When a business owner is considering an exit plan, sometimes a strategic buyer is not the best fit. The owner might want to work for a few more years, or the strategic buyer might consider firing long-term employees because their positions duplicate those of other employees. Additionally, customers and vendors might react negatively if a competitor bought the company and had unfettered access to confidential information. In those situations, a company looking to sell might consider a financial buyer, such as a private equity firm or family office.
In any selling situation, sellers need to get their house in order before going to market. Sellers should be especially prepared for a financial buyer to perform extensive due diligence before a transaction. Whereas a strategic buyer may already know the company and the industry very well, a financial buyer, such as a private equity firm, is more likely to need to do more research before they use their investors' dollars to buy a company.
Recently, the owner of a large multi-national auto repair business worked with a transaction advisory team to prepare to sell his company to a private equity firm. The sale closed for $50 million, which exceeded the owner's original expectation. The business owner followed some key steps to prepare his business prior to the sale.
Get the house in order
Beyond preparing quality financial statements dating back at least two years and a sound forecast projecting out results at least three years, a seller might need to tidy up some back-office aspects before a transaction. Entrepreneurial services professionals supported the auto repair business by assisting them with day-to-day bookkeeping needs to clean up the business' financial statements. The professionals also set up foreign subsidiaries in the company's general ledger system. The company's CFO had not had the time or internal resources to properly account for foreign subsidiaries in the company's general ledger system, so the professionals set them up at the level of detail required for a due diligence analysis.
Calculate net cash proceeds
Once the business' back office is in order, but before pulling the trigger on a deal, an owner needs to understand the realistic takeaway from a transaction.
In the previously mentioned example, transaction advisory professionals performed a fair market valuation that took into account research they performed on past transactions within the industry. After that, tax professionals performed a state sales tax exposure analysis and helped the owner calculate the net cash proceeds he could expect based on his current and future tax positions.
Recruit the right team
An investment banker, a transaction advisor and a transaction attorney all have critical roles to play in an exit transaction. Transaction advisory professionals provided the auto repair business a referral to three reputable transaction attorneys and investment banking firms deemed to be the best fit for the seller to select for his transaction team. Tax professionals then worked closely with the selected firms to set up an optimal tax structure for the transaction. Finally, the transaction professionals performed a quality of earnings review, which supported the valuation that the business owner's investment banker was marketing to the private equity firm, and then played a key role in coordinating with the private equity firm's external due diligence team.
The professionals all worked together to develop the optimum negotiation strategy for calculating working capital and getting the deal closed for the maximum value.
Time kills deals
As the due diligence from a buyer intensifies and difficulties with the negotiation process cause doubt about the final offer to be delivered, an owner might consider calling off a sale. Without ample planning and sell-side due diligence on the front end, a deal could erode or the seller could settle for a lesser amount. Early and proactive preparation and planning lays the groundwork for a successful outcome.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
