Value is in the eye of the buyer, so sellers of middle-market companies
should position their businesses as attractively as possible before they try to
make a deal. Some owners run their companies as if an offer could arrive at any
time. Other executives operate their companies as if they will never sell them and
then wonder why the market undervalues
their businesses.
“My advice is to begin planning 18 to 24
months in advance of marketing the company for sale,” says Michael Tuchman, partner at Levenfeld Pearlstein, LLC. “This
gives owners time to assemble the team of
professionals, begin strategic planning, and
allow strategic decisions to mature and be
reflected in two annual financial statement
cycles.”
Smart Business spoke with Tuchman
about how to effectively prepare middle-market companies for a sale.
Why is it important to strategically position
your company for a sale?
Strategic positioning is all about refining
the buyer’s perception of the value that the
ownership and management have created.
A recent transaction involved a financial
services company that provided a broad
range of services and had two niche areas.
Working with the investment bankers, the
company restructured itself to put the
niche service areas front and center,
including elevating management in these
niche areas. Since competitors in the niche
market segments had sold for higher multiples of earnings than diversified financial
services companies, this company as
whole was able to sell for a higher multiple
of earnings.
What type of issues do middle-market companies need to consider?
Management retention, accounting and
tax are among the most important issues.
Regardless of the buyer’s intentions for
management, the deal process requires
that key management be fully on board.
Many middle-market business owners
believe they can sell without involving
management and sometimes without even disclosing information about the sale to
them. This is a mistake. The buyer’s perception of value is strongly influenced by
the strength of the management.
Management incentives in the form of
appropriate forms of compensation and
change of control protections help maximize the value proposition, assure stability
through the deal process and give ownership something to fall back on if the deal
does not close.
The integrity of financial data is also key.
Sophisticated buyers want to know that
they have reliable financial information.
This is not about having audits as much as
it is about elevating existing processes,
including the establishment of controls,
and addressing weaknesses in current systems. Seemingly immaterial weaknesses
create serious question marks for buyers
that can result in disproportionately high
‘dings’ to price.
Finally, inefficient tax structures can
reduce the net value realized by ownership
on a sale by half. Strategic positioning
begins with understanding the tax consequences of a sale, deciding the best way to
go to market in light of those tax consequences and discussing pricing in view of
the different ways of closing the transaction. I have seen sellers set price expectations with reference to a tax-efficient stock
sale, make a casual structural concession
to the buyer to do an asset sale and not
realize there was a significant difference,
almost double, in tax liability.
What professionals play a key role in the
process?
The professional team will, of course,
include the client’s lawyers and accountants. Most important, however, is the
involvement of a good investment banker
with experience in the type and size of
company being sold. The investment
banker does much more than find a buyer.
He positions the company for sale at maximum value. The financial services company, mentioned above, that highlighted its
niche service offerings demonstrates how
a good investment banker with access to
marketplace information can optimally
position a company. A good investment
banker will also be an effective negotiator
for the deal, filling the void between the
ownership and legal counsel.
Sellers should look for legal counsel that
fits their needs. A middle-market law firm
that concentrates on middle-market mergers and acquisitions can offer the best
knowledge and experience to a middle-market company looking to sell. The deal
lawyer must know the regulatory environment in which the company operates and
must have the resources to deal with ancillary issues, such as employment agreements, noncompetes, antitrust clearances,
ERISA and benefits rules. Most of all, the
deal lawyer must know how to talk to the
other side in a way that keeps business
issues first.
MICHAEL TUCHMAN is a partner at the Chicago law firm of
Levenfeld Pearlstein, LLC. He is a transactional lawyer with extensive experience in negotiating company acquisitions, dispositions, recapitalizations and joint ventures. Tuchman is also a CPA
and adjunct professor at John Marshall Law School in Chicago.
Reach him at (312) 476-7550 or [email protected].