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HBS principals have sold businesses in every imaginable industry and for a variety of prices.  We market worldwide and sell businesses to all kinds of buyers - private equity groups, strategic buyers, immigrants seeking investor visas and entrepreneurs, as well as facilitate the sale to a management team or family member.   And, if the need is to recapitalize the business we are affiliated with Corporate Development Capital, LLC, a boutique investment banking firm located in the Rocky Mountain region that focuses on helping companies raise equity or debt capital.

 

In selling businesses we use a focused process, which we modify to meet each individual client’s needs. 

 

Too often our privately owned business clients come to us and say “can you sell my business in a couple of weeks”.  Well, this usually doesn’t work very well.  The best strategy for a business owner is to create a strategic business plan which includes an Exit Plan.   An Exit Plan is a proactive look at what your personal and business goals are, how you position yourself and your business to best meet your goals, implement the Exit Plan and then when you are ready to exit you begin the exit process.  We recommend that business owners plan at least with a three and preferably a five year time horizon.

 

Exit Planning

 

The primary reason to create an exit plan is to define and then meet your goals.  As you develop this plan you need to be aware of your personal and family goals, what you will do after you exit, your health, employee and other stakeholder concerns, and what kind of legacy do you want to leave.  In determining your goals you should decide what type of exit will you want, options include:

• Selling to employees

• Selling to a family member

• Recapitalization by bringing in a partner or investor

• Selling the entire business to a third party

 

Each one of these options result in a different exit plan, but the primary goals are to determine where you are now, how you can make the business more valuable over time, how to accomplish goals (for example, to get the best after-tax deal) and to position yourself and the business so that when you are ready to exit and the external factors (for example, strong economy, good business performance, availability of low cost capital and a healthy mergers & acquisitions market) are positive, then you can pull the trigger and start the process of exiting.  A typical exit process may take 9 to 12 months so you need to plan accordingly.

 

One key part of the plan is the value enhancement process.  We begin by conducting a valuation to see what the business is worth now, identify key factors that can be improved so that the business will be more valuable to a buyer, then work on this enhancement process so that when the exit occurs you will achieve your goals.

 

HBS will help you create and implement your Exit Plan and we generally partner with some of your other advisors like your CPA, your estate planner, financial advisor, business attorney, etc. to make this a very broad based and effective plan.  In addition, we will represent you in the exit process.

 

The Exit Process

 

For this discussion, we will assume the client’s goal is to sell the business to a third party buyer and to receive the best after-tax deal in terms of price, tax payments, residual income, terms, etc and to get it done as fast a possible and with the least hassle.  We follow the following steps:
 

Valuation. 

If an exit plan has not been done and/or a business valuation has not been developed, the first step is to determine what the likely market value of the business is to a third party buyer.  For more information on business valuation, please see this section.

 

Strategy. 

Develop a marketing strategy including who prospective buyers may be, and what is the best method to communicate with them, etc.

 

Internal Review and Improvement. 

Review the business in terms of how it will look to a buyer.  This may include doing some preliminary internal due diligence to see what issues there may be and then if cost effect mitigate them.  Activities could include:  getting the books and records in better shape, getting all materials organized for buyer’s review, identifying an issues that can be fixed quickly, determining what issues the business has that can’t be fixed but will need to be disclosed and how to best disclose the, etc.  This is more of adding a fresh coat of paint then revamping the entire business.

 

Offering Memo. 

Preparation of the offering memoranda. 

 

• This begins with the client providing all necessary information about the business including financials (Income Statements, Balance Sheets and Statements of Cash Flow) and detailed and verifiable information about: customers, markets, technology, operations, competition, future growth opportunities, physical facilities, etc. 

• A big part of this process is to “recast” the Income Statement and Balance Sheet to show what the real owner’s cash flow benefits are.  Most privately owned business owners hate paying income taxes so consequently, in conjunction with their CPA, they look for ways to reduce “taxable income”.  Recasting is a way to uncover the hidden cash benefits so a buyer can see all the benefits the business will offer him.  This is discussed in more detail in our Business Valuation section.

• From this information, we create a detailed confidential offering memo which includes the following and other information:

  • Executive summary

  • Market and industry environment

  • Business History

  • Owner, management team & employees

  • Products & services

  • Financial history and recast financial statements

  • Growth opportunities

  • Customers (e.g., profile, concentration, segmentation, etc.); without disclosing who the customers are.

  • Suppliers (e.g., concentration, exclusives, terms, etc.)

  • Real estate (leased or owned)

  • Plant and Equipment

  • Sales & marketing strategies and systems

  • Intangible assets (e.g., intellectual property, franchises/ licenses, etc.)

 

Marketing.   

Depending on our marketing strategy we will contact, on a confidential basis, potential buyers worldwide.  We may rifle shoot specific companies or make a broad marketing campaign to reach as many potential buyers as possible.  There are several important criteria during this process, including:

 

• Maintaining confidentiality

• Profile and clear screening criteria for prospective buyers

• List and/or criteria for buyers that will not be considered (e.g., specific companies like competitors, etc.)

• Assessment of the risks and benefits of approaching strategic buyers and who they are

• List of likely financial buyers, like private equity companies

• Advertising vehicles to be used include web advertising, email, direct mail, phone calls, etc.

 

Screening & Qualifying Buyers. 

We only want to deal with potential buyers who will maintain your confidentiality by signing in good faith a non-disclosure agreement, and have the financial, personal and managerial wherewithal to complete a deal.  The buyer’s motivation is an important issue.   Knowing why they may buy will help us in our approach and negotiation.  For example, the US has a visa program that will allow foreigners to obtain a green card and live in the US if they and the business meet certain criteria.  Someone who is trying to get into the US by buying a business has different motives than an American already living here.

 

The Pitch. 

After we qualify the buyer and the buyer indicates an interest in buying the next step is a phone conference call if the buyer is not local and then a face to face meeting between the buyer and client, all coordinated and controlled by us.  Generally the client will discuss, perhaps in a formal presentation, the business and answer the buyer’s questions.  If a formal presentation is required of the client, we help create this.  This is a selling opportunity.

 

Auction or individual negotiation. 

Often, if circumstances warrant it, we can get multiple buyers interested in the business and we organize an auction.  Other times, we only have one potential buyer that we work with.  Generally having multiple buyers and either have an auction or simultaneous negotiations with several of them is better than only having one potential buyer.

 

Negotiations, Due Diligence, Closing and Transition. 

Many business owners have the mistaken belief that finding an interested buyer is the primary challenge to overcome is selling a business.  Nothing could be further from the truth.  Experience business intermediaries know that fewer than 5% of “interested, qualified buyers” for any business ever get to closing, including deals that have been signed then fall apart during the due diligence process.  Our job is to help clients and buyers overcome the countless challenges that arise between offer and acceptance and closing of the deal.  Key areas include:

• Reaching agreement on acceptable price and terms

• Creating the right deal legal and financial “structure” that addresses financial, tax, legal, and transferability issues for both buyer and seller

• Overcoming resistance and developing consensus among selling shareholders, family members, and advisors

• Finding third party financing for buyer or structuring seller financing, if needed

• Introducing buyers to outside advisors like CPAs, insurance agents and attorneys that are experienced in business deals and deal-friendly, not deal-killers

• Managing buyer demands for information during due diligence that is excessively expensive or time consuming to provide

• Managing demands from buyers to interview customers, employees, suppliers, and others as part of due diligence vs. the need to maintain confidentiality

• Overcoming buyers fears and reaching compromises regarding issues that arise during due diligence (e.g., lack of detailed records, discovery that important agreements are verbal understandings and not written agreements, unanticipated landlord demands for approving lease assignment, recent decline in financial performance, recent loss of customers or employees, etc.)

• Managing volatile emotions of buyers, sellers and their advisors during an extremely stressful and often drawn out process

• Where appropriate, persuade key stakeholders (e.g., landlord, key executives, or suppliers) to approve and stay on with a buyer

• Maintaining relationships with and the interest of back up buyers during due diligence  (We always encourage our seller clients to maintain the opportunity to continue to market and negotiate with other buyers instead of agreeing to a “no shop” clause.)

• Managing the escrow and closing processes

• Preparing the organization for transition

• Managing post acquisition integration of systems, technology and people, and communications to key stakeholders

 

Celebrate.