A willing and prepared seller is only one half of a transaction — and a long way from a done deal. Sellers need buyers, as well as a path to negotiate and close a deal.
Finding the Buyer
Finding the other half of a transaction (a buyer) depends on the reason for sale (transfer vs. liquidation) and the needs of buyers. Strategic acquirers look to complement their operations, expand capacity, acquire IP, etc., while financial buyers (such as private equity firms) seek stable earnings, cashflow, and/or profitability.
Some potential buyers may be executives at the company. Others are located by leaders directly through their business, industry, community, philanthropic/or personal associations and member organizations. There also are a growing number of online resources that match business sellers and buyers, such as, BizBuySell.
Most deals — even small- and midmarket manufacturers — involve a middleman (a broker or M+A expert) who assists in identifying suitors. This intermediary, in cooperation with the executive team, also manages the transaction process and presents the organization to multiple potential buyers to spur multiple bids and higher selling prices.
At this stage, potential buyers submit formal letters of intent prior to discussing or negotiating any pricing.
“When offers do arrive, the executive team must analyze not only the math behind the valuation, but the intangibles that matter — or should matter — to both buyer and seller,” says Sosoff. “For example, when transferring ownership, it’s not unusual for owners to focus on offers that present the best path for the business going forward (i.e., retain their legacy) and that put shareholders, colleagues and employees in a position to sustain their livelihoods. Other intangibles, such as noncompete agreements for a given market or period of time, will profoundly impact the selling price.”
The actual sales price also should reflect requirements on the existing owner. It’s not unusual, for example, in the sale of small- and midmarket businesses to require existing owners to stay on, even if only for a transitional period. Compensation, and even part of the sales price, can depend on the current owner’s continued cooperation.
Yet even an “agreed-to” value isn’t quite the final selling price; how the sale is structured also matters. For example, a buyer may want the deal structured in a manner that has negative tax consequences for the seller; conversely, a buyer may want the seller to assume existing debts. Either issue can dramatically impact the final selling price.
Closing the Deal
A buyer agreement formalizes all conditions necessary to close the sale and transfer ownership. Post-sale takeover of assets and integration of the company is driven by the buyer, and the seller may have little or no voice in these decisions, even if he stays on in a leadership capacity. This is likely the seller’s last chance to change or alter the post-sale landscape.
It is not unusual for the end-to-end sales M+A process to take more than a year, even when both sides are eager to complete the process. Savvy executives will resist the urge to rush and will instead carefully review the sales agreement to ensure that it reflects all conditions agreed to by owner and buyer (purchase price, assets, contingencies, fees, closing date, etc.). When it does, the seller signs the agreement, closes the sale, and rides off into the sunset…or into the next business venture.
This article originally appeared in BDO USA, LLP’s “Manufacturing Output” newsletter (Spring 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.
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