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I Want to Sell My Privately Held Company...Now What?
by Alan J. Smith June 22, 2003

You've made the momentous decision to sell your closely held private company. It has been on your mind for months, maybe years. Whew. Relief. Glad that's over- but wait. The company still has to be sold. This is where the real hard work begins. Understanding the process helps to prepare yourself for the journey ahead.

PHASE 1- Business Analysis, Valuation & Packaging

Think of your company as a product. That product has to be presented in a way that clearly demonstrates both the value and benefits it offers to potential acquirers. It begins with a detailed, insightful business analysis that includes the business history, all the facets of the present operations, and historical financial information. All of this is critical in building a product to successfully market and sell for its maximum value. Okay, so now that we have all this information put together, what do we do with it?

Determining a proper valuation for your firm is the next step of the process. It requires the use of a valuation professional who can work with the CPA or CFO of the firm to arrive at and support a range of value. The valuation process itself involves the accumulation and analyzing of client data, performing external research, on-site visits, management interviews, adjustment of historical financial statements, consideration of projected financial statements, application of valuation approaches and methods, applying premiums and discounts, and ultimately arriving at a valuation conclusion. From there, a valuation report is prepared that explains everything that went into the analysis and how the conclusions were made. It is a necessary and thorough report.

The Packaging phase typically involves the use of two pieces of information to use in informing the marketplace of the availability of the company for sale along with details released as appropriate. The first is a blind confidential business profile that does not identify the actual company but gives a skeletal view of the business type, size, general location, markets served, financial snapshot and keys to business potential. The second piece of information is the Confidential Business Review (CBR) that is only given to qualified buyers after they have signed a confidentiality agreement. The CBR gives the complete story on the company and ultimately serves as the basis from which acquirers will submit letters of intent. It also becomes the basis of due diligence on the part of the acquirer.

PHASE II- Buyer Search and Qualifying

Okay, so now that we understand what the potential value of the company is, how do we properly introduce it to the marketplace? This phase of the process needs to be as confidential as possible. You want to create awareness in the marketplace with qualified buyers yet it is important that confidentiality is maintained in the process. You do not want employees, competitors, vendors, suppliers, bankers or customers to find out. Having that information leak out will likely have a negative impact on the sale of the company. Maintaining that confidentiality is a function of using care when releasing information. When its necessary to bring advisors and employees into the process, a confidentiality agreement should be utilized before discussions begin. The process of locating a buyer/acquirer for a mid market company is achieved through a search, not through traditional advertising. It's essential to be working with professionals who have well developed proprietary databases that can locate the appropriate buyer candidates. Finding the right type of buyer is an important element in securing the best possible price for the company. There are several tools that can be utilized to qualify buyers. A qualifying buyer profile along with the appropriate research (eg., Dun & Bradstreet) and permission to contact financial and other references aid in that effort. The buyer has to demonstrate the financial ability, the motivation to accept some degree of risk and complete the deal, along with the ability to manage the business after the deal closes.

What about the actual sales price of the company? You can always put an asking price on the company but why would you want to box yourself in? By listing the actual price, you set a ceiling on the price of the company and it can only go lower from there. By not listing a price, you let the buyer assume that responsibility. You also give yourself the opportunity for potential offers beyond what you hoped for in cases where the buyer finds your company a particularly attractive candidate.

PHASE III- Due Diligence, Deal Structuring, Negotiating, Closing and Post-Closing

Now let's assume a Letter of Intent (LOI) to purchase your company has been submitted and it is an offer that you would like to accept, albeit with some additional negotiation. This is where the due diligence on the part of the buyer will begin and it will cover 3 main areas- operational, legal and financial. The operational segment will focus on the way the company is run, everything from the overall management of the company to the finance, administration, products, services, marketing and sales of the company. The legal aspects involve all the necessary regulatory approvals, any pending litigation or claims, tax clearances and title transfer. The financial area will involve the price and terms, purchase price allocation, tax structure, tax opinions, 3rd party financing and appraisals. Key advisors during this time for the seller will include the Merger and Acquisition (M&A) Intermediary, Attorney, CPA/CFO, Valuation Professional, Financial Planner, and possibly Environmental Consultant. A critical question that needs to be carefully managed for the seller is "How can the sale be structured to maximize the after-tax proceeds?" This is where the right advice and implementation from the financial professionals is paramount to minimizing the tax bite. Once the due diligence and negotiations have been agreed upon, a definitive purchase agreement will be drawn up spelling out all the consideration in the offer, the mechanics of the offer, and the allocation of risk. Congratulations, you have just sold your company!

Alan J. Smith is the President and Founder of Bay Pacific Group, Inc., a boutique intermediary and advisory firm representing privately held middle market companies. Alan can be reached at 415-420-1696 or emailed at asmith@baypacificgroup.com. The company website is www.baypacificgroup.com.



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