Wednesday, March 05, 2014

Selling Your Business - Elements of a Successful Sell Side Process



I just posted a new video on YouTube that discusses the steps involved when a merger and acquisition professional engages in selling your business. We briefly describe the elements of the business sale - from signing the engagement agreement, to the blind profile and confidentiality agreement, to building the prospect data base, contacting the potential buyers, corporate calls and visits, negotiating letters of intent and finally the closing. Enjoy

http://youtu.be/tRO8lm_D1NI



Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Private Equity May Be Your Best Business Exit Strategy

I just posted a new video on YouTube that discusses when a private equity sale can be superior to a sale to a strategic buyer when you consider the "second bite of the apple" and the total terminal transaction value. Enjoy. 

http://youtu.be/-Ba5J1d-WmI


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Wednesday, January 29, 2014

Sell Your Business from a Position of Strength



You started your venture 20 years ago "in your garage", worked several 80 hour weeks, bootstrapped your growth, look on your company with the satisfaction of an entrepreneur, and are now considering your sale.  The decision to sell is all too often a knee-jerk one rather than a proactive one -- the principal reasons are a severe health issue, owner burnout, the loss of life of a owner, general industry decline or the defection of a major customer. Often times very competent business people manage the sale of their business with less rigor than in the sale of a home. Advance preparation can ensure that you leave your business from a posture of power, not from weakness due to necessity. The purpose of this article is to discuss the ten significant elements that a business owner should take into account in their once in a lifetime opportunity to maximize the rewards from their years of effort.

Do not wait too long.  Have you ever heard, "I sold my business too early?"  Compare that with the number of times you've noticed someone declare, "I should have sold my enterprise one years ago."  Unfortunately, waiting excessively long is most likely the single prevalent factor in reducing the financial results from the sale of a closely held business.  The decline in business price normally is most significant in that final year before exiting.  The decision to sell is often times a imprudent conclusion rather than a practical decision.  An individual who spends 20 years running their business and calculating their outcomes often behaves another way in the exit from his firm.  The primary reasons for selling are events such as a significant health concern, owner frustration, the passing away of a owner, general industry erosion, or the loss of a major buyer.  Exit your business from a posture of strength, not from the necessity of decline.  Don't let that subsequent huge deal delay your sale.  You can compensate yourself for that contract you project to close with  a astutely crafted deal agreement containing contingent payments in the future if that event takes place.

Prepare yourself for years after selling.  We all create business plans both formally and informally.  We all prepare for vacations.  We plan our parties.  We need to strategize for the most important monetary event of our lives, the sale of our venture.  Normally a privately held business represents more than 80% of the business owner's net value.  Launch with your plans of how you want to enjoy the rewards of your work.  Where do you want to journey?  What pursuits have you been intending to start?  What volunteer work have you intended to do?  Where do you intend to have your home?  What job would you do if money were not an issue?  You need to emotionally determine an identity for yourself away from your company. 

Prepare your business to establish the most value in a sale.  Now that you are all enthusiastic about the fun things you'll do once you exit your business, it's now time to focus on the things that you can do to maximize the worth of your business upon sale.  This topic is adequate subject matter for an complete expose, however, we will concisely touch upon a couple of significant factors.  First, engage a skilled CPA firm to do your financials.  Buyers fear risk.  Audited or reviewed financial statements from a well thought-of accounting firm reduces the perception of risk.  Do not assume the buyer will give you credit for something that does not exist in your financials.  If you observe that a out sized fraction of your sales comes from a  a small number of clients, launch a plan immediately to reduced customer concentration.

Buyers of companies fear that when the principal exits the most important clients and vendors are at risk of leaving as well.  Start to delegate management activities without delay and pinpoint successors internally.  If you have no one that fits that description and you have adequate time, search for, hire and coach that person that would stay on for the transition and beyond.  Buyers of companies desire to hold vital people that can continue the progress of the company.

 Investigate and recognize the growth possibilities that are accessible to your business.  What additional products could I introduce to our existing client base?  What different markets could make use of our products?  What strategic alliances would help extend my business?  Capture that in a document and identify the resources required to pursue this plan.  Buyers will have their own plans, but you'll increase their perception of the value of your business through your grasp of the growth opportunities.

Maintain your focus on running the business.  A key error business owners make in selling their business is to concentrate their time and concentration on selling the business as opposed to controlling the business.  This happens in large publicly traded companies with sizable management teams as well as in private companies where management is largely in the hands of a sole principal.  Various large companies that are in the throes of being acquired are guilty of losing focus on the day-to-day management.  In case after case these businesses endure a pronounced competitive dip.  If the acquisition does not occur, their business has suffered pronounced decline in value. 

For a privately held business the effect is even more acute.  There simply is not sufficient time for the principal to wear the many hats of operating his business while embarking on a full-time job of selling his business.  The owner wants the impending sale to be absolutely confidential until the very final instant.  If the owner attempts to put up for sale the business himself, by default he has divulged that his business is for sale.  Rivals would like to have this information.  Bankers get nervous.  Employees get nervous.  Customers get nervous. Suppliers get edgy.  The owner has inadvertently created risk, a potential slump in business and a corresponding drop in the sale price of his business.

Be sure to get many potential buyers involved in your business sale.  The "typical" business sale transaction for a privately held business starts with either an unsolicited approach by a competitor or with a choice on the part of the owner to exit.  If a competitor initiates the transaction, he generally isn't interested in over compensating for your business.  In reality, just the opposite is correct. He is trying to buy your business at a discount.  Outside of yourself there is no one in a better position to understand the price of your business more than a main competitor.  He will try to keep the sales process limited to a negotiation of one.

 In our mergers and acquisitions practice the owner often contacts us after an unsolicited offer.  What we have realized is generally that unsolicited buyer is not the eventual purchaser, or if he is, the ultimate purchase price is, on average 20% higher than the first offer.  If the owner decides to exit and initiates the process, it usually begins with a interaction with a trusted advisor; accountant, lawyer, banker, or financial advisor.  Let's say that the owner is contemplating selling his business and he tells his banker.  The well- meaning banker says, "One of my other customers is also in your industry.  Why don't I provide you an introduction?"  If the introduction results in a negotiation of one, it is suspect that you will get the maximum and best the market has to offer.

Hire a Mergers and Acquisitions firm to sell my business.  You enhance your probability of maximizing your financial results while dropping the risk of business decline by hiring a firm that specializes in selling businesses.  A large public company would not even contemplate an M&A transaction without representation from a Merrill Lynch, Goldman Sachs, Solomon Brothers or other high profile investment banking firm.  Why?  With so much at stake, they realize they will do better by paying the experts. 

Companies in the $3 Million to $50 Million range fall below their radar, but there are mid market M&A firms that can provide similar services and process.  Generally when you sell your business, it is the lone time in your life that you go through that occurrence.  The purchaser of the last company we represented for sale had up to that time purchased 25 companies.  The sellers were high-quality business people, knew their stuff, but this was their initial and probably last business sale. Who had the advantage in this transaction?  By engaging a practiced M&A firm they helped balance the M&A experience scales.

Retain other specialists that have expertise in business sale dealings.  You may have a fantastic outside accountant that has done your books for years.  If he has not been involved in numerous business sales transactions, you should think about engaging a CPA firm that has the skill to direct you on significant tax and accounting matters that can literally result in differences of hundreds of thousands of dollars.  What are the tax implications of a stock purchase versus an asset purchase?  A lower offer on a stock purchase may be far superior to a higher offer on an asset purchase after the impact of taxes on your after-tax proceeds.  Is the accountant that does your financials competent to counsel you on that matter?  Would your accountant understand the best method to allocate the acquisition cost on an asset sale between hard assets, good will, employment agreements and non-compete agreements?  

 A deal attorney is very distinctive from the attorney you retain for everyday business law issues.  Remember, each element of deal makeup that is beneficial to the seller for tax or risk purposes is normally correspondingly unfavorable to the buyer, and vice versa.  Therefore the skilled team for the buyer is under directions to make an offer with the most advantageous tax and reps and warranties results for their client.  You need a professional team that can equal the buyer's team's level of experience with deal structure, legal, and tax issues.

Be realistic in your demands on sales price and provisions.  The days of irrational exuberance are over.  Strategic buyers, private equity groups, corporate buyers, and other buyers are either very smart or do not endure very long as buyers.  I dislike rules of thumb, but usually there is a limit of sales prices for similar businesses with similar growth profiles and similar financial performance.  That being said, nonetheless, there is still a range of selling prices.  So, for illustration, let's say that the sales price for a business in the XYZ line of business is a multiple of between 4 and 5.5 times EBITDA. 

Your goal and the goal of a high-quality M&A advisor is to sell your business at the top end of the range under beneficial provisions.  In order for you to sell your business beyond that range you must have a very significant competitive lead, set of intellectual assets, extraordinary expansion opportunities, or substantial barriers to entry that would rationalize a premium purchase price.  If you think about the process of detailing your car prior to  offering it for sale, a good M&A advisor will help you in that course of action for your business.  Let's say, for example, that 4 to 5.5 multiple from above was the multiple in your business and you had an EBITDA for the last fiscal year of $2.5 million.  Your gross sale proceeds possibly could range from $10 million to $13.75 million.  A skilled M&A firm with a successful practice can step you to the pinnacle of your industry's range.   The impact of reaching the peak of the sales price range vs. the low-end more than justifies the success fee you pay to your M&A professionals.

In the business selling process, reveal, reveal, reveal, and do it early.  A seemingly insignificant less important negative exposed near the beginning in the process is an inconvenience, a obstacle, or a aspect to negotiate about.  That same negative discovered during negotiations, or worse yet, during due diligence, turns into, at best, a vehicle for reexamining the validity of every slice of data to, at worse, a deal breaker.  No agreement in the world can cover every possibility if there is not a primary meeting of the minds and a trust between the two parties.  Unless you are fortunate enough to get an all cash offer without any reps and warranties, you are going to be united with your buyer for some period in the future.  Buyers strive to keep you on the hook with reps and warranties that continue for a few years, employment contracts, or non-competes that last, escrow funds, seller notes, etc.  These all fulfill a dual role to reduce the risk of future negative events.  If future significant negative events transpire, buyers tend to be punitive in their outcome with the seller.  Volunteer to divulge your company's warts near the beginning in the process.  That will foster belief and credibility and will ensure you get to keep all of the monies from your sale.

Be flexible and amenable to inventive deal structure.  Everything is a negotiation.  You may possibly have in mind that you desire a total purchase price of $13 million and all cash at close.  Maybe the market does not endorse both desires.  You may be able to get innovative in order to arrive at that purchase price goal by agreeing to carry a seller note.  If the sale procedure creates many bids and the finest one is $11.3 million cash at close.  You may counter with a 7-year seller balloon note at 8% for $3 million with $10 million cash at close.  If the buyer is a stable company, that may be a enhanced outcome than your previous goal because the best interest proceeds you can currently obtain on your investments is 4%.  Be flexible, be inventive, and use your advisors to negotiate the demanding parts and preserve your connection with the buyer.

You may possibly have spent your life's labor building your business to supply you the returns, wealth creation, and heritage that you had planned and hoped for.  You organized and were aggressive and determined in your pursuit.  You have one concluding act in your business.  Make that your closing business success.  Leave on purpose and do it from a position of power and receive the highest and best deal the market has to offer.


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Thursday, September 29, 2011

Our Client Exits in Style

I know that we have often posted advice on how to exit your business, but quite frankly, it is seldom completed without some bumps in the road. We recently assisted one of our clients in his business sale and I have to say that the process was the smoothest we have ever experienced in over 15 years of deal making.

Don't get me wrong, we would love to claim credit for this positive event, but we pretty much did what we always do. The reason this transaction went so well was because of the seller. We knew things were going in the right direction when he made it clear to us that his people were his top priority. He was realistic about his company's value and he was engaging in his dealings with both our firm and the buyer.

Anyway, yesterday I sent him an email asking if we could use him as a reference for a new engagement that we are pursuing. You will love this. I got a text back this morning:

Dave...... I'm currently at the foot of Mt. Kilimanjaro. Back Oct 19.

Enough said. Bravo Gene. Enjoy your next adventure.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Tuesday, June 28, 2011

New blog post entitled Selling Your Software Company May be the Best Path to Product Success http://ping.fm/WDmOt

Tuesday, June 21, 2011

To read the full blog post, click here http://ping.fm/KI86B
To read more about the art of valuing a software company click here http://ping.fm/BcDC1

Thursday, June 16, 2011

New blog post Capturing That Elusive Strategic Value in a Business Sale http://ping.fm/NypPh

Capturing That Elusive Strategic Value in a Business Sale

In a business sale two different buyers can view the value of the target company far differently in terms of value. One buyer may look at paying a rule of thumb financial multiple while another recognizes meaningful growth potential and is willing to pay way beyond an EBITDA multiple.


Wow did I get a real world demonstration of the saying, "Beauty is in the eyes of the beholder." If I could rephrase that to the business sale situation it could be, Strategic Value is in the eyes of the particular buyer." We are representing a small company that has a patented and somewhat unique product. They have gotten distribution in several hardware store chains, Lowes, and are going into Wal*Mart next spring.

The owners are at a cross-roads. To keep up with their growth in volume they recognize that they require a substantial capital investment. They understand that they have a window of opportunity to achieve a meaningful footprint before a much better capitalized competitor produces a similar product and undercuts their price. Finally they realize that a one product company at a big box retailer is quite vulnerable to the inevitable rotation of buyers or a change in policy that bumps them out of 25% of their sales volume.

The good news is that their product is unique and is protected for 15 more years with utility patents. It is not a commodity so it achieves healthy margins. The product is an eco friendly product so the retailers value that. Finally, the product can be used in retailer programs where it is combined with other same category products for the spring tune up and the fall tune up. It helps drive the sales of other products.

The ideal company buyer is a larger company that provides products in the same category and sells to the same retailers. They could plug this product into their existing distribution channel and immediately drive additional sales. They would strengthen their position within their accounts by offering an additional product, a unique product, an eco friendly product, and a product that would promote companion product sales. It would also provide a unique door opener to other major accounts that would want this unique product.

With the input from our clients we located a handful of companies that fit this profile. We were pretty excited at the prospects of our potential buyers recognizing all of these value drivers and making purchase offers that were not based on historical financial performance. The book, memorandum, confidential business review, executive summary, or whatever your business broker or merger and acquisition advisor calls it, will certainly point out all of the strategic value that this company can provide the company that is lucky enough to buy it.

As part of the buying process we usually distribute the book and then get a round of additional questions from the buyer. We submit those to our client and then provide the answers to the buyer with a request for a conference call. We had moved the process to this point with two buyers that we thought were similar companies. The two conference calls were totally different.
The first one included the Merger and Acquisition guy and the three top people responsible for the product category.

Their questions really indicated that they were used to being leveraged as a commodity provider by the big box retailers. Why were co-op advertising costs so high? Were they required to do that again in order to stay on the shelves? Were they on the plan-o-gram? Was Wal*Mart demanding that they be at a lower price than Lowes? What about shipping expenses? Why were profits so low? We had a very bad vibe from these guys. They were refusing to recognize that this was a high gross margin product growing in sales by over 200% year over year and had a higher level of promotional expense than a mature commodity product line. We couldn't determine if they just didn't get it or were they being dumb like a fox to dampen our value expectations.

The second call from the other company included the Merger and Acquisition guy and the EVP. The whole tone of the questioning was different. The questions focused on growth in sales, pricing power, new client potential, growth strategy, their status at the major accounts, remaining life on the patent and what their strategy was for new categories and markets.

Well we got the initial offers and they could not have been more different. The first company could not get beyond evaluating the acquisition as if it were a mature, commodity type product with paper thin margins. Their offer was an EBITDA multiple bid without taking into consideration that the product sales had grown at over 200% year over year and the marketing and promotional expenses were heavily front end loaded.

The second company understood the strategic value and they reflected it in the offer. It was not an apples to apples comparison, because the second offer was cash at close plus a significant earn out component while the first offer was all cash at close. However, the conservative mid-point of the combined cash and earn out offer was 300% higher than the offer from the first buyer. This was the biggest disparity between offers I have ever experienced, but it was quite instructive of the necessity to get multiple opinions by the market of potential buyers.

There are some companies that no matter how hard we try will not be perceived as a strategic acquisition by any buyer and they are going to sell at a financial multiple. Those companies are often main street type companies like gas stations, convenience stores and dry cleaners that are acquired by individual buyers. If you are a B2B company, have a competitive niche, and are not selling into a commodity type pricing structure, it is important to get multiple buyers involved and to get at least one of those buyers to acknowledge the strategic value.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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My thoughts on monthly fees and the Business Broker profession Blog post http://ping.fm/hezxs

Monday, May 02, 2011

Blog Post on the difficulty of business valuation for software companies. http://ping.fm/LDQhl

Thursday, April 07, 2011

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more articles about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Friday, April 01, 2011

Just published article - Ten Keys to a Successful Business Exit http://ping.fm/kT1Jk

Ten Keys To a Successful Business Exit

The purpose of this post is to discuss the ten key factors that a business owner should consider in their once in a lifetime opportunity to maximize the rewards from their life's work with the sale of their business.

You started your company 20 years ago "in your garage", worked many 80 hour weeks, bootstrapped your growth, view your company with the pride of an entrepreneur, and are now considering your exit. The decision to sell is all too often a reactive one rather than a proactive one -- the primary reasons are a serious health issue, owner burnout, the death of a principal, general industry decline or the loss of a major customer. Often times very capable business people approach the sale of their business with less formality than in the sale of a home. Advance planning can ensure that you exit your business from a position of strength, not from weakness due to necessity.

1. Do not wait too long. Have you ever heard, "I sold my business to early?" Compare that with the number of times you've heard somebody say, "I should have sold my business two years ago." Unfortunately, waiting too long is probably the single biggest factor in reducing the proceeds from the sale of a privately held business. The erosion in business value typically is most pronounced in that last year before exiting. The decision to sell is often times a reactive decision rather than a proactive decision. An individual who spends 20 years running their business and controlling their outcomes often behaves differently in the exit from his business. The primary reasons for selling are events such as a serious health issue, owner burnout, the death of a principal, general industry decline, or the loss of a major customer.

Exit your business from a position of strength, not from the necessity of weakness. Don't let that next big deal delay your sale. You can reward yourself for that transaction you project to close with an intelligently written sale agreement containing contingent payments in the future if that event occurs.

2. Prepare yourself for life after business. We all create business plans both formally and informally. We all plan for vacations. We plan our parties. We need to plan for the most important financial event of our lives, the sale of our business. Typically a privately held business represents greater than 80% of the owner's net worth. Start out with your plans of how you want to enjoy the rewards of your labor. Where do you want to travel? What hobbies have you been meaning to start? What volunteer work have you meant to do? Where do you want to live? What job would you do if money were not in issue? You need to mentally establish an identity for yourself outside of your business.

3. Spruce up your business to create the maximum value in a sale. Now that you are all excited about the fun things you'll do once you exit your business, it's now time to focus on the things that you can do to maximize the value of your business upon sale. This topic is enough content for an entire article, however, we will briefly touch upon a couple of important points. First, engage a professional CPA firm to do your books. Buyers fear risk. Audited or reviewed financial statements from a reputable accounting firm reduced the perception of risk. Do not expect the buyer to give you credit for something that does not appear in your books. If you find that a large percentage of your business comes from a very few customers, embark on a program immediately to reduced customer concentration. Buyers fear that when the owner exits the major customers are at risk of leaving as well. Start to delegate management activities immediately and identify successors internally.

If you have no one that fits that description and you have enough time, seek out, hire and train that individual that would stay on for the transition and beyond. Buyers want to keep key people that can continue the momentum of the business. Analyze and identify the growth opportunities that are available to your business. What new products could I introduced to our existing customer base? What new markets could utilize our products? What strategic alliances would help grow my business? Capture that in a document and identify the resources required to pursue this plan. Buyers will have their own plans, but you'll increase their perception of the value of your business through your grasp of the growth opportunities.

4. Keep your eye on the ball. A major mistake business owners make in exiting their business is to focus their time and attention on selling the business as opposed to running the business. This occurs in large publicly traded companies with deep management teams as well as in private companies where management is largely in the hands of a single individual. Many large companies that are in the throws of being acquired are guilty of losing focus on the day-to-day operations. In case after case these businesses suffer a significant competitive downturn. If the acquisition does not materialize, their business has suffered significant erosion in value. There simply is not enough time for the owner to wear the many hats of operating his business while embarking on a full-time job of selling his business.

The owner wants the impending sale to be totally confidential until the very last minute. If the owner attempts to sell the business himself, by default he has identified that his business is for sale. Competitors would love to have this information. Bankers get nervous. Employees get nervous. Customers get nervous. Suppliers get nervous. The owner has inadvertently created risk, a potential drop in business and a corresponding drop in the sale price of his business.

5. Be sure to get multiple buyers involved in your business sale. The "typical" business sale transaction for a privately held business begins with either an unsolicited approach by a competitor or with a decision on the part of the owner to exit. If a competitor initiates the process, he typically isn't interested in over paying for your business. In fact, just the opposite is true. He is trying to buy your business at a discount. Outside of yourself there is no one in a better position to understand the value of your business more than a major competitor. He will try to keep the sales process limited to a negotiation of one. In our mergers and acquisitions practice the owner often approaches us after an unsolicited offer.

What we have found is generally that unsolicited buyer is not the ultimate purchaser, or if he is, the final purchase price is, on average 20% higher than the original offer. If the owner decides to exit and initiates the process, it usually begins with a communication with a trusted advisor - accountant, lawyer, banker, or financial advisor. Let's say that the owner is considering selling his business and he tells his banker. The well- meaning banker says, "One of my other customers is also in your industry. Why don't I provide you an introduction?" If the introduction results in a negotiation of one, it is unlikely that you will get the highest and best the market has to offer.

6. Hire a Mergers and Acquisitions firm to sell my business. You improve your odds of maximizing your proceeds while reducing the risk of business erosion by hiring a firm that specializes in selling businesses. A large public company would not even consider an M&A transaction without representation from a Merrill Lynch, Goldman Sachs, Solomon Brothers or other high profile investment banking firm. Why? With so much at stake, they know they will do better by paying the experts. Companies in the $3 Million to $50 Million range fall below their radar, but there are mid market M&A firms that can provide similar services and process. Generally when you sell your business, it is the one time in your life that you go through that experience. The buyer of the last company we represented for sale had previously purchased 25 companies.

The sellers were good business people, knew their stuff, but this was their first and probably last business sale. Who had the advantage in this transaction? By engaging a professional M&A firm they helped balance the M&A experience scales.

7. Engage other professionals that have experience in business sale transactions. You may have a great outside accountant that has done your books for years. If he has not been involved in multiple business sales transactions, you should consider engaging a CPA firm that has the experience to advise you on important tax and accounting issues that can literally result in swings of hundreds of thousands of dollars. What are the tax implications of a stock purchase versus an asset purchase? A lower offer on a stock purchase may be far superior to a higher offer on an asset purchase after the impact of taxes on your realized proceeds. Is the accountant that does your books qualified to advise you on that issue?

Would your accountant know the best way to allocate the purchase price on an asset sale between hard assets, good will, employment agreements and non-compete agreements? A deal attorney is very different from the attorney you engage for every day business law issues. Remember, each element of deal structure that is favorable to the seller for tax or risk purposes is generally correspondingly unfavorable to the buyer, and vice versa. Therefore the experienced team for the buyer is under instructions to make an offer with the most favorable tax and reps and warranties consequences for their client. You need a professional team that can match the buyer's team's level of experience with deal structure, legal, and tax issues.

8. Be reasonable in your expectations on sales price and terms. The days of irrational exuberance are over. Strategic buyers, private equity groups, corporate buyers, and other buyers are either very smart or do not last very long as buyers. I hate rules of thumb, but generally there is a range of sales prices for similar businesses with similar growth profiles and similar financial performance. That being said, however, there is still a range of selling prices. So, for example, let's say that the sales price for a business in the XYZ industry is a multiple of between 4 and 5.5 times EBITDA. Your objective and the objective of a good M&A advisor is to sell your business at the top end of the range under favorable terms.

In order for you to sell your business outside of that range you must have a very compelling competitive advantage, collection of intellectual property, unusual growth prospects, or significant barriers to entry that would justify a premium purchase price. If you think about the process of detailing your car before you offer it for sale, a good M&A advisor will assist you in that process for your business. Let's say, for example, that 4 to 5.5 multiple from above was the metric in your industry and you had an EBITDA for the last fiscal year of $2.5 million. Your gross transaction proceeds could range from $10 million to $13.75 million. A skilled M&A firm with a proven process can move you to the top of your industry's range. The impact of hitting the top of the sales price range vs. the bottom more than justifies the success fee you pay to your M&A professionals.

9. In the business selling process, disclose, disclose, disclose, and do it early. A seemingly insignificant minor negative revealed early in the process is an inconvenience, a hurdle, or a point to negotiate around. That same negative revealed during negotiations, or worse yet, during due diligence, becomes, at best, a catalyst for reexamining the validity of every piece of data to, at worse, a deal breaker. No contract in the world can cover every eventuality if there is not a fundamental meeting of the minds and a trust between the two parties. Unless you are lucky enough to get an all cash offer without any reps and warranties, you are going to be partnered with your buyer for some period in the future.

Buyers try to keep you on the hook with reps and warranties that last for a few years, employment contracts, or non-competes that last, escrow funds, seller notes, etc. These all serve a dual role to reduce the risk of future surprises. If future material surprises occur, buyers tend to be punitive in their resolution with the seller. Volunteer to reveal your company's warts early in the process. That will build trust and credibility and will ensure you get to keep all of the proceeds from your sale.

10. Be flexible and open to creative deal structure. Everything is a negotiation. You may have in mind that you want a gross purchase price of $13 million and all cash at close. Maybe the market does not support both targets. You may be able to get creative in order to reach that purchase price target by agreeing to carry a seller note. If the sale process produces multiple bids and the best one is $11.3 million cash at close. You may counter with a 7-year seller balloon note at 8% for $3 million with $10 million cash at close. If the buyer is a solid company, that may be a superior outcome than your original target because the best interest return you can currently get on your investments is 4%. Be flexible, be creative, and use your team to negotiate the hard parts and preserve your relationship with the buyer.

You may have spent your life's work building your business to provide you the income, wealth creation, and legacy that you had planned and hoped for. You prepared and were competitive and tireless in your approach. You have one final act in your business. Make that your final business success. Exit on purpose and do it from a position of strength and receive the highest and best deal the market has to offer.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Sunday, March 20, 2011

Just published new blog post Selling Your Software Company - How Important is the Sale Process http://ping.fm/7bYTq

Wednesday, February 16, 2011

Just published new article - Creating Company Value With Strategic Acquisitions http://ping.fm/BCpRF

CORPORATE GROWTH THROUGH STRATEGIC ACQUISITION – CREATING SHAREHOLDER VALUE

Successful growing companies usually grow through a combination of organic growthand strategic acquisitions. For purposes of this article, a strategic acquisition is defined as an acquisition where the result of the combination is far greater than the sum of the parts. For example, if Company A with revenues of $50 million Acquires Company SA with revenues of $10 million, the Newco mathematically would have revenues of $60 million. The anticipated performance of a well thought out strategic purchase might result in a combined revenue for Newco of $100 million within a 1 to 2 year period. A second category of strategic acquisition would focus on an improvement of the profit margins of Newco.

Let’s use two companies that are recognized as among the best at making successful acquisitions, General Electric and Cisco Systems. As their stockholders will happily tell you, these companies have been star performers in growing shareholder value. General Electric is a giant conglomerate with business lines such as GE Capital, GE Plastics, GE Power Systems, GE Medical, and several others. Cisco Systems could be categorized as a high tech growth company primarily focusing on voice and data communications hardware, software, and services.

The first rule of strategic acquisition we learn from these two prolific and successful companies is that they do it on purpose. They have a well thought out defined approach. To quote GE, “We are allocating capital to businesses that can increase growth with higher returns, businesses requiring human capital as opposed to physical capital. We are disciplined and integrators and we grow the businesses we acquire. Over the past 10 years Cisco Systems has acquired 81 companies. If you track their stock price over the same period, it is up a remarkable 1300% over that same period. GE, starting with a much larger base, still outperformed the S&P 500 index over the same period 3 to 1.

If you study the acquisitions of these two companies as well as good middle market growth through acquisition companies, you find some common strategic themes. The core principal that runs through almost every example is INTEGRATION. With the exception of establishing the original platform, GE expanding from their original roots and establishing a presence in plastics, for example, all of these acquisitions focus on integration.

An example that I use to summarize strategic acquisitions for Cisco Systems is not a real acquisition, but a hypothetical company that should demonstrate a point. I have been a very happy stockholder for over a decade. It seems like every year they would announce an acquisition that looked like this – Today Cisco announced the acquisition of Optical Solutions Company for $30 million in stock. Optical Solutions Company manufactures the OptiFast Switch, the fastest optical networking switch on the market today. The Company was started two years ago by two Stanford Electrical Engineering Professors. Current sales are $1.5 million and last year they lost $700,000. My initial reaction was, “What the heck are they doing?” What they were really looking at was what this technology could become as it was integrated into the Cisco family. First, Cisco has 5,000 sales reps, 12,000 value added resellers and systems integrators that sell their solutions, and 600,000 customers that think Cisco walks on water. Cisco knows their market, their customers, and the first mover advantage in their market. With this backdrop, the OptiFast Switch achieves sales of $130 million in its second year of Cisco sales. That’s what the heck they were doing – a classic strategic acquisition.

There are several categories of strategic acquisition that can produce some outstanding results with effective integration. Many acquisitions actually have elements from several categories.

1. ACQUIRE CUSTOMERS – this is almost always a factor in strategic acquisitions. Some companies buy another that is in the same business in a different geography. They get to integrate market presence, brand awareness, and market momentum. Another approach is to acquire a company that can establish a presence for you in a different market segment. For example, let's say that that Company A made fasteners for the automotive industry and felt that their expertise could be applied to the aerospace industry. A company that produced fasteners for the target industry could help jump-start this strategic initiative.

2. OPERATING LEVERAGE – the major focus in this type of acquisition is to improve profit margins through higher utilization rates for plant and equipment. A manufacturer of cardboard containers that is operating at 65% of capacity buys a smaller similar manufacturer. The acquired company’s plant is sold, all but two machines are sold, the G&A staff are let go and the new customers are served more cost effectively. Adding new customers without increasing fixed expenses results in higher profit margins.

3. VALUATION MULTIPLE EXPANSION – this is a subtle mathematical approach that the private equity groups understand very well and regularly capitalize upon. They establish a platform company, usually in the $30 million to $250 million in revenue range and then they go on a mission to acquire several "tuck in acquisitions". They buy several other companies that can add to the value of the platform company based on expanding the customer base, improving on their technology, broadening their product line, or other strategic point covered in this article. They also recognize that a small company will sell at a smaller valuation multiple than their larger platform company.

Below is an example of how that might work for a company looking to grow through acquisitions. Let's say that the acquiring company is $30 million in revenue and is looking to acquire a $10 million in revenue target. The $30 million company with $7.5 million in EBITDA has a valuation multiple of 6.5 X EBITDA while the $10 million company with $2.5 million in EBITDA has a multiple of 5.25 X EBITDA. Pre acquisition that would mean that the value of the acquirer was $48.75 million and the target was $13.125 million. Theoretically, if you combined the two companies, the new value should be $48.75 plus $13.125 or $61.875 million. However, post acquisition, the combined company takes on the EBITDA multiple of the acquiring company resulting in a valuation of ($2.5 + $7.5 million in EBITDA) or $10 million X 6.5 or $65 million. Wall Street refers to this phenomenon as an accretive acquisition

4. CAPITALIZE ON A COMPANY STRENGTH – this is why Cisco and GE have been so successful with their acquisitions. They are so strong in so many areas, that the acquired company gets the benefit of some, if not all of those strengths. A very powerful business accelerator is to acquire a company that has a complementary product that is used by your installed customer base. It is ten times easier to sell an add-on product to an installed account than to sell a product to a new account. Management depth and skill, production efficiency/capacity, large base of installed accounts, developed sales and distribution channels, and brand recognition are examples of strengths that can power post acquisition performance.


5. COVER A WEAKNESS – This requires a good deal of objectivity from the acquiring company in recognizing and chinks in the corporate armor. Let me help you with some suggestions – 1. Customer concentration: too much of your business is concentrated on a small group of customers 2. Product concentration: too much of your business is the result of one or two products 3. Weak product pipeline – in a business environment that is becoming more innovation focused, having a thin product pipeline could be fatal. Many of the acquisitions in the pharmaceutical industry are aimed at covering this weakness. 4. Management depth or technical expertise and 5. Great technology and products – poor sales and marketing.

6. BUY A LOW COST SUPPLIER – this integration strategy is typically aimed at improving profit margins rather than growing revenues. If your product is comprised of several manufactured components, one way to improve corporate profitability is to acquire one of those suppliers. You achieve greater control of overall costs, availability of supply, and greater value-add to your end product. Another variation of this theme some refer to as horizontal integration is to acquire a company supplying you distribution.

7. IMPROVING OR COMPLETING A PRODUCT LINE – this approach has several elements from other acquisition strategies. Successfully adding new products to a line improves profitability and revenue growth. Giving a sales force more “arrows in their quiver” is a powerful growth strategy. You take advantage of your existing sales and distribution channel (strength). You may be able to improve your competitive position by simplifying the buying process - providing your customers one stop shopping. You have already established momentum and credibility with your installed accounts and it is far easier and cost effective to sell them additional products than it is to win new customers.

8. TECHNOLOGY – BUILD OR BUY? This is a quandary for most companies, but is especially acute for technology companies. Acquiring technology through the acquisition of another company can be an excellent growth strategy for several reasons. First, the R&D costs are generally lower for these smaller, agile, more narrowly focused companies than their larger, higher overhead acquirers. Secondly, time to market, window of opportunity, first mover advantage can have a huge impact on the ultimate success of a product. It has been said that Alexander Graham Bell arrived four hours before another inventor at the patent office for essentially the same invention. If there is a good idea or a market opportunity, most likely it is being pursued independently and simultaneously on several fronts. First one to establish their product as the “standard” is the big winner. I sure would not want to try to displace Microsoft Windows as the operating system for PC’s.

9. ACQUISITION TO PROVIDE SCALE AND ACCESS TO CAPITAL MARKETS – In this area, bigger is better. Larger companies can generally weather a storm better than smaller companies and are considered safer investments. Larger companies command larger valuation multiples. Some companies make acquisitions in order to get big enough to attract public capital in the form of an IPO or investments from Private Equity Groups. Many smart business owners have consolidated several smaller companies at lower multiples to create a larger company that the investment community valued at higher multiples. This can be a very effective grow to exit strategy.

10. PROTECT AND EXPAND MATURE PRODUCT LINES - I recently came across an outstanding example of the execution of this strategy. Johnson & Johnson, the multi-billion dollar pharmaceutical company in 2000 acquired Alza Corporation, the maker of drug delivery systems and devices for what appeared to be an unbelievably steep price of $13.7 billion, or 23 times year 2000 revenues. They are the inventors of the transdermal patch used in products such as NicoDerm CQ. They have developed time released pills that can, for example, deliver Ritalin, the drug for attention deficit disorder in children, at prescribed times with one dose. They have developed an injectable titanium stint to deliver cancer medication over the course of a year. Why would J&J pay so much for this company? Here is the strategy. The latest price tag for getting a major new drug through the FDA and to market is a whopping $800 million. These delivery technologies can turn J&J’s old drugs into new best sellers that are re-patentable at a far lower price than new drug development. An added benefit is that they can do the same for off patent drugs from other competitors.

11. PROTECT CUSTOMER BASE FROM COMPETITION – The telephone companies have done studies that show that with each additional product or service that a customer uses, the likelihood of the customer defecting to a competitor drops exponentially. In other words, get your customers to use local, long distance, cellular, cable, broadband, etc and you will not lose them. Multiple products and services provided to the same customer dramatically improve retention rates. At the risk of repeating myself, it costs ten times more to get a new customer than it does to keep one.

12. ACQUISITION TO REMOVE BARRIERS TO ENTRY – An example of execution of this strategy is a large commercial information technology consulting firm acquiring a technology consulting firm that specializes in the Federal Government. The larger IT Consulting firm had valuable expertise and best practices that were easily transferable to government business if they could only break the code of the vendor approval process. After many fits and starts to do it themselves, they simply acquired a firm that had an established presence. They were able to then bring their full capabilities from the commercial side to effectively increase their newly acquired government business.

13. OPPORTUNISTIC ACQUISITION FOR WHEN THE MARKET TURNS – as they taught me in business school: buy low and sell high. Well-run businesses often will buy competitors that bring many of the benefits from above at very favorable prices when times are tough. They buy customers, new geographies, technology, management talent, etc. at less than strategic prices because they have the staying power to last through a market downturn. Buying a company that doesn’t fit at a bargain is ultimately not a bargain if you are unable to integrate to make your core business more powerful.

Larger firms with lots of resources have established business development offices to execute corporate growth strategies through acquisition. These experienced buyers search for companies that fit their well-defined acquisition criteria. In most cases they are attempting to buy companies that are not actively for sale. If a strategic company is for sale and is being represented by an M&A firm, the M&A firm’s job is to sell that strategic value to the marketplace. If properly done, the buyers are competing with several other buyers that recognize the strategic value and the price tends to be bid way up. The win for the successful corporate acquirer is to target several candidates that have many of the characteristics from above, buy them at financial valuation multiples (traditional valuation techniques like discounted cash flow or EBITDA multiples), integrate to strength and achieve strategic performance.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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Wednesday, December 08, 2010

Just published a new article - Selecting a Merger and Acquisition Advisor for the Sale of Your Business - The Request for Proposal
http://ping.fm/yXjGo

Selecting a Merger and Acquisition Advisor for the Sale of Your Business - The Request for Proposal

In my prior business experience in the information technology industry, it was a very common practice for potential buyers to submit a Request for Proposal in order to make a purchase decision. After several years as a Merger and Acquisition advisor, I finally got an RFP. A light bulb went off. This is the most important "purchase decision" a business owner will ever make, and yet the process of selecting an advisor in a multi million dollar transaction is generally less diligent than the purchase of a $200,000 software product.

I gave this a great deal of thought and came to a conclusion. These business owners are very smart and accomplished people, but they generally will only sell one business in their lifetime. They knew how to evaluate every other product or service relating to their business because they had made those purchase decisions multiple times over the years. It occurred to me that they did not have the experience to know the right questions to ask in order to objectively evaluate one M&A firm against another. Their instincts are generally pretty good, so in the selection process we normally go through, they bring in the 3 or 4 firms for presentations, check a few references and make a decision on a gut reaction.

The purpose of this article is to provide those business sellers that possess great instincts an additional tool to objectively compare Merger and Acquisition advisors by asking the right questions. Below is a sample RFP that should be helpful in your selection process:

Request For Proposal for the Merger and Acquisition Advisor
Sell Side Engagement for XYZ COMPANY, INC.


COMPANY DESCRIPTION

XYZ is an IT Services firm consisting of 3 divisions. The first provides contract maintenance and break fix maintenance for mid range systems and network components. The second division is an IBM Business Partner for mid-sized systems combined with consulting and professional services. Division 3 is a used equipment brokerage service. The company has been in business since 1995 and does about $25 million in revenue.

Approximate 2005 Revenues - $25 Million

Responding Company Name

Brief Company Description

Years in Business

Primary Contact Name for this Engagement

Phone Number
Email address
Company Address
Company Web Site

1. In the past 24 months what transactions have you completed?
Company Name Nature of Engagement Industry Description of Client
Example
XYZ Company Sell Side Engagement Healthcare information technology

2. How many Investment Bankers work for your Firm?

3. Who would be working as the lead on my engagement? Please include Bio.
a. Include any professional designations i.e. Series 7, CBI
b. Include any industry associations i.e. IBBA, local business broker chapter M&A Source, etc.

4. Is your firm known for a particular industry niche? Transaction niche? Please describe.

5. What steps do you take to insure the confidentiality of the sale process?

6. Please Send a sample of your deliverables:
a. Blind Profile
b. Confidentiality Agreement or NDA
c. The Book, Memorandum or Executive Summary
d. If you do a mailing - typical contents

7. Describe your process of marketing your sell side engagement with a typical timeline from start to finish: i.e. day 1 sign engagement agreement, 1 Week submit first target database for approval, Week 2 submit draft of Profile/NDA for approval.............Confidentiality Agreements Signed, Executive Summary is completed, etc.

8. Describe the Marketing Process - is it posted on Internet Sites, emails, mailing campaign, direct telephone calls, etc

9. What is the profile of the "A Target" buyers for my company? Briefly describe.

10. If you have any client reference letters from the past 24 months, please include 2 or 3 in your package.

11. As one of our final selection criteria, will we be able to speak to references?

12. Detail your fees.
a. Up-front payments
b. Monthly fees
c. Minimum Cash at Close
d. Expenses
e. Other
f. In lieu of this, please submit your agreement with the fees as they would be set for this sell side engagement.

13. What is your philosophy on putting a price tag on my company?

14. Describe your process of keeping your client informed on the progress of the sale.
g. What reports do you submit to the client? Include samples please.
h. How often are reports submitted?

15. How will I know that I am getting the best price and terms if your firm represents my company for sale?

16. Does your contract call for exclusivity?

17. If I don't think you are doing a good job, what options do I have?

18. What about a "tail" on the agreement? If your firm is fired, what prospects carry a tail for fees to your firm? How long is the tail?

19. Please explain why your firm is the best fit for our sale engagement.

20. What are your thoughts about valuations for our company/industry.

21. What would your firm do in to advise us on improving on our transaction value?

The RFP responses are due by May 24. If you have any questions please email them to billsmith@xyz.com. Please note that this is highly confidential and my employees are not to be made aware that we are considering the sale of our company.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist