One of the most difficult decisions an owner of a business can make is when to sell that business. The reasons to sell include the desire or need to retire, unexpected changes in personal circumstances, competitive pressures or an interest in pursuing other opportunities. Whether the reason is personal or driven by outside forces, every business owner would benefit from preparing in advance for a sale. Ideally, preparation should begin one to two years before the sale takes place. Among the early steps that an owner can take to increase the chances of a successful sale and maximizing the sale value of the owner’s business are to understand and identify the objectives and motivations of potential purchasers, how to strengthen the business’s value proposition to those purchasers, and to identify and proactively address any issues that could pose problems during a sale process.
Understanding merger and acquisition dynamics in an industry is essential to positioning a business for a successful sale. Among other things, sellers should have a strong understanding of where the industry will be in its market cycle at the time of sale and how that will affect valuations. Sellers should also be aware of those purchasers that have recently engaged in merger and acquisition activity in their industry. Purchasers of established businesses can generally be categorized as either strategic or financial buyers. Strategic buyers are companies that are already operating in the sellers’ industry or a related industry, while financial buyers are firms such as private equity groups and venture capital funds that are seeking to expand into a new industry.
When evaluating an acquisition target, strategic buyers will focus on a number of operational and strategic factors, such as potential synergies, the ease or difficulty of integration, trade secrets and specific assets of the target business that can be used by the buyer in connection with its business, and customer and geographic market overlap.
Financial buyers focus on maximizing their return on investment by growing their portfolio businesses through tested processes, achieving optimal capital structures, leveraging their investment with debt and incentivizing management through equity participation. While financial buyers are often unwilling to pay as much for a business as strategic buyers are, financial buyers do offer their own advantages. For example, financial buyers are usually more likely to retain the business’s existing management team and employees. Financial buyers often require existing management’s commitment to participate in the business after the sale as a condition to the purchase. Due to their expertise and experience in deal making, financial buyers are also often able to offer a greater degree of flexibility in transaction structures. Some of the virtues of financial buyers can also be drawbacks. The emphasis of financial buyers on investment return and the need to retain management after closing often leads to tough negotiations around the sale price and can require a seller’s continued participation in the business after closing, thereby limiting the seller’s ability to walk away from the business. When financial buyers evaluate acquisition opportunities, they tend to focus on consistent cash flow generation, the strength of the management team and the opportunities for growth.
Positioning a Business for a Sale
Once a seller identifies the likely purchasers in its industry and their objectives and motivations, the seller should identify the valuable aspects of its business that are likely to appeal to those purchasers and those aspects of its business that are less valuable or reduce value. Sources of value can include the ability to generate consistently strong cash flow, intellectual property assets, brand reputation, customer relationships, distribution networks, a strong management team, industry expertise, the potential for cost and revenue synergies and growth prospects. Identifying the selling business’s perceived and actual strengths and weaknesses well in advance of the sale process will give the seller the time to improve its strengths and reduce its weaknesses and thereby increase the sale value of the business.
With careful and thoughtful planning and preparation for a sale, an owner can increase the chances of a successful sale and the value realized from the business. A business should commence the planning and preparation process at least one to two years before the sale, and this process should involve the active participation of advisors with experience in the purchase and sale of businesses.
About the Authors
Stephen W. Burke, a partner in the Corporate Section at Williams Mullen, assists companies with the sale of their businesses or the acquisition of other businesses. He also works with business owners and executives in analyzing and solving complicated business, tax and legal issues in connection with the formation, structuring, financing or refinancing of businesses. He can be reached at 757.473.5332 or sburke@williamsmullen.com. Rajan Singh, an associate in the Corporate Section at Williams Mullen, has a diverse transactional practice that ranges from assisting start-ups in the formation of new business entities to the representation of public and private companies in strategic mergers and acquisitions, private equity transactions, and business restructurings. He can be reached at 757.629.0658 or rsingh@williamsmullen.com.