EQUINOX Business Law Group - Seattle Bellevue

Key Takeaways: Preparing For The Sale of Your Business

September 28, 2009

We had a great month discussing key considerations in preparing a business for sale. Our Equinox Focus seminar offered three perspectives on best practices for sellers as they prepare for this transaction. Some key takeaways for me were:

1. Prepare 2-5 years in advance. As we discussed in our "Building Value Into Your Business" program in July, you can take proactive steps to make your business more valuable to a buyer. A purchase and sale transaction is something to be planned so that you, as the seller, can maximize the sale price.

2. All buyers are not created equal. You want to focus the marketing of your business for sale to the right buyers for the business. This includes those who can afford to buy the business but also those who fit the culture of the business and can grow the business with the employees and customers.

3. Confidentiality of the sale is not necessary. In many cases, sellers can reach a broader, more appopriate, buyer base by sharing the planned sale of the business with employees and other stakeholders. These groups know a lot about the business and may be one of the "right" buyers. The message regarding the sale must be carefully crafted, but keeping it secret may result in more damage.

4. A sale is an emotional event. The sale of a business is an emotional event for everyone involved - sellers, buyers, employees, and even customers. Remember the human and emotional element as you consider the purchase and sale transaction and communications throughout the process. It is important to do as much as possible to be forthright and eliminate surprises.

A well planned transaction will result in a seamless deal with a maximum price.

Purchase and Sale: It's Never as Basic as it Looks!

September 21, 2009

Bill Pearsall, guru of selling businesses and preparing owners to maximize sale price, offers our guest blog post this week. Bill will be participating as a speaker in our September 23 Equinox Focus seminar "Preparing Your Business For Sale."
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It’s Never as Basic as it Looks

Most owners of privately held companies are exposed to the process of buying or selling a business only once. Those owners that bought their business usually are not aware that the selling process is much more involved than the buying process.
In many transactions the buyer need only prove their ability to pay. Conversely, the seller must be prepared to prove all material facts, support performance history and justify the offering price. This must be done with full documentation. The seller must accomplish all of this while concurrently running a full time business. Sounds like I'm making a case for professional assistance. Well, I sure am. Preemptive transition planning is never an un-recoupable expense.

Too often, the basic business sale; the most complex and important sale the business owner will ever make, must be made with short term or partial preparation.
Our case study scenario pulls from three sales and outlines a basic small business sale.

The sale of “The Cackling Jackal, Golf & Gift Shops”

Like many business owners, Floyd and Jane Cackling, now in their early sixties, had talked about selling their company but didn't act until they were compelled to do so by outside circumstances.

In the Cackling's case their long time general partner, Fred Jackal, had recently expired in a tragic accident during a tour of an underinsured golf ball factory. (The distressed divestiture of Milton Hava's, Hava Ball Industries, Inc., will be the subject of a future Case Study.)

A 12-year-old poorly written and never updated partnership agreement allowed Fred Jackal's family to force the Cacklings to CASH out Fred's 50% interest. Although not an openly hostile demand, the Jackals wanted to be paid within one year of Fred's demise. This represented a cash requirement that could not be met without the sale of the company or the new burden of a mogombo long-term debt. The Cacklings decided to sell.

The company had three retail locations within a market of 2.5 million people. They were two years into a growing national catalogue mail order department.
Floyd & Jane worked as a CEO/COO team and the late Fred Jackal did the golf related buying. The debt free company had 21 employees & 6 managers. They used an in-house bookkeeper and an outside tax jockey. Until starting the mail order department, the partner's net, beyond salaries, was around 2.4% on 2.1MM. Although sales had grown, the cash investment in national marketing and associated mail order start-up expenses had reduced profits to a tad below break even. The payback benefit for the mail order investment would not be seen for yet another year.
The critical path to a mutually beneficial divestiture was mapped as follows:

A. The first element must be an informed commitment on the part of the sellers. All partners agreed to engage our services to confidentially perform a valuation and present options for divestiture.

B. The second element is information gathering. This process not only provides needed valuation input but also tells us what potholes in the critical path must be filled with modified or missing documentation. Audit quality books are not necessary, however what buyers don't see up front, they can make you go find. We identified many non-standard entries, lax logging of asset purchases, potential lease assignment problems and a long list of details.

C. Valuation comes next. Several accepted methods should be used to achieve a valid market value and realistic offering price.

D. Presentation of options. This is where the sellers are told what to expect from the sale along with value development suggestions. Transaction design scenarios with after tax cash flows and risk factors were discussed. At this time we were engaged to sell the company. The Cacklings were given authority to approve a sale on behalf of the Jackals.

E. Next is preparation for sale. While offering and marketing materials are being produced, the seller works with a checklist and time line approach to correct observed operational details. The Cacklings needed to do much basic housekeeping, update employee information files, and make lists of suppliers and other day-to-day tasks.

F. Buyer marketing, qualification and presentation started less than 30 days from engagement. Continuing confidentiality and non-piracy measures were kept in force. We chose to bifurcate the retail units from the mail order department and market them separately. Four Buyers made formal offers with a letter of intent.

G. Offer presentation, analyses and counter offer design. All offers were presented and the merits discussed. Counter offers were approved and submitted.

H. Counter offer is accepted. At this point Escrow is opened and the due diligence process is performed as defined by the transfer document. As intermediaries, we facilitated all due diligence, contingency removal, lease assignments, physical inventory, supplier notification, public announcements and legal coordination.

I. Closing. All parties sign.

How It Worked

The retail units were sold for cash and stock, at 94% of the offering price, to a small regional chain of sporting goods stores. Our presentation used recast statements with an economy of scale scenario based upon assumptions of the buyer's operating style. The tradename was not part of the sale. The Jackals were cashed out with 80% of these proceeds.

The Mail Order business was sold for 100% of the offering price to the existing department manager. The manager provided operating capital and a note to the Cacklings plus a future earnout provision. The Cacklings were also retained on a consulting contract with the new company. After proper preparation the value at closing was 20% greater than the original base valuation.

The Nut Shell Guide to avoid appearing as one of my case studies.

1. At business start-up or acquisition, design an exit strategy into short as well as long term plans. Update annually.

2. Use a neutral professional to create your partnership/stock purchase agreement with a purchase & sale provision and succession plan.

3. Do not bury profits to avoid tax dimes. It will cost you in much bigger divestiture dollars.

4. Generate a detailed industry standard monthly operating statement with current balance sheet.

5. Document asset purchases and update asset lists monthly.

6. Consult with a transition professional three (3) years prior to the planned sale of the business.

As transition professionals it is our task to eliminate client comments like, “I wish I would have known that before I sold the Company.”

THREE COMMON PITFALLS IN BUSINESS SALE TRANSACTIONS

September 16, 2009

Our guest blogger this week is Jolene Anderson with Coldwell Banker Bain Commercial. Jolene has been working with business buyers and sellers since 1991 and shares her experience in common pitfalls that break deals.
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THREE COMMON PITFALLS WHEN BUYING OR SELLING YOUR BUSINESS

My experience in selling business opportunities, since 1991, and assessing the 3 critical deal points in every transaction provides the basis for the following suggestions:

1. When buying a business, financing is critical to a successful transaction. In the words of a famous actor: "Get the money first". The first step in getting the financing is preparing a financial statement for the lender; 3 years tax returns and a resume including those skills which will provide the lender with the reasons why the buyer will be an asset to the business is necessary. Having a successful Business Plan is necessary in many cases. There are individuals and firms who write successful Business Plans.

If the buyer is seeking a small business loan, a helpful website is: www.sba.gov. One helpful local bank, Key Bank has a link on their website for small business funding: https://www.key.com/html/small-business-funding-solutions.html. Having a financing package ready to go is critical to getting the business transaction closed. In my business, when I meet with a buyer the first time, this is the first piece of business. WIthout the financing, the deal just won't happen and it is unrealistic to waste a seller's time if there is no ability to secure financing. Some sellers may be willing to finance a portion of the business but are wary if the buyer has no prior experience in the business or management skills and if the buyer has low credit scores. Forget all those 0 down stories the sales and marketing people write about.

Conversely, Sellers must provide 3 years profit and loss statements. If there are insufficient financial records or if there is unreported income, it may be very difficult to get a buyer to pay what the seller is asking for the business and it will be damaging to the good faith necessary in the transaction.

2. Most business opportunities require an assignment of the lease and/or the ability of the buyer to secure a new lease with the landlord. The landlord will require the same financials as the lender, credit scores will be crucial and the resume/history of the new lessee. If there is no previous credit history of leasing or owning a business, the landlord will require a personal guarantee from the lessee. Many sellers will be reluctant to assign the lease as they will still be liable in case of default. Having a good attorney involved in the transaction, to prepare the necessary documents in the assignment and or guarantee of lease will be critical to prepare the parties in the transaction. Think of the attorney as "health insurance" and prevention.

Too many business sales are jeopardized by leaving the lease assignment to the last minute. Providing enough time to allow the landlord to review the financials is necessary to a successful closing of the transaction and also provides a window to handle any renegotiation between the parties and a review by their respective attorneys.

3. The final critical ingredient in a successful closing is good faith between the 2 parties. It is amazing how easily the transaction can move along when both parties are acting in good faith, providing accurate information and showing professional respect for all parties concerned as opposed to allowing ego drive the transaction. This climate of good faith provides fertile ground for resolving differences toward the mutually satisfactory goal of both parties in closing the transaction. Conversely, when one party seeks to dominate and control or bully the other party, even the simplest wrinkle in the transaction can be blown out of proportion. Employing mutual respect while in the process of a difficult negotiation lays a proper foundation for success.

Top Issues For Business Buyers

September 09, 2009

Today's guest posting comes from John Martinka of Partner on Call. John is a Business Buyer Advocate, helping to connect them to sellers, conduct thorough due diligence, understand the transaction, and to buy a business that's right for them. John will be a guest speaker at our Preparing Your Business For Sale seminar on Sept. 23.
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Business buyers are by nature a skeptical lot. Because they typically start their search for a business on the Internet they see too many lousy companies dressed up to look charming and attractive. It doesn’t take them long to realize the true situation of those firms. Business owners/sellers need to realize this as they start the process for an eventual sale.

The seller can influence most of what a buyer wants. One thing a seller has no control over is the answer to the question, “Do the buyer’s skills fit with this business?” Get this out of the way early. Don’t waste time trying to sell a sales oriented business to a manufacturing engineer or vice-versa.
However, a seller can ease a buyer’s mind on other important topics. Some of the top issues to buyer are:

• Is this a good business but not a “perfect” business, so I can add value?
• Is there growth potential? A deal is based on what the business has done but it’s rare that a buyer doesn’t want to grow the business and they must see how they can capitalize on the potential.
• Buyers want to be comfortable with the financial statements. They don’t want to feel they are crossing a landmine field to get to the real profit number.
• No surprises please! They want the seller to have run the business as if it wasn’t being sold. Equipment is purchased as needed, marketing it done so there is a full pipeline of prospects, there is no need for large computer system upgrades in the immediate future, etc.
• Is there a team in place so the buyer can work on the business not in the business (after the transition)?

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John Martinka has a Masters Degree in Economics & Finance and is an author and national public speaker. He has expertise in business acquisition and problem solving. He has owned profitable companies; led a turnaround and successfully opened consulting practices in 10 cities. Mr. Martinka has used the Partner On Call programs in his consulting business since 1994.

Preparing Your Business For Sale

September 02, 2009

In July, we shared with you tips and insights on how to increase the value of your business' physical, intellectual and relationship assets. With the knowledge of how to increase the value of your business, the next question for many is “How do I go about selling my business?” Below are a few important points to consider as you contemplate this question.

1. Preparing for Sale. It is important to reiterate that the process for preparing a business for sale may span 2-5 years during which time the business owners capitalize on opportunities to grow the business’ assets and ensure necessary legal and financial documentation is in place to support the business’ value. The business must proactively manage its cash flow and value of its assets and create financial statements that accurately reflect the condition of the business. In addition, the owners should ensure contracts are in place with key stakeholders including owners, investors, clients, vendors and employees. These contracts, if drafted carefully, can make a business much more attractive to a prospective buyer because they tie in key relationships and protect the business’ assets. Finally, corporate governance matters such as annual meeting minutes and strategic decisions must be documented properly.

2. Finding a Buyer. Buyers for businesses that have positive cash flow and the potential for growth remain in the market, even today. One of the best ways to find qualified buyers is to work with a broker, agent or intermediary with experience in the purchase and sale of businesses. They not only have experience in the transactional element of the sale process but also are connected to other agents and buyers. An important criteria in selecting a broker or agent is to ensure that the person recognizes who is a qualified buyer for your business and does not present buyers or offers unrealistic for your circumstances. Many brokers and intermediaries also work directly with sellers in the preparation period to help enhance the value of the company so as to benefit both parties.

3. Understanding the Buyer’s Perspective. Sellers are often surprised by the number of questions and volume of information requested by prospective buyers during the “due diligence” process. Some of the requests, such as requests for the seller to substantiate the financial statements, are offensive to a seller as it suggests malfeasance or dishonesty by the seller. When looking at the transaction from the buyer’s perspective, though, we understand that the buyer must protect against potential liabilities or non-disclosures prior to sale. Typically, the Purchase and Sale Agreement helps to protect a buyer against many of the risks, but buyers (and buyers’ agents) know that rolling back a transaction or suing for damages is not an easy or practical course of action. The best time to obtain the information is before the deal is done.

4. Purchase and Sale Transactions. Although purchase and sale transactions are all very similar, no two are identical. Generally, though, the parties begin by discussing the business generally and the buyer is provided access to certain high level information about the business. The information is often provided in connection with a Confidentiality or Non-Disclosure Agreement, but not always. As the buyer becomes more comfortable with the data he or she has received, the buyer presents a non-binding Term Sheet with core business terms, including a proposed purchase price, to the seller. The Term Sheet becomes the baseline of the Purchase and Sale Agreement but is subject to change as more information about the business is disclosed by the seller. When all information has been disclosed and accepted, the Purchase and Sale Agreement becomes effective (subject to any further contingencies) and the transaction closes. The closing may be very formal or informal depending on the activities necessary to complete the transaction.

5. Emotional Preparation for Sale. An element often discounted by business owners when selling their businesses is the emotional aspect of the sale. Business owners put their hearts, souls, and finances into the business and often find it difficult to walk away. Part of the planning process includes an understanding of what role you want to play as a seller – to walk away entirely, stay on as a consultant, or stay on full time. Each of these options has an emotional counterpart that must be addressed between buyer and seller and in all cases, the buyer must relinquish control, which is often very difficult to do.

In our seminar on September 23, we will discuss each of these factors in more detail, helping you to prepare and plan for your transition out of your business so as to ensure maximum value and minimal drama through the purchase and sale process.