Negotiating the Sale to Your Advantage or Not
by Alan J. Smith September 22, 2003
The last couple of years have been tough for just about every business owner, in one form or another. The go-go days of the dot com era are now only memories and the fallout from 9-11 has certainly left a lasting impact on all of us. Yet, there are signs that the economy is starting to move forward once again, although at a more cautious pace and with a sobered view.
For a mid market privately held company, this is likely to be a very good time to sell. There is a tremendous amount of private equity sitting on the sidelines (estimated at $100 billion) that is showing renewed interest in buying companies. Well-positioned companies coming to market are selling, merger and acquisition activity is coming alive, and there is a thirst for high-quality activity.
As I have pointed out in past articles, buyers pay for the future prospects of the company and it's important for owners to be prepared to articulate a vision of the future. The vision needs to be specific and with supporting documentation with which to present and entice buyers. It needs to demonstrate that there has been and will be continuing activity to build a company for the long haul and that a new owner can take over with confidence in that knowledge. A well presented vision creates additional value.
Presenting a vision is not a creative license for the seller. A very common mistake sellers make in projecting financials is to project them too optimistically and then during due diligence have to address a revenue or profitability shortfall in the current month or couple of months. This shortfall creates doubt, and gives buyers ammunition with which to adjust the price of the company downward. By achieving the revenue and profit forecasts during the due diligence period, the credibility of the seller is enhanced and the strength of the deal remains in the sellers favor.
In the initial stages of a buyer and seller agreeing to terms, the seller almost always has the advantage. All the information is going one way and the proper marketing of the company is obviously going to enhance the image of the company. At the same time, the buyer is at a disadvantage as he tries to grasp the particular nature of the company. The seller typically wants to talk about all the good things regarding the company and glosses over the bad things. Who wouldn't? This is, however, a tactical mistake and will cause problems down the road as the buyers due diligence begins to take hold. The smart thing for the owner to do is to air any problems at the beginning of the negotiations when the strength is with the seller and there is an opportunity to present a reasonable spin on the particular area that is problematic.
On the due diligence timeframe, an owner should strive to minimize the time period and close as quickly as possible. The ability to do this is enhanced by having a complete package of pertinent information prepared for the buyer for his review or inquiry. The owner will want to anticipate what the buyer will be asking for and have it ready when the time is appropriate. Information regarding leases, plant equipment, legal concerns, environmental issues, corporate documents, shareholder information, operations, personnel information, agreements and transactions, insurance, and other areas that affect the company need to be in order to speed the process of the due diligence period. Again, having this information ready to be shown and explained helps the credibility of the owner while increasing confidence in the buyer about the quality of the organization.
Perception is reality. One of the easiest ways to create additional value in a company is to do the simple things that every company should be doing in the first place. An owner should strive to present a company image to a potential buyer as one of a well oiled machine running smoothly and with efficiency. It pays for the owner to take the necessary steps to get the company ready for sale by systematically addressing all the critical functions of the company and then making adjustments as needed. Conversely, if a company for sale presents a scenario where it appears there is confusion or internal issues that are problematic, it creates a negative perception of entire company. A buyer is going to wonder how a company that seemingly can't get it together on the inside could be doing any better of a job with that all important asset, the customer base.
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 firstname.lastname@example.org. The company website is www.baypacificgroup.com.
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