Three key areas must be examined before a wholesaler attempts to sell his company or merge with another business. They are:
- How to attract a potential buyer;
- How to value your company (and the one you're dealing with); and
- How to negotiate the final contract price and terms (including whether the other company will buy you out or the two will merge into a new entity).
Knowing the basic premises of each can be vital to maximizing your business position.
Attracting buyersUnderstanding what prospective buyers are looking for in a company and properly preparing a presentation package (including adjusted financial statements) are essential elements for attracting a buyer. A business plan also must be in place for the prospective buyer to know what is being acquired.
The seller must ensure the company has its best face presented and that it has been prepared properly so it's attractive to potential buyers. If a business is having a downswing in sales or is overloaded with inefficient employees or obsolete inventory, it's not ready to be put on the market.
The seller must be in a position to provide documentation that explains the operation's major components. Five key areas must be addressed in the presentation package:
1. Brief company history. This will include the business's major focus, the overall size of the business and the ownership interests. This must be as precise as possible so that buyers can understand how the business arrived at its present position. It also should include the number of locations, how long each has existed and how many years the company has been in business overall.
2. Organizational structure and operational aspects. A summary of how the company operates can be of great assistance. If the organization is not in a form that can be readily understood by a potential buyer, then a "cleaning" needs to be done.
3. Analysis of the company's overall market position. The analysis will include such elements as the amount of walk-in business vs. ongoing accounts and an approximation of the loyalty of key accounts. This information has become a prime motivator for prospective buyers, many of whom are looking for acquisitions that can supply additional market penetration and entry to new markets without a long adjustment period. More than any other element, a strong market position enhances the dollar amount that a potential purchaser will pay for an ongoing business.
4. The company's financial position. The financial aspects presented to a buyer can hurt as much as help in obtaining a strong selling price. In a closely held company, one of the primary objectives is to minimize profits, thus lowering taxes while enhancing cash flow. Also, many personal expenses taken by current owners would not be allowed if an outsider owned the company. Personal expenses should be eliminated from the company's financial statements so the company is presented in its best light. A listing of "adjustments" should be included in the financial data provided to a prospective purchaser.
5. Lists of key personnel, background information and specific duties of each employee. Over a period of years, many owners forget they have qualified individuals performing valuable services. These people and their skills should be highlighted to a potential buyer. A review of key personnel will show the company where it needs to strengthen its weak links and allow it to enhance its strengths by identifying valuable personnel. Also, a prospective purchaser will want to know if the key individuals responsible for the business' success are going to stay with the company after it is sold.
Producing a valuationThe second phase of selling a company involves determining its value. Factors to consider include a verification of asset values, recalculation of earnings, cash flow and projected future growth. Valuing the stock in a closely held company should be done whether the company is preparing to be sold or not, so the owner will know the company's value should he want to transfer ownership or put a succession plan into place.
Several methods are available to determine the company's worth. To ensure that a fair method is used, the tax code requires at least two approaches be used from the many available. (For more details on these methods and their differences, see "How to value your company" in the March 1998 issue of Supply House Times.)
Negotiating the dealThe third element is possibly the most important step: negotiation. Key steps to follow each time you consider entering an agreement include what type of information to present, how to present it, when to do so, where to do it and what to ask for in compensation. The company's previously established value provides the basis for beginning negotiations. The process involves six key steps:
1. Select a price slightly higher than you expect to receive. This provides a cushion so the buyer can receive a good deal while the seller can still get a price close to what he expects to get.
2. Set price limits for negotiating. The seller must understand that he will not be able to receive every penny of the asking price. This has to be stressed and acknowledged; difficulties during the negotiation process can kill many deals.
3. Determine what is being sold. Will it be a sale of assets or a sale of company stock? Knowing the difference can help avoid double taxation. Buyers typically are better off acquiring assets of a company. This may eliminate the liability for debts they don't assume, as well as protecting them from liability against their predecessors.
4. The manner in which the payment will be made. In the typical scenario, the buyer wants to pay the cost out of future profits while the seller wants to collect as much cash as possible upfront. Therefore, the seller should determine the minimum amount of cash acceptable upfront.
5. The location where the deal will close. When selling a business, the seller usually calls the shots. But the seller must remember that if the buyer is uncomfortable with the proposed location, it may hurt the sale.
6. Other elements besides pricing. In many situations, sellers are concerned about security and future benefits for themselves and their employees. Changes in medical benefits, retirement programs, vacation plans and other elements can come into play. In addition, considerations must be made for different forms of security, such as a lien against real estate.
After the specifics of payments, prices, and related compensation and operational elements have been worked out, the attorneys draft a letter of intent that spells out each step to be taken to close the sale. This document describes the chain of events, what will happen at each stage and how the sale will evolve.
Following the agreement by both parties to the specifics as stated in the letter, the companies practice "due diligence," in which they each visit the other company and assure themselves that the other company has been represented accurately. They count inventory, review financial papers, check receivables and talk to employees about their positions and history. Once this is completed, the attorneys draft a definitive agreement based on the letter of intent. Typically, each company's local attorney also will review the agreement to ensure it conforms to state law.
Time cushion helpsIn most cases, a grace period of six to eight months is provided for the complete takeover to ensure that the shift is performed without any complications that could interfere with transacting business with customers. This usually involves integrating staffs, computer systems, and inventory and ordering programs. It may mean eliminating some portions that are redundant or upgrading an area completely. These elements cannot be accomplished until after the definitive agreement is in place.
Negotiating the sale of a business primarily depends upon the extent to which the selling party is willing to be organized. The more the seller understands and organizes his company to present it efficiently, the easier the process will go. The seller should keep in mind that the buyer may already have made initial evaluations of the company's worth and beneficial pay ment methods prior to entering negotiations.
Being prepared, remaining flexible and keeping an eye on the ultimate goal - a fair price for the business will make the process move more smoothly and quickly as well as save both parties time and frustration.
Sidebar: Looking for buyers?Intrigued by the notion of merging with another company but not sure how to attract interest? Two key elements go into finding the right business.
First, put together a presentation package on the company. This should include a historical analysis of the company and its market, focusing on its strengths and customer base.
For instance, key elements in one such package recently assembled for a distributor contained 13 major sections. The first of these summarized company data, comprising the history and physical condition of the company, its product lines and customer base, management organization and key employees, competition and achievements. The next two sections focused on a property appraisal and a company valuation. The following nine sections presented financial statements, balance sheets, income statements and cash-flow records going back three years. The final section provided an organizational chart.
With this package completed, the industry should be surveyed to target potential suitors. The ideal targets are companies active in acquiring smaller firms not operating in your market. In some cases, this work can be accomplished through a broker or adviser.
Keep in mind that a broker charges a percentage of the deal's total cost, usually about 3%. This amount must be paid whether the deal is completed or not - the broker's fee is based on finding potential buyers, not in finalizing the sale. An adviser usually charges on an hourly basis or a package price, depending on the extent of services performed.