When Is A Company In Trouble?
Companies can be in trouble or headed for it for many reasons. However, most of them can be linked to one or more of the following:
• Lack of proper focus
• Poor management
• Poor financial controls
• Loss of key employee(s)
• Loss of important customer(s)/client(s)
• Not keeping up with technology
• Quality control or other operating issues
• Legal or governmental issues
• Target market change or shift
• Competition
Unfortunately, by the time a business owner realizes that the business is in trouble and recognizes why, it may already be too late. The obvious solutions are to either fix it or sell it. The decision should be made quickly, since time may be of the essence.
Unfortunately, too many owners of privately held businesses wait too long. A decision to sell should be made when the business is doing well, not when it is in trouble.
Now may be the time to check with a professional intermediary to see what you can do to prepare your business for sale.
What Sellers Don’t Expect When Selling Their Companies
In the proverbial “perfect world,” business owners would plan three to five years ahead to sell their companies. But, as one industry expert has suggested, business owners very seldom plan to sell; rather, selling is “event driven.” Partner disputes, divorce, burn-out, health, and new competition are examples of events that can force the sale of a business.
Sellers often find, after they have decided to sell, that the unexpected happens and they are “blindsided” and caught off-guard. Here are a few of the unexpected events that can occur.
The Substantial Time Commitment
Sellers find that the time necessary to comply with the requests of not only the intermediary, but also the potential buyers can take valuable time away from the actual running of the business. The information necessary to compile the offering memorandum takes time to collect. Many sellers are unaware of the amount of their time necessary to gather all the documents and information required for the offering memorandum, nor of its importance to the selling process.
There is also the time necessary to meet and visit with prospective buyers. An intermediary will play an important role in screening prospects and separating the “prospects from the suspects.”
Handling the Confidentiality Issue
Owners of many companies are also the founders and creators of them. They can have difficulty in delegating and tend to want to make all of the decisions themselves. When it comes time to sell, they want to be involved in everything, thus, again, taking time away from running the business. Members of the management team, like the sales manager, have a lot of the information necessary not only for the memorandum, but also on competitive issues, possible acquirers, etc. The owner has to allow his or her managers to be part of the selling process. This is easier said than done.
Forgetting the Others
Many mid-sized, privately held companies also have minority stockholders or family members who have an interest in the business. The managing owner may be the majority stockholder; but in today’s business world, minority stockholders have strong rights. The owner has to deal with these people, first in getting an agreement to sell, then convincing them about the price and terms. A “fairness opinion” can help resolve some of the pricing issues. Minority stockholders and family interests have to be dealt with and not overlooked or pushed to the end of the deal. When this happens, many times it is the end of the deal, literally speaking.
The Price is the Price is the Price
All sellers have a price in mind when it comes time to sell their companies. Most businesses go to market with a fairly aggressive price structure. When an offer(s) is presented, it is generally, sometimes significantly, lower than the seller anticipated. They are never prepared for this event – they are blindsided, and obviously not very happy. They turn the deal down without even looking past the price. Here is where an intermediary comes in, by helping structure the deal so it can work for both sides.
Not Having Their Own Way
Business owners are used to calling the shots. When an offer is presented, they, in some cases, think that they can call all of the shots. They have to understand that selling their company is a “give and take.” They can stand firm on the issues most important to them, but they have to give on others. Also, some owners want their attorneys to make all of the decisions, both legal and business. Unfortunately, some attorneys usurp this decision. Owners must make the business decisions.
Confidentiality Leaked
There is always the small possibility that the word will leak out that the business is for sale. It may just be a rumor that gets started or it may be worse – the confidentiality is exposed. Sellers must have a contingency plan in case this happens. A simple explanation that growth capital is being considered or expansion is being explored may quell the rumor.
“Keeping Your Eye on the Ball”
With all that is involved in marketing a business for sale, the owner must still run the business – now, more than ever. Buyers will be kept up-to-date on the progress of the business, despite the fact that it is for sale.
How Does Your Company Rate?
Valuation of private companies is much more subjective than public companies because there is no free trading marketplace for the private companies’ stock. Just like a champion Olympic figure skater, the performance has to be flawless. Take a look at the following check list – see if the target company rates near perfect (on a scale of 1 to 10 – 10 being best):
• Stable Market
• Stability of Earnings Historically
• Realized Cost Savings After Purchase
• No Significant Capital Expenditures Herewith
• No Significant Competitive Threats
• No Significant Alternative Technologies
• Large Market Potential
• Reasonable Market Position
• Broad-based Distribution Channels
• Synergy Between Buyer and Seller
• Sound Management Willing To Remain
• Product Diversity
• Wide Customer Base
• Non-dependency on Few Supplier
Points to Ponder for Sellers
Who best understands my business?
When interviewing intermediaries to represent the sale of your firm, it is important that you discuss your decision process for selecting one. Without this discussion, an intermediary can’t respond to a prospective seller’s concerns.
Are there any potential buyers?
When dealing with intermediaries, it always helps to reveal any possible buyer, an individual or a company, that has shown an interest in the business for sale. Regardless of how far in the past the interest was expressed, all possible buyers should be contacted now that your company is available for acquisition. People who have inquired about your company are certainly top prospects.
Lack of communication?
It is critical that communication between the seller, or his or her designee, and the intermediary involved in the sale, be handled promptly. Calls should be taken by both sides. If either side is busy or out of the office, the call should be returned as quickly as possible.
Does the offering memorandum have cooperation from both sides?
This document must be as complete as possible, and some of the important sections require careful input from the seller. For example: an analysis of the competition; the company’s competitive advantages – and shortcomings; how the company can be grown and such issues as pending lawsuits and environmental, if any.
Where are the financials?
It may be easy for a seller to provide last year’s financials, but that’s just a beginning. Five years, plus current interim statements and at least one year’s projections are necessary. In addition, the current statement should be audited; although this usually presents a problem for smaller firms — better to do it now than later.
Are the attorneys dealmakers?
In most cases, transaction attorneys from reputable firms do an excellent job. However, occasionally, an attorney for one side or the other becomes a dealbreaker instead of a dealmaker. A sign of this is when an attorney attempts to take over the transaction at an early stage. Sellers, and buyers, have to take note of this and inform their attorney that they want the deal to work – or change to a counsel who is a “teamplayer.”
Intermediaries are responsible for handling what is usually the biggest asset the owner has – and they are proud of what they do. Intermediaries realize that the sale of a business can create the financial security so important to a business owner. Even when a company is in trouble, the intermediary is committed to selling it, since by doing so, jobs will be saved – and the business salvaged.
Mistakes Sellers Make
• They neglect to run their business during the sales process. – The owner of a business with sales under the $20 million range can get so involved in the selling process that they neglect the day-to-day operation of the business.
• They don’t understand the “real” value of their business. – A business may actually command a higher price than the value determined by an appraiser. The business may be worth more than the sum of its parts. A professional intermediary, along with other advisors, can answer the question of real value and help determine a “go-to-market” price.
• They aren’t flexible in structuring the transaction. – In many cases, how the deal is structured is more important than the price or terms.
• They are not looking at the business from a buyer’s perspective. – Buyers may look for different aspects of a business than those the seller looks for. For example: growth potential, management depth, customer base, etc.
• They start with too high a price. – Sellers obviously want to maximize the price they receive for their business, but today’s marketplace is difficult to fool. A good buyer may just elect to pass because of an overly aggressive starting point.
• They are impatient. – Sellers have to understand that it can take 6 to 18 months to find a buyer and proceed through the sales process, which includes due diligence, the legal and accounting issues that must be handled, and ultimately the closing. However, on the flip side, the longer the deal drags, the more likely it is to fall apart. As the saying goes: Time is of the essence!
• They have insufficient or inadequate documentation. – Sellers should have current real estate and equipment appraisals at the ready along with any documentation a buyer might want, such as projections, business forecasts and plans, and environmental studies. Having all the documentation and financial records readily available will not only speed things along, but might also provide for a higher price or, even more important, save the deal.
Fairness Opinions
Since one often hears the term “fair value” or “fair market value,” it would be easy to assume that “fairness opinion” means the same thing. A fairness opinion may be based to some degree on fair market value, but there the similarities end. Assume that you are president of a family business and the other members are not active in the business, but are stockholders; or you are president of a privately held company that has several investors/stockholders. The decision is made to sell the company; and you as president are charged with that responsibility. A buyer is found; the deal is set; it is ready to close — and, then, one of the minority stockholders comes out of the woodwork and claims the price is too low. Or, worse, the deal closes, then the minority stockholder decides to sue the president, which is you, claiming the selling price was too low. A fairness opinion may avoid this or protect you, the president, from any litigation.
A fairness opinion is a letter, usually only two to four pages, containing the factors or items considered, and a conclusion on the fairness of the selling price along with the usual caveats or limitations. These limitations usually cite that all the information on which the letter is based has been provided by others, the actual assets of the business have not been valued, and that the expert relied on information furnished by management.
This letter can be prepared by an expert in business valuation such, as a business appraiser or business intermediary. The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert. It does not provide any comment or opinion on the deal itself or how it is structured; nor does it contain any recommendations on whether the deal should be accepted or rejected.
Fairness opinions are often used in the sale of public companies by the board of directors. It helps support the fact that the board is protecting the interests of the stockholders, at least as far as the selling price is concerned. In privately held companies, the fairness opinion will serve the same purpose if there are minority shareholders or family members who may elect to challenge the price the company is being sold for.