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Selling Your Company

Sept. 1, 2006
Don't fly solo if you want to sell your business. An experienced financial advisor will be an invaluable co-pilot in the process - and someone who can get you up to 20 percent ,ore for your business.

Do you want to sell your company? Your situation is analogous to a person facing major surgery. For that individual, the most important decision will be selecting the surgeon who performs the operation because that decision will likely determine if and how quickly the person returns to complete health.

The most important question you must answer before proceeding with the sale process is, “What investment banking/advisory firm should I retain to handle the transaction?” The answer to this question will likely determine whether you achieve a premium-priced deal with minimal risk to post-closing liabilities. If you are the owner or CEO of a middle-market company — firms with a transaction price between $2 million to $250 million — the importance of this decision is probably even greater, because many advisors serving companies of this size are less than adequate. Most electrical distributors, independent manufacturers' reps, as well as many electrical manufacturers, are in this range. This article will teach you what characteristics to look for in an advisor who can maximize the value of your company in a sale.

The advisor should have an open and verifiable track record. Advisors should be willing to discuss any non-proprietary information related to a prior deal, except for the transaction price and deal terms. The advisor should give you a thorough list of completed transactions, including the identities of sellers and buyers, and this record should be made available for your unrestricted investigation. These deals should be supported by references you can contact directly to substantiate the advisor's claims relating to prior transactions. Be sure to talk to these former clients.

As a general rule, advisors should consummate two deals per professional person (employed by their firms) per year to be considered reasonably good. Outstanding firms have a long-time record of consummating three to four deals per person per year.

Make sure the advisor will guide you from the beginning to the end of a transaction. Advisors must be able to help their clients plan and time the sales of their companies. In addition, they must control all aspects of the deals. An advisor's responsibilities should not end when a letter of intent (LOI) is executed. The advisor should be your lead negotiator from the LOI until the execution of the definitive purchase agreement (DPA). To do this, they must possess highly specialized knowledge in the area of representations (reps), warranties and indemnifications. These are critical issues with financial consequences that potentially can be as financially significant as the purchase price. The normal terms acquirers usually obtain in these areas are generally accepted by most legal counsel as adequate. However, these normalized terms leave a seller in a precarious post-closing situation that could cause them to potentially lose a significant portion of the sale proceeds. Consequently, your advisor must have an intimate familiarity with these issues and have the capability to control the deal process from the LOI to the execution of the DPA. This will assure you the maximum protection in the reps, warranties and indemnifications.

To obtain a premium price, your advisor must be tough, aggressive and determined. This is necessary to convince a strong-willed, sophisticated acquirer that things are going to be done in a manner acceptable to you. The advisor must understand the leverage points that will pressure an acquirer to provide your desired price and deal terms. It's often beneficial for middle-market sellers that started up, built and managed their own companies — like most electrical distributors or reps — to retain advisors who themselves are entrepreneurs. As a small-business owner, they will better understand your make-up and the things important to you. This should enable the advisor to negotiate a deal that will fully satisfy your needs. In addition, advisors with this background should be more capable of helping sellers deal with the many post-closing emotions they often have in the months following a deal's completion.

Look for an advisor who takes a business-oriented as opposed to a financially oriented approach to the valuation and sale of your company. Most advisors believe the sale process is just a financial exercise. Nothing could be further from the truth. Ask yourself the question, “Do all publicly-traded companies in a specific industry trade at the same multiple of earnings?” Of course, they don't. That's because of the differences in the companies' business foundations and what it portends for future growth and/or threats to earnings. The only way a seller's business foundation can be evaluated and a determination made about the company's future growth opportunities and/or risks is by your advisor's thorough presale investigation of your business foundation. This includes a detailed investigation of the capabilities of your company's operations and production, marketing, personnel, facilities, purchasing and operational cost efficiencies and demographic considerations related to your industry.

By the time the process is concluded, the advisor must thoroughly understand your business niche and how it correlates to future growth and profitability. This will enable an accurate forecast of future profitability and EBITDA (earnings before interest, taxes, depreciation and amortization). Many advisors either do not possess the capabilities or are unwilling to spend the time to perform this business investigation. Utilizing only a financially oriented approach will likely have a serious negative impact on your transaction price.

Your advisor should have a history of doing all-cash deals. All-cash deals are conducive to minimizing your post-closing exposure. With the exception of certain highly unusual situations, no good reason exists for sellers not to do all-cash deals. Advisors that recommend their clients accept other than all-cash deals are being overly accommodative to an acquirer's needs at the expense of their client.

Sellers need advisors who clearly articulate advice and ideas in a manner that provides strong guidance to clients. Advisors must have the strength of will, breadth of knowledge of the acquisition process and the ability to convey that to a successful, independent entrepreneur in a manner that makes the seller want to follow their advice. Although the ceding of a minimal amount of control is often difficult for a successful entrepreneur, it's necessary for sellers to maximize transaction price. They should allow a qualified and proven advisor to guide and direct the process because they probably don't have the market expertise or experience to make independent judgments on how to professionally handle the sale process. Although the advisor should direct the process, only the seller should retain the unqualified right to make all decisions regarding the acceptance or rejection of a specific deal's pricing and terms.

Sellers foolhardy enough to want advisors they can totally control are making critical mistakes. They should realize any advisor who can be dominated by a client will also likely be dominated by an acquirer. What the seller really needs is the rare advisor with the proven record of being able to control large, sophisticated acquirers and obtain premium prices for their clients.

If it's necessary to transact a premium-priced deal, your advisor must be patient. You don't want an advisor committed to a quick sale, regardless of price, because the objective is to consummate a deal only after a premium price has been obtained. Although the normal time to transact a deal is usually six months to 12 months from when an advisor starts evaluating the company, in unusual situations it might take two years to five years to consummate a premium-priced deal.

In these cases — probably about five percent to 10 percent of total deals — a much longer time is required if the seller's legitimate objectives are to be fully satisfied. Discuss their overall record with a potential advisor. If they have not taken an extremely long time to successfully complete a few sales, it probably means they are more interested in “churning deals” at less than a premium price than in getting maximum value for their clients.

If a company has multiple shareholders who have significantly different financial and personal objectives and/or personal problems with each other, it becomes even more imperative to find a strong-willed advisor. Advisors faced with these situations must have the expertise to develop solutions to reasonably satisfy all shareholders and the ability to articulate why the compromises inherent in those solutions will fairly benefit all shareholders. This mandates not only a strong and forceful advisor but also one who has the compassion and understanding to appreciate the significance of the personal reasons, objectives and conflicts that make certain divisive issues important to particular shareholders. In this way, a compromise can be developed that will make all shareholders agreeable to the solution.

Summary. No one approach to a sale is appropriate for all sellers. For advisors to be consistently successful, they must be creative. An advisor who takes the time to understand your company, you and your needs will be able to determine your unique recipe for success. This advisor should be able to sustain the positions that will satisfy your personal objectives and provide you a premium-priced deal.

Don't look for someone with the most pleasing personality or whom you have known the longest. The sale of your company will probably be the largest transaction in your life, and the right advisor should be able to add at least 10 percent to 20 percent to your transaction price. Apply those percentages to your expected transaction price and then decide which characteristics are most important. The most important characteristics an advisor should have are knowledge, experience, character, integrity and toughness. When you find an advisor with these five characteristics, you will have found the advisor who will maximize your company's purchase price.

George Spilka is president of George Spilka and Associates, Allison Park, Pa. The firm specializes in mergers and acquisitions. The author's Web address is Reach him at (412) 486-8189 or by e-mail at [email protected].

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