Business Owner Took These 4 Steps to Sell Business for Premium Price
Sometimes a strategic buyer is not the best fit for an exit plan. Perhaps the owner wants to work for a few more years, or the strategic buyer would fire long-term employees because their positions duplicate those of other employees.
Customers and vendors could also react negatively if a competitor bought the company and had unfettered access to confidential information.
In those situations, a company looking to sell might consider a financial buyer, such as a private equity firm or family office.
In any selling situation, sellers need to get their house in order before going to market. However, sellers should be prepared for a financial buyer to perform extensive due diligence before a transaction. Whereas a strategic buyer may already know the company and the industry well, a financial buyer, such as a private equity firm, is more likely to need to do more research before they use their investors’ dollars to buy a company.
Recently, the owner of a large multi-national auto repair business prepared to sell his company to a private equity firm. The sale closed for $50 million, which exceeded the owner’s original expectation.
The business owner followed these key steps to prepare his business prior to the sale.
1. Get the house in order
Beyond preparing quality financial statements dating back at least two years and a sound forecast projecting out results at least three years, a seller might need to tidy up some back-office aspects before a transaction.
The auto repair business benefitted from the support of entrepreneurial services professionals who assisted with day-to-day bookkeeping needs to clean up the business’ financial statements. The professionals also set up foreign subsidiaries in the company’s general ledger system, something that the company’s CFO had not had the time or internal resources to properly account for at the level of detail required for a due diligence analysis.
2. Calculate net cash proceeds
Once the business’ back office is in order, but before pulling the trigger on a deal, an owner needs to understand the realistic takeaway from a transaction.
In the previously mentioned example, transaction advisory professionals performed a fair market valuation that took into account research they performed on past transactions within the industry. After that, tax professionals performed a state sales tax exposure analysis and helped the owner calculate the net cash proceeds he could expect based on his current and future tax positions.
3. Recruit the right team
An investment banker, a transaction advisor and a transaction attorney all have critical roles to play in an exit transaction.
In this case, transaction advisory professionals provided a referral to three reputable transaction attorneys and investment banking firms deemed to be the best fit for the seller to select for his transaction team. Tax professionals worked closely with the selected firms to set up an optimal tax structure for the transaction. Transaction professionals performed a quality of earnings review to support the valuation that the business owner’s investment banker was marketing to the private equity firm and then played a key role in coordinating with the private equity firm’s external due diligence team.
When coupled with a sound business valuation, a quality of earnings report can add credibility to a marketing report prepared by an investment banker.
The professionals all worked together to develop the optimum negotiation strategy for calculating working capital and getting the deal closed for the maximum value.
4. Time kills deals
Several times during this process the owner contemplated calling off the sale as the due diligence from the buyer intensified and difficulties with the negotiation process caused doubt about the final offer to be delivered. Without ample planning and sell-side due diligence on the front end, the deal could have eroded or the seller could have settled for a lesser amount. Upfront preparation and planning laid the groundwork for a successful outcome.