September 19, 2017
After working incredibly hard, you have finally been making record profits, with your independent business, year after year. You have your company structured perfectly. Your management team is effective, your workers are satisfied, and your shareholders are reaping all the rewards.
Things are going so well and they don’t seem to be slowing down anytime soon.
You have absolutely no plans to sell, and your future looks clear. You know just how much more progress you can make at the helm of your business, and you’re getting there at a record pace. Then, out of the blue, you get a phone call from someone talking about mergers and acquisitions law.
The person on the line introduces themselves as a potential purchaser and makes an initial offer on your business. At first, you probably ignore them with skepticism. Instead, you focus on growing your business every day and forget all about their unsolicited offer.
But the more your valuation grows, the more calls you get.
Although you still aren’t taking the offers that are rolling in too seriously, curiosity begins to get the better of you. You begin to take an interest in weighing the pros and cons of the various mergers that have been suggested.
Finally, someone says a number that you can’t refuse, and just like that, you will begin negotiations. Unfortunately, this process might take years and many buyers and sellers experience deal fatigue. Keep reading for three tips on how to make sure your sale doesn’t lose its momentum.
Managing your Unsolicited Offers
When you receive an offer that is unsolicited from someone who can credibly purchase your business, you should feel very proud. It is a huge sign of accomplishment that you were able to grow your small business into what might become a conglomerate.
Once you have given exclusivity in a deal started by an unsolicited offer, the onus of responsibility will shift to you. The purchaser will want you to give them any information that can help them to better understand the proclivities of your business.
This kind of information can help them to identify possible risks, within your business model, that weren’t visible on the surface. They will want to pour through all your documents and set up a data room.
Tip Number One: Maintain a Data Room
If you are unfamiliar with mergers and acquisitions law, you may not have heard the term “data room” before. This term refers to a secure location that you can create, on a server, with your seller so that you can share confidential materials for mergers and acquisitions law that need to be inspected. This setup will allow documents to be safely sent.
Another term used for this type of storage center is a due diligence data room because it is an integral part of the vetting process. Investors like to analyze every aspect of a firm’s business before they will make a commitment to acquiring it.
To create a data room, you will need a lot of time, and it will take a ton of effort. Some businesses dedicate entire teams to maintaining their rooms.
Although getting these documents in place before a sale is helpful, it is only something you want to share once you have decided for certain that you are planning to sell and have signed an exclusivity agreement. The documents involved are highly sensitive, containing things like copies of financial records, accounts of legal activity, and documents that contain intellectual property.
To make it less expensive for the person selling their business, data rooms are most often created to be accessed remotely. Since the entry is restricted, the buyer’s team may only view it one at a time in the order stated by a predetermined schedule.
Tip Number Two: Do Your Due Diligence
Unfortunately, everyone who is interested in your business isn’t going to always have pure intentions. In the business world, everything is a competition and there are some that like to take short cuts. But how do you avoid these sharks?
Due diligence (on the part of the seller) is the name for the process, in mergers and acquisitions law, that a seller will go through to assess the possible benefits. They need to know if the company attempting to purchase them is a suitable buyer that has the ability to close the transaction.
One of the biggest things you need to look for is their intentions. It is not unheard of for a competitor to make an offer on a smaller company just to gain access to their proprietary knowledge, without ever actually purchasing the company. Although this kind of shady business practice doesn’t happen often, it happens enough that you should be combing meticulously for any sign of inconsistencies.
Most of the time, your potential buyer will be genuine. One hallmark of their honesty is their track record with previous acquisitions. If they have successfully acquired other businesses, then they will be more likely to act properly while purchasing yours.
Tip Number Three: Manage Your Expectations
As those well acquainted with mergers and acquisitions law know, managing your expectations is crucial to the success of your deal. The time frame needs to be closely monitored and agreed to in a letter of intent. This letter is used to create an infrastructure for the sale.
During this key stage, the seller should be in control. If the buyer were dictating the process, or if it were planned to be open-ended, it often leads to deal negotiations at the final hour.
A proper exclusivity period is no more than six to eight weeks and efficiency during this time is a great way to avoid deal fatigue.
Deal Fatigue in Mergers and Acquisitions Law
Everyone loves to focus on the potential profits they will be making after their deal goes through. But getting too excited can hurt you badly.
If you are lucky enough to be going through with selling your business, don’t spend a penny until the ink is dry. Unfortunately, all too often sellers will mentally withdraw from their purchase before the deal has completed. They will either set their sights on their next venture or be distracted by record growth in their own business. Don’t make their mistake.
If you need help getting your merger moving, contact The Leland Group at (866)353-6065.
April 25, 2017
Valuing your business is key to a successful exit. But even owners who aren’t planning a sale can benefit from knowing the value of their business. If you’ve never had a business valuation before, the process can feel intimidating. These four considerations can take the emotion and frustration out of the business valuation process.
Set Reasonable Expectations
Business owners know their company best, and often have a good idea of the business’s general value. However, they need the judgment and wisdom of an objective third party, since it’s impossible to know a business’s true value until you attempt a sale.
Business owners understand the value drivers of the business, but can struggle to be objective. The value you estimate might not take into account each variable. For example, owners may not consider market or other external factors.
A third party valuation offers confirmation of the business’s value from someone not involved in its daily operations. This type of valuation also incorporates adjustments for non-recurring and discretionary expenses, in addition to normalizing adjustments. This means that adjusted cash flow from a third party might be quite different from reported cash flow. Business owners often fail to incorporate these adjustments, producing a value estimation that differs substantially from that of an outside expert.
A good valuation expert will explain the methodology used to arrive at a business’s value. He or she also incorporates company and industry-specific data, looking at the business as a whole, including operations and non-operating assets.
No one wants to leak confidential, proprietary information. But an accurate, reasonable valuation demands transparency. The right valuation provider will still protect confidentiality.
A valuation expert can draw on experience with similar businesses, but will not have the same level of experience with your business. Thus you must disclose even seemingly unimportant information. Something as simple as leasing a property below market rate can affect value, making transparency key.
Transparency can also help reduce anxiety during a sale, since it’s less likely that unexpected negative information will impact the sale. The many documents you must complete and questions you must answer as part of a valuation can serve as helpful tests before a sale. Doing your due diligence helps you assess whether it’s the right time for a sale, in addition to gathering the information you’ll need anyway for the sale.
When planning a sale, not knowing business value can cause costly mistakes when obtaining financing, raising capital, applying for insurance, or agreeing to sales deals. With a known value, owners can highlight value drivers while streamlining performance and operations. This knowledge arms business owners with the information they need to manage new opportunities and potential offers.
Leave Emotions Out of It
Selling a business can be emotional, since many business owners are also the business’s founder. They’ve thrown themselves into the business for decades, and have strong emotional attachments to the company.
A valuation consultant’s role is to objectively analyze the economic value of your company. Don’t highlight the work you’ve put in, or what the business means to you. What matters most are hard figures and evidence-based economic forecasts.
Accurate valuations depend on having a consultant who understands your business. That means you need to find a qualified individual or team, with credentials or experience in your industry. Ask for references, and follow up with those references. Consultants learn from previous experiences, so experience relevant to your business is key.
An accredited, experienced consultant can help yo navigate the valuation process. That includes setting a reasonable time line and managing your expectations. The best consultants ensure that the final valuation comes neither as a shock nor as a source of displeasure.
March 27, 2017
Business owners often wait for a specific need to seek a company valuation. They may be ready to sell or raise capital, or a shareholder might be gifting equity to a family member or seeking to be bought out. A valuation can be valuable even if there is no immediate, specific need. Here are some big benefits that you might not have considered.
Planning for Retirement
You should seek a company valuation at least a few years prior to retiring from a business you own. A full valuation in anticipation of a sale or other transaction can help you better understand your options, and potentially even open up new options. Pre-retirement valuations are increasingly popular as Baby Boomers age. They want to explore their options, begin planning, and perhaps initiate the process of negotiating so that they know what retirement—and the business sale that accompanies it—will look like.
Planning for an Uncertain Future
You might not want to think about it, but the world is full of uncertainty, and a worst case scenario can wreck your business. Whether it’s the death of one of your co-owners, a vicious divorce, or a dispute between partners, a business valuation can arm you with information you need.
A valuation also offers your family some certainty if you suddenly die. Rather than wasting time on a valuation, your family can quickly decide what to do. Moreover, the value of your business can help you determine the right value for a life insurance policy, in addition to offering clear guidelines for the right business and other insurance values.
Shareholder agreements often contain provisions requiring regular valuations: this information helps owners and management keep up with the business’s changing value. This helps you assess how your business changes over time, and weigh how effectively various ownership strategies are functioning.
If you prefer to minimize costs and time, a valuation firm can annually calculate value based on predetermined procedures. This can be as simple as determining the current EBITDA multiple, then applying it to your business’s most recent EBIDTA stream. This helps owners see how the company is performing in light of market trends, but is a limited analysis, not a full appraisal.
Performing Better During Hard Times
No company is immune to market shifts. Understanding how these shifts can affect your company can insulate your business against the worst down swings. Businesses, for example, can be affected by the oil industry, even if they aren’t part of that industry. Some don’t want to know their value, for fear it will demoralize them. But this important information can help you capitalize on market swings. For example, down swings in the market are an ideal time to gift equity, thereby minimizing gift taxes.
No business wants to take a hard look at its weaknesses, but staring these weaknesses in the face can help you make intelligent business decisions. A valuation helps you assess risk and weigh performance. You’ll get a clear idea of the factors that drive value, offering you more control over your business’s value. AR turnover, customer concentration, leverage ratios, and working capital position can offer red flags to buyers, but may also undermine overall growth. A valuation alerts you to potential future problems, allowing you to avert catastrophe before you consider a sale.
Moving Beyond Gossip
We all hear gossip about other companies—and wonder why we can’t get the same values they do. A valuation expert looks at a company’s financial health and history to establish realistic sales numbers that are based neither on gossip or wishful thinking. Business owners contemplating an exit will find that a valuation can help them plan ahead.
A valuation firm ensures realistic expectations, helps you address possible weaknesses, and prevents your wishes from interfering with reality. Buyers always want to offer less than owners want. An independent appraisal by a business valuation expert helps both sides negotiate more reasonably. In so doing, both owners and buyers have a better chance of getting a fair deal that acknowledges a business’s strengths and shortcomings.