by Brad Williams and John Leighbody
When selling a company, consider the following:
1.Stock Market and Interest Rates: Even if your company is private, the stock market will play a role in the price you can expect from its sale. Public and private company valuations are correlated. Interest rates also play a factor in the cost of capital. As interest rates go up, valuation typically goes down. Interest rates are now historically low, which is one of the reasons why your business has a historically high valuation. In the next two years, if interest rates or your revenues increase, you may expect your business to be worth the same as it is now.
2.Your Business’ Value: A business is valued when it is for sale on a different basis than when you value it as assets less the company’s liabilities (or “book value”). Values today are determined by current multiples of the company’s earnings or annual revenue. Additionally, the appropriate multiple for any company is determined by the current aver-age multiple paid by buyers in each industry and the size of the company. These industry average multiples are available in proprietary databases where actual transaction information for both private and public companies are available to subscribers. It is always best for business owners to consider overtures or offers to buy their company from outside buyers as “teaser” offers. Real market value is only derived from an examination of the price at which companies in your industry and in your range of annual revenues have changed hands in the past.
3.Feasibility: The first thing to consider is the valuation of your business. Once that is established, you need to deter-mine if the after-tax price paid will sustain your future spending. Conversations with your financial advisor, accountant, family members and advisory board play a role in determining if selling is the right decision and if it is the right time to sell. Once a business is sold, you can no longer take advantage of it for a company car, country club membership, business travel or customer entertainment.
4.Pre-Sale Planning Activities: It is very important for you to know in advance the structure of the transaction best suited to assure you the most tax-efficient outcome. There are several structures that can benefit you, such as a sale of assets, a leveraged recapitalization with a one-time dividend, an installment sale or the use of trusts, to name a few. Investment bankers will run an after-tax model scenario for each structure.
5.Investment Banker’s Role: The investment banker will first help conduct an offering price analysis of your business. In coordinating the efforts that lead to the sale of your company, the second task would be to create a teaser and confidential information memorandum (known as “the book”) to market the business. The banker will help you determine the best route to take, which could be selling to a strategic buyer or private equity firm, creating an employee stock ownership plan, going public, selling to management or, perhaps, not selling at all but transitioning it to the next generation. The banker should list the pros and cons of each of these avenues, help negotiate the best outcome for you and structure the deal.
When buying a company, consider the following:
1.Due Diligence: One of the more time consuming issues related to an acquisition is the due-diligence process. Once several targets have been identified, you will want to explore the prospects. This will include onsite visits, as well as reviews of their financial statements, client concentration, management team, inventory, and synergies between your systems and theirs. An often overlooked consideration is environmental issues at the location of the acquisition. Look at potential future repairs/modifications. Understand the local competition. Ask if the present owner and management team would be willing to help during the transition process.
2.Cost and Access to Capital: The cost of capital and its availability depend on the market environment. Financial institutions may be relaxed when it comes to the credit application or they can make the process an uphill battle. Currently, rates are historically low. However, the spread is very tight and the banks’ screening process can be very laborious. Be prepared with financial records, including the last three years’ worth of your in-come statements, as well as balance sheets, an accounts receivable report, personal balance sheet and items that you may pledge as collateral. You will need a strong application to show the acquired target integrates within your existing business with projected synergies including cash flow analysis.
3.Capacity to Acquire: The time to acquire the target firm will be more time consuming than you expect. You will need to spend time integrating employees, systems, processes, internet technology, culture, human resources and building relationships with current customers. The total cost to acquire will include the purchase price of the business and fees for the lawyers and advisors helping to prepare and structure the deal. The most important thing is to make sure there is enough cash flow to support you personally.
4.Geographic Location and its Economy: Geographical consideration is another issue. How far from your core business can you realistically explore? What does the labor market look like in the areas where you are considering an acquisition? While you are exploring the geography, you should interview potential merger and acquisition experts to help you streamline the process and remove some of the burden from yourself and your management team. These experts have considerable assets, which will save you time and money. You and your team should be involved with major decisions related to the acquisition and not the fine details.
5.Purchase Price: There are a number of considerations you need to make before beginning the search process. The transaction price needs to be taken into consideration. Start this process with your existing banker, who can help mitigate funding issues as you move forward since various factors, such as cash flow and hard assets, determine borrowing rates. Determine if your bank considers cash flow or hard assets in their lending process. You also need to make sure all of your financial statements are order. These include three years’ worth of reviewed financials (income and balance sheets), a personal financial statement and an accounts receivable report. Remember to be patient, dig deep and, if the price lines up with your due diligence, ready to plunge on the opportunity.
About the Author: Brad Williams and John Leighbody are vice presidents and managing directors of The Beringer Group, a nationally-recognized investment bank serving distribution wholesalers and middle market companies. The Beringer Group is an approved IMARK Plumbing member service provider and has provided consulting services to many IMARK Plumbing members. For more information, call 610-293-2020 or visit theberingergroup.com.