Getting Acquired in Corporate Mergers & Aquisitions

As an entrepreneur, getting acquired by a major corporation may be the exit strategy you have been hoping for.To assist you in this endeavor, we have compiled the 4 things you should know before selling your business. Click next to learn about the different types of buyers.

1: Types of Buyers
2: Indications of Value
3: Increasing Your Business Worth
4: Ten Secrets to Ensure Success

Types of Business Buyers

Most business owners think that there is one value their business can sell for. The truth is, depending on who you sell your business to, different types of buyers are willing to pay dramatically different prices for your business. Having an understanding of different buyer types will assist you when it is time for you to sell your business.

  1. Individual buyer
    This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time. The individual buyer will hit a strong bottom line when it comes to price. Therefore, these buyers will usually limit themselves to transactions involving less than $1 million cash.
  2. Strategic buyer
    This buyer is almost always a company, having as its goal entering new markets, increasing market share, gaining new technology, or eliminating some element of competition. In essence, it is part of this buyer´s “strategy” (hence the name) to acquire other businesses as part of a long-term plan. Strategic buyers can be either in the same business as the company under consideration, or a competitor.
  3. Synergistic buyer
    Synergy means that the joining of the two companies will produce more, or be worth more than just the sum of their parts. Example: A large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases.
  4. Industry buyer
    Sometimes known as “the buyer of last resort”, this type is often a competitor or a highly similar operation. This buyer already knows the industry well and, therefore, does not want to pay for the expertise and knowledge of the seller. These buyers will pay for assets (but probably not what the seller thinks they are worth); they will not pay for goodwill, covenants not to compete, or consulting agreements with the seller.
  5. Financial buyer
    Financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible. Working on the theory that debt is the lowest cost of capital, these buyers purchase businesses with the sole purpose of making the maximum amount of money with the least amount of their capital invested.

For business owners considering the sale of their business, advice should be sought from a business broker who understands the different types of buyers. The relative sizes of acquisitions by different buyer types (compressed into their broader categories), is shown in the accompanying chart (keep in mind that all figures are approximate):

Type of Buyer

Less than $3 million

$3 to 10 million

$10 million

Individuals

45%

25%

5%

Public Companies

30%

20%

20%

Private Companies

10%

15%

15%

Investment Groups

20%

30%

20%





Indications of Business Value

When you are selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. It is perhaps more important to recognize when the buyer arrives at a price at which he or she will leave the negotiations. Buyers naturally try to buy the business at the lowest possible price possible, however most also have a top price over which they are probably not willing to go. Here are some of the “high value” indicators as well as some of the “low value” indicators to consider when evaluating your business.

Indications of High Value

  1. High sustainable cash flow
  2. Room for the business to grow
  3. Anticipated industry growth
  4. Competitive advantage – location, area, etc.
  5. Business niche
  6. History and reputation
  7. Low failure rate in industry
  8. Modern, well maintained facility

Indications of Low Value

  1. Customer concentration on a few major customers/clients
  2. Reliance on owner
  3. Poor financials
  4. Distressed circumstances
  5. Few assets
  6. Product or service sensitivity
  7. Poor outlook for industry – regulations, foreign competition, price cutting, discount stores, etc.

Considering the above factors and how to address them can help a seller look at the business through the eyes of a potential buyer. A professional business broker can help the business owner sort through the many areas that buyers consider when looking at a business and trying to arrive at an initial offering price.

Many sellers make the common mistake of pricing the business too high, believing that they can always drop the price if the business does not sell on the market. Having the business sit on the market for too long is often a danger sign to potential buyers. Selling a business is very different from selling a house. It is much riskier for one to buy a business, and most buyers (which happen to be first-time buyers) shy away if they see any danger sign at all, such as a business sitting on the market for too long.

It is often a wiser choice for sellers to employ the services of a business broker to price their business accurately. When the asking price reflects the market value of a business, it is not unusual for multiple buyers to make offers on the business, bidding the price up. The initial asking price is not a number that should be determined lightly. When it comes to selling your business, it pays to do your research carefully.




Increasing Your Business´s Worth

Your company’s value depends on many factors, some of which include cash flow, asset values, financial history, condition of equipment and premises, lease attractiveness, competition, potential for improvement, location, industry type and the economy, among many others.

Most business owners sell their businesses at the wrong time - they only sell it when they have to. The best time to sell a business is when your business is doing well. If you wait too long, you risk a downturn and the selling price will suffer.

Next, many people attempt to sell the business themselves by methods they have seen in movies, television, and newspaper. Unfortunately, these sources deal with public companies and not the private companies they own. There is a world of difference between the two. Private company owners need not be concerned with hostile takeovers, junk bonds, P/E ratios or loss of a job because the company did not show a sizable profit in recent quarters. Applying public company protocol to sell a private company arrives at the wrong selling price, and many times attracts the wrong buyers.

A company’s selling price is driven substantially by earnings, yet most private owners minimize earnings for taxation, which leads to a selling price lower than it should be. The key to knowing the true value of your business lies in recasting earnings into a meaningful cash flow for the potential buyer. In addition, the recast will need to be a demonstration of the future cash flow capabilities of the business.

After the recasting process, your company will need to be properly positioned. Because it is virtually impossible to view oneself truly objectively, positioning should be left to a professional. Your company’s strengths, weaknesses, uniqueness, hidden values, competitive environment, and information from outside sources will be gathered and organized into a comprehensive profile that will attract the right buyers and position your company to sell for a premium price.

Obtaining the best price for a business begins with the timely decision to sell. Doing it yourself should be limited to the decision to sell. Thereafter, professional assistance should be obtained in order to maximize value, maintain confidentiality, and avoid costly mistakes.

Major corporations engage “pros” to enhance the value of their products in the marketplace. Professional athletes have their promoters, actors have their agents, and public companies have their investment bankers. The unfortunate fact that most small to mid-size companies are sold for much less than they should be indicates that the owners of these companies need professional assistance in their sales process.



Ten Secrets to Ensure Success

  1. Place a reasonable price on your business. Since an inflated figure either turns off or slows down potential buyers, rely on your business broker to help you arrive at the best "win-win" price.
  2. Carry on "business as usual." Don´t become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.
  3. Engage experts to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert intermediaries can channel the process and the parties involved to keep the sale within safely silent bounds.
  4. Prepare for the sale well in advance. Be sure your records are complete for at least several years back and do all pertinent legal or accounting "housecleaning"--as well as a literal sprucing-up of the plant or store.
  5. Anticipating information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets as well as information to satisfy environmental regulations (when real estate is concerned).
  6. Achieve leverage through buyer competition. This can be tricky; you are wise to let your business broker, as a third party, create a competitive situation with buyers to position you better in the deal.
  7. Be flexible. Don´t be the kind of seller who wants all-cash at the closing, or who won´t accept any contingent payments or an asset transaction. Depend on the advice of your intermediaries--their knowledge of financing and tax implications-- to keep the deal sweet instead of sour.
  8. Negotiate; don´t "dominate." You´re used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too. With your business broker´s help, decide ahead of time when "to hold" and when "to fold."
  9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.
  10. Be willing to stay involved. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm´s reach for a while. Consult with intermediaries to determine how you can best effect a smooth transition.

If you are ready to make your business sale a success, your next step is to meet with a business broker to discuss the specifics of your situation. We can advise you on the best way to position your business for sale. This consultation is confidential and free of charge.

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