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Sunbelt Business Advisors is a specialized firm providing the highest quality level of merger and acquisition and advisory services, for small to medium-sized public businesses, as well as selected middle market, privately-held companies.
Our exceptional depth of professional expertise provides our clients with a broad spectrum of sophisticated business advisory services and attentive support.
We have been approached over the past six months by huge numbers of prospective buyers of struggling competitors, who are asking about the potential to “bail out” these struggling competitors by merger or purchase. There are more companies today than in many years that are now thinking they might be stronger and better positioned to weather a sagging economy if they were a part of something larger and better capitalized. This can be a great time for opportune acquisitions, and today’s article is written with the intent to help in those efforts.
The most common questions we hear are:
1. If I have a competitor who is struggling, how can I best approach them to pursue the possibility of acquisition?
This can be a great time to make a move toward potential additions, but the initial approach can be critical to the seller’s receptivity toward putting something together. The initial call to a competitor should be only to the owner of the other entity, and should begin with the thought that the two entities combined could produce greater “staying power” for the future. It is usually gentler to begin such talks with mention of possible “merger” as opposed to direct “acquisition” discussion first thing. (Every merger is inevitably an acquisition by the controlling side to the deal, and yet considered attentiveness to retaining the best of both worlds can make an enormous positive impact in the relationship between parties.) You need to acknowledge that this is a highly sensitive and confidential subject, and that you will maintain confidentiality, and that you also want their commitment to be quiet and careful in any such discussions. You probably need to probe the seller’s desires for longer term future employment in his current endeavor. If he mentions that he has considered or would consider retirement, and if you would want the company without that individual long term, be receptive. Mention that you could support such a move, as long as it wasn’t too quick and had reasonable transition. Then, get a signed ND in place, and continue discussions. If the other owner makes it clear that he would only have interest if his role remained significant in the new combined entity, this is still worth continued discussion, if it’s someone you think you could live with.
2. When should I discuss value issues with my prospective seller?
It is preferable to avoid value discussions at least until after you have seen financial data, and have had the opportunity to question the seller about recent trends and expected future prognosis. Sometimes the eager but weakened competitor may begin very quickly to probe about possible values, or even to indicate that they would only consider talking if values were at some specified level. Consider asking how the seller views his estimates of value, as a multiple of recent earnings. If the seller is one who views value based on an expected up-trending prognosis for the future, he may be receptive to being paid for such upturn as it is “proven” for the future. If the seller is silent about expected values, this is fine, and actually may be even better for you to begin discussions after you get a firm view of financial and operational histories. If the seller is losing money, or is making very little, the company’s balance sheet will become far more critical in assessing potential value. Losing companies typically can command selling prices at something between liquidation value and book value of the entity to be sold. The more information you can get on real solid liquidation value of assets, the better for you to ascertain real market value of the entity, and for you to command reasonable financing from potential lenders for the transaction.
3. What are the earliest discussion points we should review in considering a combination of this type?
First, consider the relative cultures of the two entities to be combined. If one has long positioned themselves and the top quality force in their niche, and the other has long identified themselves as the lowest cost provider, you are likely to have difficulty blending the two.
Secondly, consider the role of the top executives as the entities move forward together. If there are strong second tier managers in the entity to be acquired, their enthusiasm about the combination is likely to be critical to the combination’s success. Lobby to try to discuss the possible blend with those individuals before spending too much time or money on the potential combination.
Thirdly, consider the potential for combination of physical facilities. Often in smaller or middle market privately-held companies, either the owner holds real estate personally, which they lease to the company, or, at a minimum, the owner is likely to have personally guaranteed lease arrangements. It will be critical to be able to combine physical offices reasonably quickly, both to reduce costs and to blend cultures of the two entities into one stronger company going forward.
4. Are there M&A firms that are good at these sorts of transactions that might assist as we move forward?
The process of buying another company is one that really does, in every instance, create risk for the buyer. It is extremely valuable to have experienced help in assessing potential values, in devising solutions to the inevitable glitches that arise in discussions, and simply in spending the time necessary to do appropriate due diligence and ensure that you know what you are buying. Although many firms like ours spend most of their time representing sellers, they do also help with focused and well-directed buy-side engagements. Professional help reduces risk, and if done well, may also reduce net cost of the proposed acquisition.
The fastest growing business segment in the U.S. today is the small to mid-sized privately owned company. Entrepreneurial owners are betting the ranch – guaranteeing debt, working fourteen-hour days, and generally running flat out to catch the currents of business success. Alas, for all their hard effort, all too many wind up “owning” little more than a job. Worse yet – the job you own is one without lots of security or benefits. It is also a job attached to a lot of worry and responsibility.
The object of business ownership is to own VALUE. It is to build, own, and to some day sell a company worth a great fortune. It is to win the freedom to call your own shots, to point your nose toward the most exciting new directions, and – yes – even to take off from work time once in a while.
Until you build a living, breathing entity that can thrive without you, face it: you don’t own a company; you own a JOB. You can, however, change all of that.
There is an old Chinese proverb, which says that the best time to plant a tree is twenty years ago. The second best time is today!
What are the key elements to that process?
Nurture People Who Can Assume Decision Making Roles
Often the hard-charging founder of a small business has trouble “letting go” – or handing the reigns over to other managers. Until that happens, the enterprise is vulnerable due to one-person dependency, and value is diminished. Look at that second tier of managers as the building blocks for your company’s future. Nurture and encourage them to step up to greater responsibility. Sure, they will sometimes make mistakes. But…guess what? You do too, once in a while.
Build Customer Loyalty At Multiple Contact Points
Customer relationships often begin with an owner-entrepreneur who over time, gradually hands off the least critical of such relationships to other sales executives. Imagine how much stronger that relationship becomes if it’s rooted at many levels within the organization! It is like a tree reliant on a single taproot versus one held fast by a wide and thick network of roots spreading in many directions. For true security, add depth and breath to the service network and do what you can to ensure that customers love many contact points within your organization.
Document Key Technologies and Work Patterns
Most small to mid-sized entrepreneurs have relatively scant documentation on their systems and policies. This creates vulnerability as people transition, and costs time in constant small needs to recreate mechanical solutions and systems. Grow up! Write it down! There should be no element of your organization which new resources would have to “start over” in the event of lost staff.
What is your reward for all of this? Certainly it is greater solidity and security. Certainly it’s more freedom for the owner. But, most importantly by far, it’s value enhancement. When the time comes to sell your company, buyers want assurance that the company can continue without you. Even if you are willing to continue working, buyers will not be willing to count on that. You will never catch the gold prize if the future value of your business would fail without you.
Our firm is in the business of selling middle market companies. We often wish we could meet every client a few years before they want to sell, so that we could take that independent look as buyers do, at strengths and weaknesses for possible sale. We feel that every seller could enhance value by 25% (and some by 100% or more) if they just took an early inventory of strengths and weaknesses and included in their business plans a targeted approach in building value.
By the time you have accomplished only the few things listed above in this article, you will have built your company’s value immeasurably. Own a company – not a job! Your personal flexibility and professional value will be greatly enhanced!
The tThe typical business owner will only sell a business once. Understanding the complex process involved will help produce the best best results. But don’t fall prey to the myths that can derail or seriously affect a potential sale.
Myth #1 – I Can Sell It Myself
Many owners believe they’re qualified to sell their business without professional assistance. Many owners are entrepreneurs and the key salesperson for the company. But selling a business is not like selling a product or service.
If you’re looking to sell on your own, confidentiality is lost. If word of a potential sale gets out, there are definite risks of losing clients, employees and favorable credit terms.
Do you really have the time to run your business and compile marketing materials, advertise, screen buyers, give tours and facilitate due diligence? When you’re looking to sell you want to put even greater emphasis on running your business, boosting your sales and not taking on new challenges.
Myth #2 – I’ll Sell When I’m Ready
Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business.
Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.
Myth #3 – I Know What it is Worth
Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.” Still others utilize industry multiples.
A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.
Myth #4 – It’s Like Selling a House
Preparing to sell your house may take a few weeks, then you want to get the word out to everyone that the house is on the market. Once you get a satisfactory offer, you sign on the dotted line, turn over the keys and move on.
Selling a company is much more complex. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.
The average house will sell in less than four months, while the average business sale is nine months to a year.
Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success.
SoundSound sale strategies will bring you the optimum price the market will bear. Go to market with realistic expectations by getting a professional valuation and using a professional business broker or intermediary.
Our experience is most business buyers want to buy the right business, the right way.
One of the easiest ways to do that is avoid buying a loser.
Professional advisors and sources of financing can attest to the sad fact that too many buyers either buy the wrong business or they buy the right business on the wrong terms. These problems stem from defective acquisition techniques, not a lack of good businesses for sale.
Thinking of fixing a loser — or buying one? According to a study by Northeastern University, 80% of turnaround specialists thought they could improve a business’ profit. Here’s what happened:
Turnaround specialist, Sherwood Partners, which has worked with more than 100 companies, says that for every company the firm has saved, it has overseen the liquidation of roughly three others.
It's a good time to buy a business, even during this recession - but only if the business you're buying is profitable.
When you find a winner, don't mess around thinking, "What better deal might exist?" If you find a worthwhile business for sale on reasonable terms, buy it.