Keeping the Business Deal Alive
Recently, a wealth management professional approached us about a client of his. This client owned a large industrial distribution business and was being courted over a long period of time by a private equity-backed competitor. She was interested in selling but wanted to make sure it was the right deal for the right price. She also did not want to overspend on fees and transaction expenses so she decided to rely only on her attorney to handle all aspects of the transaction.
For over a year, the attorney managed the process of gathering due diligence items, negotiating terms, and preparing transaction paperwork. This attorney is an excellent and highly-skilled professional, but over time, the process got bogged down as “opposing counsel” scrutinized every item submitted or requested.
The client’s wealth manager had seen this happen before. When the two parties in a transaction are communicating exclusively through attorneys, it is often impossible to have the necessary open, and off-the-record dialogue to bring a deal to close.
Enter The Vant Group
The wealth manager knew The Vant Group (TVG) and our expertise in avoiding deal killers to bring transactions to a quick and successful closure, and so he introduced us to his client. Over the course of multiple meetings, we listened to the client and really got to know her and her situation. We also got to know the buyer to learn their strategy and long-term vision. Because we have a deep understanding due to extensive experience representing both buyers and sellers, we were able to speak freely with both sides to get past any roadblocks to ensure that our seller got the best deal possible.
From there, we worked with the seller, her financial planner, the buyer, the buyer’s audit firm, and the attorneys from both sides. Incidentally, the seller’s original attorney was involved throughout the transaction. Since TVG was quarterbacking the deal, we were able to focus on the multitude of deal details, while the attorneys were able to focus on papering the transaction in the manner that best protected their clients. The transaction closed, and all parties were happy with the outcome.
After closing, the wealth manager thanked us and told us that the deal “would have never happened” without The Vant Group’s leadership.
Selling a business takes effort and time; a business broker ensures confidentiality, financially qualified prospects, deal negotiations, and a successful closing.
Pricing a business
In conjunction with a CPA, a business broker conducts a thorough market analysis, determining the best price for your business.
Once a business owner has decided to sell his business and all the pertinent documents have been prepared, a business broker qualifies all potential buyers.
Preserving confidentiality is one of the main reasons to hire a business broker. Brokers manage the requirement of financial statements and confidentiality agreements of all potential buyers before your company name and location are provided.
Higher sale price
A business broker brings a highly honed skill set to ensure the seller obtains the highest price for a business, such as evaluation experience, market awareness, and knowledge of deal structure to name a few.
Handling the support team
Having a support team in place facilitates a smooth business transfer. A CPA, attorney, lender, and controller are needed in the sales process and the business broker is the natural point person that coordinates your winning team.
The closing process
The closing process is usually the most strenuous and stressful steps involved in the sale of a business. A seasoned business broker has the experience of working with closing attorneys and escrow companies, ensuring your interests are protected as the deal closes and relieving the seller of handling any problems on their own.
Services provided by a qualified Business broker
· Consultation and review of seller’s documentation
· Review of seller’s financial statements
· Market analysis
· Listing agreement, seller’s disclosure & file
· Marketing plan development
· Buyer qualification, interview, and screening
· Business showings and follow-up
· Buyer Letter of Intent and seller presentation
· Meetings with buyer/seller to coordinate buyer due diligence
· Consultations with buyer/seller and outside team advisors
· Consultation with parties regarding transfer of licenses, utilities, etc.
· Attending the closing and subsequent transfer of the business
To learn more about selling a business, get this book by Alex Vantarakis, “Exit– A Business Owner’s Guide To Selling A Company”.
It has been well documented that only a low number of small businesses listed actually sell. While there is a myriad of reasons why overpriced businesses are quite common thus accounting for a high percentage of them going unsold. Anyone who studies markets knows that markets can swing. Sometimes the markets are bullish, and prices can be pushed to a premium and sometimes the markets can be bearish, and prices are discounted.
It is very important for sellers to set realistic price expectations when selling their business. For example, let us take a real estate transaction. If all homes in your neighborhood with the same square footage, bedrooms, and amenities sold for $300,000; it would not be prudent to list yours for $600,000 and expect a lot of buyers.
The same is true for business transfers. Buyers are becoming more astute and will benchmark your company against other similar listings. If you are charging too much of a premium, buyers will seek other opportunities.
Markets often change quickly, and as a seller, you do not want to run the risk of missing a bull market just to squeeze an extra dollar or two from the buyer, especially if the underlying fundamentals of the company do not merit the increase in value. The TVG Valuation Services can get a business over this hurdle. Business owners are also able to take advantage of the AOBT event discussions, which are geared toward attendee requested topics.
Here is an article that further explains the importance of setting a realistic price when selling a business:https://www.axial.net/forum/red-flags-bear-market-come-sellers-respond/
Challenge: There was a significant change in the profit and loss (P&L) statement from the seller after TVG had already marketed an EBITDA number and found a Buyer based on the original inaccurate data.
Since, the seller was unaware of his own financial numbers and not familiar with how to read financial statements, he gave the documents to TVG stating that they were complete and final statements from their CPA. At that point, their tax returns were not yet filed for that year, so TVG used the P&L for the current year in the EBITDA calculations. The full EBITDA number was calculated using two years of prior tax returns and one year of the current P&L. The current P&L was weighted at 50% towards the marketed EBITDA number to most closely mimic trends in their business. However, the CPA was a year behind on entering expenses due to the seller/owner’s delay of delivering credit card statements. This produced a grossly overstated profit statement.
Approach: When the bookkeeping was complete, the final and correct P&L was delivered. TVG was able to explain to the buyer the reason for the changing numbers. It was agreed that the sale price would be adjusted accordingly. The same multiple that was applied on the incorrect EBITDA was applied to the new EBITDA, and the buyer was satisfied with the adjustments. With a proper explanation of the error, he proceeded in buying the business. TVG used a weighted average of three years of EBITDA so the change in the current year EBITDA was only weighted at 50%. Therefore, the impact on the new sale price was only 50% of the corrected EBITDA numbers. Whereas, had TVG used the current year P&L EBITDA 100%, the effect on the sale price would have been much more significant.
Result: Buyer was happy with the approach to the adjusted sale price and TVG was able to close the deal.
While each business acquisition transaction varies in its complexity and size, knowledge of the process will help keep you on the path to a successful close.
Owner’s decision to sell
Intermediaries understand that there are two elements necessary for a successful business sale:
- The business offering must make economic sense to both a buyer and a seller.
- Often, it’s the occurrence of a cataclysmic event like fatigue, declining health, divorce or the desire to retire, that pushes the owner’s decision to sell.
Determining Your Buying Parameters
Before a search for a viable business can begin, buyers should have a good idea of their needs and buying requirements.
- Geographic preference
- Financial ramifications
- Financing is an issue in most small business transfers
- Type of industry, annual sales volume, number of employees, and longevity of business
Identify Potential Businesses
There is always an overabundance of buyers for good business offerings, the key is to determine the right fit. Buyers should be ready to sign a confidentiality agreement and provide verification of their financial ability to complete a transaction.
Determine the Value of the Business
The ultimate value of a business will be the final price negotiated between buyer and the seller. A seller may a request a business valuation from a CPA or a qualified valuation company.
Arranged Buyer and Seller Meetings
The meetings with a seller are of paramount importance to the deal. The decision of both parties will depend upon financial information provided to each, the quick response to questions answered and how each party presents himself or his business.
Offer to Purchase / Letter of Intent
After meeting with the owner and completing the analysis on the financial statements, buyers will:
- pass on a business
- ask for more information
- prepare a formal contract
The two most common legal vehicles are a Letter of Intent or an Offer to Purchase and either document is accompanied by an escrow check, as a good faith gesture.
Negotiations – Structuring the Deal
The seller has three primary decisions once a legal offer has been submitted:
(b) a decline
The purchase price, payment terms, length of training, consulting agreements, and allocation of purchase price are just a few items that can be leveraged to make a deal more favorable.
Due diligence is a time to learn more about the business to determine compatibility. The buyer performs due diligence to ensure that the books, records and operation of the business have been portrayed accurately. Due diligence can last between 7 to 45 days with the average length being around 21 days.
This is the best part of the whole process, the time you are handed the keys to the business. Prior to closing, the offer to purchase or definitive agreement is submitted to an escrow company or closing attorney so that legal and governmental due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include:
- lien and title search
- real estate and personal tax prorations
- preparation of closing documents
- disbursement of funds to the seller
To learn more about buying a business download this book by Alex Vantarakis, “Entrance– A Business Owner’s Guide To Buying A Company”