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Selling a Business: Make Sure the Reward is Worth the Effort

With our concentration in serving privately-held businesses and entrepreneurs, Smith & Howard is sometimes called upon to assist our clients with the sale or acquisition of businesses. Critical to the success of any such venture is a relationship with knowledgeable, experienced advisors. Among those key advisors are investment bankers, such as The Breckenridge Group, Inc. which specializes in middle-market companies.
 
Recently, Smith & Howard asked Alan McClure and Bruce Woodward, founding member and senior partner, respectively, of Breckenridge to lay out the commonly asked questions of those who are considering selling a business, and to provide their thoughts on the best answers to those questions. Their article follows.
 
SELLING: MAKE SURE THE REWARD IS WORTH THE EFFORT
 
Contributed by Alan A. McClure and E. Bruce Woodward
 
You own and operate a profitable business where much of your net worth is concentrated. You wonder what alternatives might exist to free up significant liquidity from your business and shift much of the risk of owning the business to someone else. Many owner/operators in this situation contact an investment banker to investigate their options.
 
Outlined below are some of the common questions we answer from business owners who are looking to sell their business.
 
Who do I assemble as a team to help me sell my business? It is important to assemble an experienced and qualified team of advisors. This includes an attorney, accountant, tax advisor and investment banker. Each has their own area of expertise and is critical to providing the solutions to the myriad of legal, tax, accounting and market issues that arise in the course of selling your business.
 
What type of process should I expect? Since few sellers are actually forced to sell their business, remember that you are in control. Set your objectives for the transaction at the outset and work with your team of advisors to structure a sale process to meet your objectives. In addition, remain flexible with respect to the outcome as the ultimate transaction structure may be different than your initial thoughts.
 
What type of processes exist? In general, we classify the sale process in three ways:
  • Private negotiated sale with one specific buyer
  • Narrow marketing of the opportunity to a limited buyer universe
  • Broad marketing of the opportunity to a large universe of buyers.
Each process has its own strengths and weaknesses. Concern over limiting disclosure of the potential sale of your business and achieving the highest price for your business seem to influence this decision the most. Whatever process you choose, you should control who has access to your information through advance approval of whom your investment banker contacts and through the use of a legally binding confidentiality agreement with the buyers.
 
Broadly defined, buyers are classified as follows:
  • Strategic: This type of buyer is generally in your industry or a related one. They tend to be corporations who seek to achieve some form of operational, marketing or product development synergy from the transaction. These buyers may choose to offer non-cash consideration (i.e. stock) as part of the transaction.
  • Financial Sponsor: This buyer is typically a private equity firm or similar investor. To finance the acquisition, the financial buyer will contribute equity plus raise debt financing through leveraging the company's balance sheet. They tend to partner with existing management and owners to acquire significant control of the business (greater than 60%) but not total control. They rely on their combination of access to capital and management’s operational skills to create value for the business. Their typical transaction structure results in a subsequent sale of the business when all share in the wealth created.
What issues are critical to the process? The factors that are critical to the success of each transaction are unique. Areas that we have experienced recently include:
  • The parameters established for the process in the beginning.
  • Interim financial performance of the business. Once the letter of intent is signed, don’t assume you are finished. Continue to manage your business as if you will own it for a long time.
  • Ongoing management ownership and continuity. This is important for the buyer since they want to know who will manage the business after close and how they will be motivated.
  • Leveragability of the business. Does the business experience lumpy financial performance? If so, this will affect the amount and type of leverage that can be placed on the business.
  • Customer concentration. The financial implications of the loss of a major customer will be closely evaluated.
  • Quality and timely preparation of financial data. Since the business will most likely contain leverage after close, decisions will rely on quality financial data delivered in a timely basis.
  • Perceived regulatory and competitive risks. These factors can influence valuation and how the transaction is structured.
  • Overall industry outlook and prospects. These as well may influence valuation and the ultimate exit strategy for the new owner.
  • Legal documentation that ensures the proper transfer of the business risk from the current owner to the new owners.
  • Personal commitments of the seller post closing, including:
      1. Employment Agreements
      2. Non Competition Agreements
      3. Indemnification provisions
  • The communication plan for all employees. It is critical that the seller work with the team to time communication to employees and to minimize disruption of operations.
How long does a typical sales process last? We advise clients to expect the process to take from between five to eight months or longer to complete. The exact timing is influenced by numerous factors.
 
While many of the items above may appear daunting, the reward is generally worth the effort. Assembling the right team of advisors not only increases the chance of success, it places considerably less strain on the business owners
 
ABOUT THE AUTHORS
Alan A. McClure: Mr. McClure has over 21 years of experience advising management teams and shareholders of middle market businesses in connection with the sale of their business as well as assignments relating to acquisitions and capital raises. Industries in which he has experience include telecommunications, manufacturing, business services, and distribution. Mr. McClure is a founding member of Breckenridge. Prior to joining Breckenridge, Mr. McClure was an associate with Stringer, Wyatt & Williams, Inc., a regional Investment Bank in Atlanta. Before Stringer, Wyatt & Williams, Mr. McClure was a senior manager in the Emerging Business Department of Deloitte Haskins & Sells (now Deloitte & Touche) as well as a senior accountant at Cooper & Lybrand (now PricewaterhouseCoopers).
E. Bruce Woodward: Mr. Woodward has over 23 years of experience advising the management teams and shareholders of middle market businesses in connection with the sale of their business as well as assignments relating to acquisitions and capital raises. Industries in which he has experience include transportation, manufacturing, financial services, retailing and distribution. Mr. Woodward joined Breckenridge as a senior partner in 1990. From 1980 until joining Breckenridge, he worked in the Investment Banking department at The Robinson-Humphrey Company where he led the practice group specializing in transportation, retailing and distribution services.
Phone: 404-965-1600

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