PLANNING FOR THE SALE OF A PRIVATELY HELD COMPANY
By: Eamon Moran
This is the first in what is designed to be a series of articles concerning entrepreneur- or family-owned companies and the potential sale of these businesses. The inaugural topic introduces planning for a transaction. The reasons for selling a business can be numerous, including retirement, succession, estate planning or even (in unique circumstances) in response to an unsolicited offer. Regardless of the genesis of the decision, advance preparation on the part of the seller is a critical component to a successful transaction. An entrepreneur or family may only sell their company once in a lifetime and it is important to recognize that the process is neither simple nor intuitive.
Just as the reasons for selling a business are numerous, so too are the advantages of planning in advance. First (and in many instances foremost), is the ability to drive the value of the business. The more organized the seller, the more control there is over the process. Taking the time internally to review the business provides the seller with the ability to identify problems that detract from value, establish plans to address the problems and, to the extent possible, remedy those issues. Another advantage of being prepared is the time saved responding to buyer information requests, being subjected to due diligence and even preparing transaction documentation. A third key advantage to advance preparation is the credibility the seller brings to the process. While the least tangible of advantages, make no mistake that even a perceived lack of credibility can quickly crater a transaction. Buyers will walk away from deals if given the impression that the seller is either unable or unwilling to meet the buyer’s requests for access and information.
The most obvious truism in just about any pursuit is that being prepared produces superior results. This is particularly the case in regards to the sale of a privately held company. However, rare is the business owner or management team practiced in mergers & acquisitions. Rather, many of the skills required are unique to the selling process. Therefore, it is important to keep the items addressed in the following paragraphs within reach for regular review.
FINANCE
Financial statements are generally the first and most important documents reviewed by buyers. It is critical to have historical records prepared in accordance with Generally Accepted Accounting Principles (GAAP) by a competent accountant. This is important both in terms of building credibility and establishing the veracity of company financial performance. Financial statements will be used by buyers to begin the exercise of establishing a purchase price. Reviewing financial statements in advance of a potential transaction has two immediate benefits. First, the seller has the opportunity to ‘clean up’ the financial statements by normalizing the balance sheet or rationalizing extraordinary expenses. Second, these adjustments can serve as the basis for financial projections. For example, a privately held company might have family members on payroll who, post-transaction, will not be replaced. By removing this payroll on a pro forma basis, the profitability is improved.
OPERATIONS
In the context of a sale of the business, the focus predominantly concerns the ongoing operations. A potential buyer will seek to understand very quickly how the business operates and where inefficiencies, if any, may exist. Keep in mind that while you, as the business owner, are intimately familiar with the operations, an outsider will likely require extra time getting up to speed. A buyer will want to establish an overall understanding of multiple functions, including manufacturing, purchasing, marketing, order fulfillment, accounting and cash management. Again, a good way to build credibility with the buyer is to create a detailed flow chart of the operations, identifying how the various functions interact. Beyond production processes, good operations planning will assist the business owner in assessing related areas such as environmental liabilities, capital investment, customer contracts and relationships, lender agreements, change of control provisions, etc.
MANAGEMENT
Private company owners are justifiably proud of the enterprises they have built. In many cases, the owner has invested decades in building a successful and valuable company. The entrepreneur set the strategic direction, established and managed customer relationships, and has a firm control over the financial performance of the company. However, this individual focus is often reflected in a command and control structure more like a benevolent dictatorship. This works great while the company is under private ownership. A problem can arise when the potential buyer looks past the owner to determine who among the management team is prepared to lead the company under new ownership. Regularly, the company is staffed with managers competent in a particular functional area but lacking an executive with a more comprehensive view of the firm. Owners are well-advised to build executive expertise that will survive the current ownership. This is also an effective means to bolster the ongoing value of the company.
CONCLUSION
In the current deal environment, extreme caution is practiced by both buyer and seller. While this reduces the risk to both sides of consummating a bad deal, it can have other unintended and negative consequences. For example, the length of time to complete a transaction today is typically on the order of 6-9 months. This, in turn, consumes buyer and seller resources, increases stress on the management team and leads to ‘deal fatigue’. The full impact of these distracting effects is manifested in the deterioration of company performance.
Engaging a professional to assess the functional areas discussed previously is a cost-effective way to prepare the business for sale in the 1-3 years before a contemplated transaction. More importantly, a professional review of the business will include the identification of areas for improvement, and establishes a baseline from which to track progress. Tackling these improvements as part of the sale preparation process is the surest way to build seller credibility, enhance value and ultimately drive the purchase price.
Mr. Eamon Moran is Principal of Camlin Advisors and specializes in providing tailored financial services to individual and corporate clients, including Valuations, Transactions Advisory and Strategic Planning. He has more than 15 years of experience in mergers and acquisitions, corporate development, and strategic planning for manufacturing, service and technology firms, among others. Mr. Moran received his BA from Stanford University and his MBA from the University of Michigan. He can be reached at eamon.moran@camlinadvisors.com
