Challenge: Reporting Financials / Partner Disputes

Due to partnership conflicts, our client went from being a passive minority investor to a majority active owner in an industry with limited knowledge in a short period of time.

To make matters worse, late paying customers and a non-traditional accounting approach made year-end financials appear drastically different from the health of the business which caused great pause for lenders. Given a majority of deals are financed through some type of third-party financing and the financial limitations of the company, we knew the buyer pool could be limited which could increase the time to close. The seller was anxious to sell quickly so we had to balance the seller, the business hurdles, and marketplace.

Approach: Expanded Deal Structure / Demonstrated Value

  • Established Expectations. Because of the late-paying customer and non-traditional accounting methods, we understood the lending climate would be limited at best if not non-existence.
  • For this reason, we educated the seller a significant amount of seller financing would be involved. We provided an estimate of value as well as expected deal structure before engagement ensuring the sellers would be open to all types of offers and the lay foundation a full-price all-cash offer would be the exception and not the norm.
  • Told the story. While every buyer could see the financials were on a decline, the company still have some great assets. The company has some great accounts, focused on a very niche industry within the IT sector and had multiple channels of revenue. The core of the company was still intact and with a focused growth strategy, a new buyer could easily return the company to its glory days.
  •  Focus marketing search. Given the issues of the company, we understood a generic buyer probably won’t be the best buyer to target. We either need a strategic partner who understood the assets of the company and could create synergies or an IT professional who wanted to run his own operation.

Result:

  • Received 3 competing offers | Closed in 4 ½ months | Seller received 94% of asking price.
  • An IT professional purchased the company using a ROBS (Rollover for Business Startups).
  • The purchase price consists of equity from the buyer and a seller note.
  • Since no outside banks were used, we will able to have a quick close and save time.

There are key steps involved in a business transfer. Each step will vary in its complexity and size; having knowledge of the complete process will help to keep you on a path to closing successfully.

Step 1: Business owner deciding to sell his or her business

Sounds simple, doesn’t it? However, unless a business owner is truly deciding to sell, the process should not begin. Scenarios can occur daily for many business owners to cause them to ponder the idea of selling. Often, a more cataclysmic event needs to occur to push an owner over the edge into a selling mode. A business owner must come to a definitive decision before he begins this process. If not, it could be a waste of time and money.

Step 2: Determining the market value of a business

Before placing a business on the market, a value or range of value must be established so that you have a basis for what and how to negotiate. This is one of the most critical steps and should be handled with special attention. There are many different people that you can turn to in determining a business’s market value, which includes but is not limited to CPA, attorney, valuation company, self, and a business broker. Depending on who sets a value on a company, the pricing range can be wide.

Step 3: Gather pertinent information into a marketing package

The resulting marketing package created is the first interaction a prospective buyer will have with a business; therefore, the old adage, “You can only make a first impression once” could not be more appropriate. The marketing package should include at a minimum, information about financials, employees, assets, and the operation of the business. A business analysis must be performed to explain the strategic plan, financial statements, strengths, and opportunities.

Step 4: Marketing the business

Potential buyers need to be approached in order to be made aware of your business. There are two basic avenues of marketing a business: hiring a business broker or selling it yourself. In general, there are many methods that either party can use to reach the market: The Internet, newspaper, trade associations, and others. The most important factor is that a game plan is absolutely necessary to ensure that the greatest numbers of qualified buyers are contacted regarding the sale.

Step 5: Identify potential buyers

The key is determining who they are if they have the necessary funding and if they are a good fit. A brief list of potential buyers includes corporate executives, customers, suppliers, competitors, investment groups, and employees. It is imperative not only to identify the potential buyers but also to ensure they are financially capable of purchasing your business.
There are a number of pre-qualification methods that can be used to ensure a prospective buyer is financially secure. All potential buyers should sign a confidentiality agreement and provide verification of their financial ability to complete the transaction.

Step 6: Arrange meetings with buyer and seller

The first meeting between a buyer and seller is similar to a first date. Each side is wondering if the other likes them. The meetings with a seller are of paramount importance in a buyer’s final decision. You should always be forthright in your answers and give quick responses to inquiries on updated information.

Step 7: Offer to purchase/letter of Intent

The two most utilized legal vehicles used for formal contracts are a Letter of Intent and an Offer to Purchase. The main difference between the two documents is the level of commitment.
A Letter of Intent is a document stating intent by a buyer to buy a business. An Offer to Purchase is more detailed and binding. A Letter of Intent is usually followed by an Offer to Purchase. In some instances, a further step is taken with the preparation of a Definitive Agreement, which is a more formal version of an Offer to Purchase. Be advised that the documents are merely tools to ultimately get to the closing though they should include as many detailed “deal points” as possible.

Step 8: Negotiating and deal structure

There are three primary decisions: accept, decline, or negotiate. The sale price is only one of several negotiation points on a contract. Variables such as payment terms, the length of training, consulting agreement, and allocation of sale price are just a few items that can be leveraged to make a deal more favorable. The most important aspect of a business transfer is what a seller ultimately receives after the transaction has been completed.

Step 9: Due diligence

The beginning is mainly taking the time to learn more about the other person, the business, and to determine if both sides are compatible. Due diligence is performed by the buyer to ensure that the books, records, and operation of a business are as they have been portrayed. If it is a solid company, then the due diligence should be effortless, but if there are problems with the business, then due diligence could take longer and be more complicated. Due diligence can last between 7 and 45 days with the average length being around 21 days. The size, type, and complexity of a business, as well as the style of the buyer all, affect the amount of time due diligence will take.

Step 10: Closing

Closing a deal is the finest part of the whole process! It’s time to get paid. Prior to closing, the Offer to Purchase or Definitive Agreement is submitted to an escrow company or closing attorney, so that due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include: lien and title search, real estate and personal tax pro-rations on the business, preparation of closing documents, and disbursement of funds to the seller.

To learn more or to get the “Exit” book please visit vantgroup.wpengine.com.

 

 


You have work to do now – Seven steps to getting the price that you want.

The required steps to be ready to sell a business outlined in this article was excellent! Great attributes are put into place during the growth stage of a company, however, some of those things may have a negative effect on the actual the sale price.  For example, overspending on hiring, advertising in anticipation of growth and then hitting a good a projection but missing the overall projection, causing the net income to be lower which would cause the value to be to lower.

General preparation for selling a company is something that must be done many years in advance, as the key is nailing down those numbers.  Ensuring that those figures are as high as possible will maximize your sale price.  At the end of the day, a business is sold at a multiple of how much profit it makes.  Read more

The Vant Group is here to help guide you through the steps of selling a company and make it a successful transaction!