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Interested in Selling Your Company? Tips for a Successful Transaction

December 2, 2010

By Jeffrey Van Winkle and James Waggoner

Businesses enter into financial and strategic combinations for a wide variety of reasons. Many are in need of additional growth capability, which can be supplied by new products, an infusion of capital or acquisition of new management; others are interested in a business combination to maximize shareholder value or to provide an exit for the ownership for retirement or business continuity reasons.

Whatever the reasons for considering a business combination, the needs and goals of the parties should be examined by the ownership of the business, its internal management and by experienced financial and legal advisors to establish a viable action plan. This article will address two important topics related to business combinations:

  • The current climate of merger and acquisitions in the United States
  • The various value-maximizing items firms interested in selling their business should consider prior to approaching potential buyers

M&A Market Trends

From the peak of 2007 and continuing through the first two quarters of this year, M&A transactions have dropped considerably. Though 2010 has seen a bit of up-tick in activity compared to 2009, it is apparent that the business climate here in the United States and the financial uncertainty abroad continues to negatively impact the M&A market. Potential buyers are still looking to avoid taking the big risk, while those interested in selling are having difficulty establishing a purchase price consistent with current market conditions. Nevertheless, many inside the industry continue to remain optimistic that conditions will continue to improve during the course of this year and into 2011. A cursory overview of information about completed transactions over the past 12 months shows that larger sized transactions, particularly among the publicly held businesses, have increased. That trend has not been observed in the smaller M&A transactions typical for small and mid-sized businesses.

Advisors report that many businesses and funds are very actively seeking candidate businesses to purchase, but often do not have the right connections to discover businesses interested in selling. One reason for increased optimism for completed transactions centers around financing availability, which has continued to improve. In addition, financial advisors and business brokers representing sellers say they are expecting firms interested in selling to better understand the value of their businesses.

Preparing Your Business for Sale

Ideally, selling a business is part of a long term strategy relating to existing owners reaching the end of a work career or planned management transition. However, it is often hard to know the right time to consider a sale. If the business has strong management, ownership interested in the next 10 years, sufficient capital to move to the next step and a business model or strategy that will generate growth and profits, there should be no reason to sell. On the other hand, the absence of any one or more of those four requirements may prompt consideration of a sale, especially if capital or a management team is missing.

When considering whether or not to sell, the best prepared businesses have focused on the following items in order to maximize the value of the business, especially in a struggling M&A market.

Maximizing Business Value

Financial Performance: The financial performance of a firm is often the prime factor in determining the ultimate value of the business. Certainly, potential buyers will want to see how the business has fared especially during the economic downturn. Perhaps as important, however, are the future financial prospects of the business. If the selling firm is able to provide evidence of strong projections, it certainly may prove to be more attractive to a buyer. Although the price may not be higher, at least the deal will close.

Management: A well-established management team which shares in the long term vision established for the firm is a vital part of any business. Any interested buyer will want assurances that the management team will be able to execute the firm’s existing business plan as well as the plans developed by the buyer. In the event, however, that the buyer plans to insert its own management team following the acquisition, it will be just as important that current management agrees with and participates in the transition process.
Customers an d Suppliers: One of the key aspects in developing strong financial projections will be the firm’s relationship with its customers and suppliers. Potential buyers will want to determine that the firm has established long term, profitable relationships with its customers, while effectively managing its costs through favorably priced supply contracts. Moreover, to the extent the firm is able to demonstrate the strength of these relationships, the more likely it is that the buyer will remain confident that the relationships will continue following the closing of the sale.

Due Diligence: Planning for the transaction in advance of approaching potential buyers is extremely important. Not only will this help to facilitate the buyer’s due diligence process, but it will also enable both the parties to save on transactional costs. In addition, the firm may be able uncover and perhaps correct any unexpected negative information, which otherwise could impact the likelihood of successfully closing the sale.
If a business tends to these issues, it will enhance its ability to complete a purchase or sale on the terms it is seeking.

Jeffrey Van Winkle and James Waggoner are both attorneys with Clark Hill, PLC, Mr. Van Winkle is based in Grand Rapids and Mr. Waggoner in Birmingham.

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