It is impossible to list all the issues and decision points that may arise in the course of selling or preparing your business for sale. Every Merger & Acquisition transaction is different. A successful sale requires early preparation from the seller to optimize the sales value of their business and minimize the risk of a failed transaction. The planning process begins with:

• Clarify Seller’s Goals – assess the seller’s expectations and goals within the current market conditions to determine the best exit strategy and the right type of buyer.
• Know the Challenge – the seller must be willing to simultaneously operate a successful business and manage the sales process.
• Know the Buyers – the seller must identify the right buyers; where the right buyers see value, the value drivers, and the deal making and breaking issues.
• Strengths, Weaknesses and Corrective Actions – perform sell-side due diligence followed by corrective actions.
• The Presentation – position information gathered in sell-side due diligence to educate buyers of the benefits of owning the business.
• Forming Your Team – it is critical to identify key internal individuals and external advisors.

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The thought of “cashing out” lingers in the back of every business owners’ mind. Confronted daily with time constraints, market volatility, hawkish competition, profitability and growth objectives, and employee satisfaction, owners often neglect taking the necessary actions to establish a viable exit strategy. There are simply not enough hours in the day.

However, business owners must realize that inaction creates vulnerabilities and few alternatives at the time of transition. A practical exit strategy for a business will identify and correct problematic issues, determine and enhance the value drivers, accelerate growth, and increase profitability. Businesses are the most valuable asset of a majority of business owners, and an exit strategy is too important to disregard!

Business owners preparing for a liquidity event well in advance of its execution will insure maximum value from their M&A transaction. Every buyer will eventually become a seller; planning for the liquidity event should begin on the first day of operations!

In addition to the future earnings of a business, mergers and acquisitions require the delivery of the ordinary and necessary balance sheet of the business to the buyer. The balance sheet should be adequate for the continued operation of the business and exclude cash and long-term debt. Due to the varying nature of the balance sheet, sensible targets for cash (if any), net working capital, and net assets are standard.

Net working capital, or current assets minus current liabilities, tends to be the most vague and contentious balance sheet target. With significant fluctuations in cash, receivables, and payables from negotiation to close and varying definitions of the term, net working capital targets may require further negotiation between parties. Approaches to a negotiated target may include:

• Average working capital for a specified period around the time of negotiations
• Average working capital for a specified period as a percentage of quarterly or monthly sales
• Average working capital from comparable companies in the industry

An experienced M&A Team understands the complexities of deal structures and will identify and resolve any potential issues early in the transaction process.

Intellectual capital is often the key objective in mergers and acquisitions. Despite the importance of intellectual property rights (IPRs), intangible assets and goodwill, the assets are routinely misunderstood and are often under-valued, under-managed or under-exploited.

“The cardinal rule of commercial valuations is that the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances.” Before a valuation of IPRs, intangible assets and goodwill can be carried out, the questions “to whom?” and “for what purpose?” must be asked. The context is all-important for the seller to receive potentially a higher value for their business.

Sell-side valuations must include the values of the talents, skill and knowledge of the workforce, training systems and methods, technical processes, customer lists, distribution networks, trademarks, patents, copyrights, etc. Specific drivers of owner (enhanced) value will vary from buyer to buyer.

Lack of adequate preparation before beginning the selling process is always a major pitfall. Optimizing value and closing requires that IPRs, intangible assets and goodwill are included in all discussions of shareholder value.

In the mergers and acquisitions marketplace, competition from multiple prospective buyers is an absolute necessity to maximize the sale’s value of an owner’s business. An experienced M&A Advisor will develop a Confidential Information Memorandum (CIM) designed to stimulate competition among potential buyers. The CIM reflects sales and marketing strategies to efficiently, effectively and confidentially attract qualified buyers from two major groups:

• Financial Buyers – long-term investors; primarily interested in the return that can be achieved from the acquisition.
• Strategic Buyers – same business or industry; financial condition of the seller may be secondary to complementary attributes.

These groups may include:

• Private Equity Groups – raise capital, invest to gain influence over operations in pursuit of maximizing return on investment; four to seven-year investment horizon.
• Operating Companies – same business or industry; seeking new markets, products and services.
• Individuals – have the resources to invest; willing to examine different types of businesses or industries.

The distinctions between financial and strategic buyers may be numerous and significant; however, persistence may be the most important quality that your M&A Advisor possesses to develop multiple qualified buyers for the sale of your company.