Archives for 2016

Why Deals Fall Apart — Loss of Momentum

Deals fall apart for many reasons – some reasonable, others unreasonable. For example: • The seller doesn't have all his financials up to date. • The seller doesn't have his legal/environmental/administrative affairs up to date. • The buyer can't come up with the necessary financing. • The well known “surprise” surfaces causing the deal to fall apart. The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum. This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don't notice the waning or missing momentum. Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it. Let's say a buyer can't get through to the seller. The buyer … [Read more...]

Personal Goodwill: Who Owns It?

Personal Goodwill has always been a fascinating subject, impacting the sale of many small to medium-sized businesses – and possibly even larger companies. How is personal goodwill developed? An individual starts a business and, during the process, builds one or more of the following: • A positive personal reputation • A personal relationship with many of the largest customers and/or suppliers • Company products, publications, etc., as the sole author, designer, or inventor The creation of personal goodwill occurs far beyond just customers and suppliers. Over the years, personal goodwill has been established through relationships with tax advisors, doctors, dentists, attorneys, and other personal service providers. While these relationships are wonderful benefits, they are, unfortunately, non-transferable. There is an old saying: In businesses built around personal goodwill, the goodwill goes home at night. It can be difficult to sell a business, regardless of size, where personal … [Read more...]

The Three Ways to Negotiate

Basically, there are three major negotiation methods. 1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.” 2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used. 3. This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner's son to continue employment with the firm. The buyer may want to move the business. There is an old adage that advises, “Never negotiate your own deal!” The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good … [Read more...]

Due Diligence — Do It Now!

Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a buyer's perspective in performing due diligence as part of an annual review of the business. Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door. This process, when performed by a serious acquirer, is generally broken down into five basic areas: • Marketing due diligence • Financial due diligence • Legal due diligence • Environmental due diligence • Management/Employee due diligence Marketing Issues It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry. For example, here are just a few questions … [Read more...]

Considerations When Selling…Or Buying

Important questions to ask when looking at a business…or preparing to have your business looked at by prospective buyers. • What's for sale? What's not for sale? Does it include real estate? Are some of the machines leased instead of owned? • What assets are not earning money? Perhaps these assets should be sold off. • What is proprietary? Formulations, patents, software, etc.? • What is their competitive advantage? A certain niche, superior marketing or better manufacturing. • What is the barrier of entry? Capital, low labor, tight relationships. • What about employment agreements/non-competes? Has the seller failed to secure these agreements from key employees? • How does one grow the business? Maybe it can't be grown. • How much working capital does one need to run the business? • What is the depth of management and how dependent is the business on the owner/manager? • How is the financial reporting undertaken and recorded and how does management adjust the business … [Read more...]

Keys to a Successful Closing

The closing is the formal transfer of a business. It usually also represents the successful culmination of many months of hard work, extensive negotiations, lots of give and take, and ultimately a satisfactory meeting of the minds. The document governing the closing is the Purchase and Sale Agreement. It generally covers the following: • A description of the transaction – Is it a stock or asset sale? • Terms of the agreement – This covers the price and terms and how it is to be paid. It should also include the status of any management that will remain with the business. • Representations and Warranties – These are usually negotiated after the Letter of Intent is agreed upon. Both buyer and seller want protection from any misrepresentations. The warranties provide assurances that everything is as represented. • Conditions and Covenants – These include non-competes and agreements to do or not to do certain things. There are four key steps that must be undertaken before the sale of … [Read more...]

“Red Flags” in the Sunset

Unlike that poetic title of an old-time standard song, Red Sails in the Sunset, red flags are not a pretty sight. They can cause a deal to crater. Sellers have to learn to recognize situations indicating there might be a problem in their attempt to sell their business. Very, very seldom does a white knight in shining armor riding a white horse gallop up, write a large check and take over the business – no questions asked. And, if he did, it probably should raise the red flag – because that only happens in fairy tales. Now, if the check clears – then fairy tales can come true. Sellers need to step back and examine every element of the transaction to make sure something isn't happening that might sink the deal. For example, if a company appears interested in your business, and you can't get through to the CEO, President, or, even the CFO, there most likely is a problem. Perhaps the interest level is not what you have been led to believe. A seller does not want to waste time on buyers … [Read more...]

The Confidentiality Myth

When it comes time to sell the company, a seller's prime concern is one of confidentiality. Owners are afraid that “if the word gets out” they will lose employees, customers and suppliers. Not to downplay confidentiality, but these incidents seldom happen if the process is properly managed. There is always the chance that a “leak” will occur, but when handled correctly, serious damage is unlikely. Nevertheless, a seller should still be very careful about maintaining confidentiality since avoiding problems is always better than dealing with them. Here are some suggestions: Understand that there is a “Catch 22” involved. The seller wants the highest price and the best deal, and this usually means contacting numerous potential buyers. Obviously, the more prospective buyers that are contacted, the greater the opportunity for a breach of confidentiality to occur. Business intermediaries understand that buyers have to be contacted, but they also realize the importance of confidentiality and … [Read more...]

A Selling Memorandum

A sellers memorandum includes all those points one would normally expect to see in any business plan, to wit: an executive summary, a business description, financial requirements, target market niche, identification of top management, an operations review, analysis of strengths and weaknesses, and current financial statements and projections. Guide to Mergers and Acquisitions published by PPC A proposed sale of a middle-market company almost always begins with a selling memorandum. This document is called many things, including offering memorandum, confidential descriptive memorandum or simply the book. Regardless of what you choose to call it, its purpose is to encourage prospective buyers to take a further look at the company. For the seller, it has a secondary side benefit. It forces them to take a hard look at the company, its strengths and its weaknesses. Upon reviewing the information necessary to prepare a selling memorandum, the seller may, in fact, decide that it's not such a … [Read more...]

Common Seller Questions

How long does it take to sell my business? It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment (generally 40 percent of the asking price or less), the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business's ability … [Read more...]