Most business owners devote their
entire lives to building a successful enterprise. One day, for whatever reason, it comes time to sell.
“When clients engage in the process of
selling a business rarely do they understand the complexities of the actual
transaction that is being considered,”
says Will Thatcher, vice president and
affiliate head of business banking for
Fifth Third Bank.
The road to a successful transaction is
littered with obstacles. Smart Business
asked Thatcher to help negotiate around
the potholes.
How far ahead of a potential sale should
one start getting the ducks lined up?
Over the years, I have seen many reasons why business acquisitions have not
occurred. The tangible ones are easy to
identify — the seller might prefer a stock
purchase while the buyer wants the
potential tax advantages and liability
protection of an asset purchase. Or, the
existing owner will not carry any contingent liabilities for future warranty
claims. Sometimes, the current owner
does not want to carry a seller note into
the future after closing.
There also are many reasons why transactions are not completed that do not
include the tangible dollars, but rather
instincts or preferences, such as the
owner does not believe he or she can
trust the suitor with the company, the
suitor wants to change the name of the
business, key employees will be down-sized, the company will be moved out of
market by the new suitor, payable relationships are strained, financial controls
are suspect, etc.
Therefore, whether you are a buying a
company or selling a company, it is
important to be mentally prepared for
what you are searching for in a transaction. As it relates to the seller, it is very
important to work with your accountant,
banker and a business broker to get your
balance sheet and income statement in a
position to be sold. No different than selling a home, there are many small things that can be incorporated into your presentation to potential suitors that will
improve its potential purchase price.
Clients that intend to maximize value
may spend many months, if not years,
preparing their company for sale,
depending on the complexity on their
business.
Is this a good time to be selling today?
When the economy is not as robust
there are great opportunities for both
buyers and sellers. Presently, there are
many displaced senior-level, capable
professionals who are looking for a business to purchase and do not want to
change geographic locations due to family considerations.
Furthermore, these future acquirers
typically have well-funded 401(k) plans,
are highly motivated to venture into
something new and are not necessarily
risk averse.
With that said, there are several things
that a seller should investigate prior to
engaging suitors: 1) In my industry, how would a bank structure a business acquisition? 2) What is the typical criteria for
setting a sales price in my industry, and
does it fit my needs? and 3) How long do
I want to wait for my sale proceeds?
What financial information must I be prepared to share? Can I be protected against
someone using that information — tax figures or customer data — outside the sale?
This is a great question and one of the
key reasons why it is important that a
seller engage counsel early on in the
process. The potential seller needs to be
prepared to be fully transparent, but
there is a time and place for everything.
The seller may have processes, employees and clients that allow it to be successful, and it is important to guard that
information until it is required to be divulged. Therefore, confidentiality agreements are to be signed by all parties and
those professional advisers to the buyer,
as well. These agreements are designed
to protect the seller from the proliferation of their company’s information.
In terms of what information may be
shared, suffice to say all financial information utilized to make financial decisions — divisional reporting, receivable
and payable information, client lists, corporate financial statements and possibly
even pertinent portions of personal tax
returns — will be on the table.
But it’s hard to let my ‘baby’ go.
In my experience, more business transactions are not matriculated due to the
seller’s expectations not matching the
market than to a lack of qualified purchasers or financing in the market. The
appetite for risk by financial institutions
may adjust due to the economic climate;
therefore, it is important that the business owner engage professionals to
understand what the temperature of the
market is and decide if the time is right to
engage suitors.
WILL THATCHER is vice president and affiliate head of business banking for Fifth Third Bank’s Cincinnati and Northern Kentucky
market. He can be reached at [email protected].
