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& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | APRIL 12, 2004
By Alan Smith How to Sell Your Company To reap the benefits of the hard work that built a business, owners need to be just as diligent when negotiating with potential buyers A common entrepreneurial saga begins with the enormous amount of time, energy, and resources spent developing a successful business and ends with a failure to capitalize at that most critical moment: when the owner is ready to sell out. Take one of the three companies I founded, Advanced Medical Devices, a $22 million distributor of surgical products, which I sold in 1998 to Johnson & Johnson (JNJ ). J&J's initial offers were significantly less than the final one. I attribute that to one factor: my decision to retain an expert in mergers and acquisitions (M&A) to represent my interests. The leveling of the playing field between the two parties -- J&J's sophisticated financiers were now dealing with a peer who they could assume was knowledgeable and credible -- made all of the difference in securing the higher price. Therein lies a lesson -- in fact, the first of two lessons -- for entrepreneurs aiming to sell a privately held company. No matter how adept they may be when it comes to running their enterprises or astute about financial matters, owners should begin by hiring an experienced M&A specialist, private investment banker, or intermediary to quarterback the effort (see BW Online, 4/12/04, "Making Your Business Worth Buying"). ONE-TIME EXPERIENCE. In 2002, I founded and still serve as president of such a firm, San Francisco-based Bay Pacific Group. In this role, I have witnessed a lot of wishful thinking: Owners cling to the notion that they can sell the company themselves with the help of their attorney, CPA, and internal financial executives. However, it doesn't work that way. For the vast majority of entrepreneurs, selling the company is a unique, one-time experience. Owners are on a continual learning curve from start to finish. They are pitted against a buyer armed with an M&A specialist who has extensive experience -- and thus a significant competitive edge in the negotiations. Full disclosure means I must mention that the year after I sold Advance Medical Devices, I sold another company I had founded (and had been running concurrently) without the assistance of an M&A specialist. However, this company, with annual revenue of $2 million, was much smaller. In addition, I was on intimate terms with one of the two buyers, because he was working for me. In short, it was the exception that proves the rule: that literacy regarding the sale of a company involves acknowledging what you don't know -- and acting accordingly. Better to concentrate on managing your company -- after all, this is no time to take your eye off the ball -- and let your M&A specialist manage the sale. That brings us to the second lesson. Being literate about selling your company also means acquiring enough knowledge about the process to be able to work intelligently with your representative. Teamwork is essential when marketing a private company. The M&A specialist will want to work closely with the owner's accountant and legal advisers to determine where adjunct support is needed. Another essential is that confidentiality be maintained until it's absolutely necessary to disclose information. Three distinct phases are involved in the marketing process. What follows is a look at each. Phase I: Historical Analysis and Company Valuation A company for sale must be presented in a way that clearly demonstrates the benefits and value it offers potential acquirers. A detailed, insightful written analysis that includes its business history, financial information and current operations is needed to understand how to emphasize strengths and shore up weaknesses. A proper valuation -- a determination of the company's worth on the market -- prepared by a valuation professional working with the company's CPA or CFO is the mandatory next step. The valuation serves more than one purpose. It defines and supports a range of value for the company and also explains what went into the analysis and how the conclusions were made. Finally, it identifies the factors that influence and enhance what the company is worth. The process itself, which the M&A specialist oversees, involves the accumulation and analysis of client data, external research, management interviews, normalization of historical financial statements, assessment of projected financials, and the application of suitable valuation approaches and methods.
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