potentially providing an audit and/or a quality of earnings (QofE) review as well as working capital analysis
Most business owners intuitively know they need to involve their accountant when considering a sale of the company. Just make sure you contact the accountant as soon as possible, and verify they are experienced in transactions of your company size and profile.
Mergers and Acquisitions (M&A) Lawyer
Unlike with an accountant, many business owners do not maintain a regular relationship with an M&A lawyer. Therefore, you may need to find and engage an M&A lawyer to join your advisory team. In Part 2 of this article series, we first encountered the need for an M&A lawyer, when reviewing and signing an NDA with your potential buyer. If pursuing the sale of a company, working with a M&A legal specialist is a must-do. A competent and proactive M&A lawyer will provide incalculable protection to you and your company throughout the negotiation and purchase process. Your potential buyer likely has expert legal advisors on its side, and you need them too.
Your M&A lawyer will provide many important services during this process, including:
- Legal review and guidance for all relevant transaction documents and agreements such as letters of intent, purchase agreements, employment agreements, non-compete agreements, shared services agreements, etc.
- Negotiation of terms and conditions to reduce your risk and ensure your deal structure is consistent with market norms and standards
- Assistance with preparing the company for due diligence and sale, including reviewing company legal and operating documents, contracts and agreements such as leases, customer contracts, vendor agreements, joint venture agreements, etc.
If you do not have an existing relationship with an M&A lawyer, ask your business attorney or your accountant to recommend several M&A lawyers to consider. The sooner this professional is on your team, the better.
In most situations, engaging an investment banker to represent your company in the discussions and negotiations with a potential buyer is a wise move, even if you are only considering this one potential buyer. (See our webinar "Knock Knock!...How to Know if the Potential Buyer at Your Door is a Waste of Time or the Opportunity of a Lifetime" to learn how to cost-effectively engage an investment banker for a targeted process that involves just one or a very small number of potential buyers.) This is especially true if your company leadership/management team does not have extensive experience acquiring and/or purchasing companies. Again, your potential buyer almost certainly has a team of people who have negotiated the purchase and sale of many companies. It is important that you have the same experience and expertise on your side too.
A common question we hear from business owners is “How do I select an investment banker?” Business owners should apply these four criteria to find and select an investment banking relationship:
- Typical Deal Size – Select an investment banker that routinely works with companies of similar size and value to your business. A banker who usually works with $10 million companies may not be the best choice if your business is worth $100 million, and the reverse. To discern if the size is a good match, ask the investment banker to list five to ten recent transactions that he or she directly represented, including company size, industry, and other relevant data. If the banker is part of a larger team or firm, be sure the list includes transactions that your investment banker directly worked on, and not a list of deals done by other people from that firm.
- Industry Experience – In many cases, it makes sense to select an investment banker who has relevant experience in your industry or sector. This applies if your industry is highly specialized, technical, or presents a niche market. A banker with experience in your industry needs less ramp-up time, possesses a deeper understanding of industry factors influencing company value, knows relevant industry trends, and may have relationships with potential buyers. However, in some situations it can be disadvantageous to work with an investment banker who specializes in your industry. That investment banker may have ongoing relationships with the more prolific buyers in your industry—relationships the banker may not want to push hard to get you the highest sale price. Also, being too much of a specialist may insulate the banker, leaving them unaware of potential buyers outside the traditional players.
- Compensation Alignment – In recent years, investment bankers have evolved into a greater variety of compensation methods and practices. For example, some investment bankers charge a fee payable upon the successful sale (thus commonly called a “success fee”) that is expressed as a percentage of the total company value at sale. Another approach is to charge a flat fee or tier of flat fees, with or without an incentive on top of the flat fee tied to achieving a higher sale price. To further complicate matters, retainer fees can greatly vary in amount from one banker to the next, and some bankers credit their retainer against the success fee, while others do not. This diversity requires you to sift through a wider range of compensation methods, but you gain the opportunity to select a banker whose compensation structure aligns with your situation and preferences.
- Your Other Advisors Support Your Choice – Selling a company is a team sport. An investment banker usually plays the lead role in negotiating with the potential buyer but will need help from your other advisors along the way. Ask your other advisors for their input on which investment banker you intend to use, not just to protect your interests but also to make sure that you create a team of advisors who work together effectively.
Exit Planner (that’s Us)
The last professional to add to your team is your exit planner. At NAVIX we specialize in exit planning, and we have extensive experience assisting business owners pursue and successfully exit by way of company sale. Our sole focus is to help our business owner clients plan for and achieve successful exits. Engaging us creates three potential advantages: save you time, reduce your risk, and help you net more money at the end of the process.
- Save You Time – Reading this three-part series of articles probably has highlighted for you that selling a company is a significant time demand. The time burden is greater if you and your leadership/management team have limited experience in these transactions, and if you were put into this potential sale situation on short notice. Furthermore, when selling a company, it is imperative that you and your team avoid getting distracted or bogged down with the sale. While in discussions with the potential buyer that party is closely watching the company’s financial results. If the company misses its revenue or profit targets during the sale process, which most commonly occurs when the leadership team does not have enough time to lead and grow the company while simultaneously assisting with the sale of the company, that can cost you a lot of money or even kill the deal. When selling a company, insufficient time equals lost money and increased risk. Engaging NAVIX saves you time, because our experience means we know what needs done ahead of time, and how to get it done as quickly as possible.
- Reduce Risk – All of the professionals on your advisory team—your accountant, M&A attorney, investment banker, and exit planner—help reduce the risks that inherently come selling your company. Those risks are not just legal and transactional. Common risks include the potential that:
- Employees, customers, competitors, or vendors prematurely learn your company is for sale
- You fall short of reaching the amount you wanted to net from the sale
- You and your business partners find yourselves divided about the sale opportunity (if applicable)
- Your potential buyer turns out to be unqualified, dishonest, or predatory
- You close on the deal but the buyer later trashes the company culture and/or reputation
- You receive less than 100% cash at closing, but never see the rest of the funds
- You sell too soon when you should have just waited
- Net More Money – The final way NAVIX adds value to business owners seeking to exit successfully and sell their company is to potentially increase net value from the transaction. Not all companies sell for the same price or multiple—we understand the factors that drive business value at sale. Perhaps you have heard that companies in your industry are selling for some multiple range, such as “between 6x to 10x earnings” for example. That is helpful to know, but which company gets a 6x at sale and which gets an 10x? We help companies maximize the multiple through our proprietary analysis tool called the Transferable Value Score, contact us to see how it works. The Transferable Value Score analyzes 80 factors not directly related to revenues or profits, that drive company value today and at your exit. Raising your company’s Transferable Value Score can help you sell your company for a premium multiple and favorable terms.
Working with NAVIX is like hiring a part-time, temporary team-member who’s only job is to help you exit successfully: maximize your company value, exit on your own terms and timetable, and build a sustained business legacy.
Conclusion and Next Steps
Through these articles you have learned what it takes to explore and pursue the potential sale of your company. You understand the important steps and have a clear plan for creating an advisory team who are going to help you fulfill our exit goals. At this point, we’d be glad to speak with you to learn more about your specific situation and see if we can help you like we have assisted hundreds of other business owners. Contact us to schedule a complimentary and confidential phone or video call.