Pat Niekamp: I’m Texas CEO Magazine publisher Pat Niekamp. For business owners, there will come a day when it’s time to sell the business. Experts say preparing to exit takes about three years. Why three years? Because that’s what it takes to get the business as robust as possible. When you sell the business, you want the valuation to be high. To learn how to get a business in shape and what goes into the process of selling, Texas CEO traveled to San Antonio. At the Texas CEO Speaker Series breakfast we listened to experts in the business of mergers and acquisitions. Eduardo Berdegue is an investment banker for Corporate Finance Associates. Berdegue works with business owners to take their business to market.
Eduardo Berdegue: And unfortunately many owners think of exiting as different from actually running the business. And so they forget about thinking about the time to exit until it is time to retire or they feel that it is time to retire.
And at that point we may not have enough time to do things that you need to have to run a successful process.
Pat Niekamp: A successful process means a win-win negotiation for both the buyer and the seller. Berdegue emphasizes being ready to sell is not the same as being prepared to sell. Being ready to sell is a state of mind and being prepared to sell involves both planning and the advice of a team of professional consultants. A CPA, a transaction attorney, an insurance adviser, a financial planner, and an investment banker. an investment banker like Berdegue works with the business owner to prepare the strategy for selling the business and then marketing it to potential buyers.
Eduardo Berdegue: A business owner that tells you he’s ready to go to market what he wants for his business is 20 million dollars. And when we ask why is that. The answer is well because my financial planner mentioned that that’s about what I need to do to retire and maintain my lifestyle. You know it doesn’t work that way. Sometimes what you need is to maintain your lifestyle matches what your business is worth. But sometimes and many times if you haven’t prepared for that situation it doesn’t. And it is sad and it is disconcerting to be in a situation where you find this out late in the process.
Pat Niekamp: In order to bring in the most money for the seller, the investment banker takes the business to market. That means contacting potential buyers with the goal of creating interest from several companies. More potential buyers equals a higher potential price.
Eduardo Berdegue: We conduct a professionally managed competitive process. From my experiences in our firm of over 60 years doing deals, there is no doubt to us that conducting a competitive process is directly related to the ability to maximize valuation for your business when it comes down to the time to do so.
Pat Niekamp: Since preparation is the key to a high valuation, Berdegue offered what needs to be ready to share with the potential new owner.
Eduardo Berdegue: It is a very general inclusive recommendation to keep good financial records, legal issues settled, document’s well organized and easily retrievable. It doesn’t work if you haven’t well organized where you don’t know where they are. Impeccable facilities. Why not smiling employees committed to the company, knowledgeable of the goals and aligned with the goals of the company. I know we’ll talk about some of the legal aspects of it, but specifically when it comes to financial records, keeping monthly financial statements is key. One of the key criteria of a buyer will be to look at your trailing 12 months and results. And so for that we will need to update those results, those financials on a monthly basis. Keeping accrual statements on an accrual method of accounting that will be key. Without statements on an accrual basis it is very difficult, if not impossible, to determine the actual performance of a business.
Pat Niekamp: The value drivers for an owner are clean financials, robust cash flow, strong management, no customer concentration, or a healthy customer base, and a clear growth path. Attorney Will Leibmann, of Dykema Cox Smith, specializes in business transactions. Liebmann emphasized the details of preparation, starting with the financial information about the company.
Will Liebmann: Accounting is key as Eduardo mentioned. You’ve got to have financial statements that can stand up to scrutiny. You’ve got to be able to produce in many cases financial projections for a buyer so they can see what the trajectory of the business is. And all that comes from the foundation of having a good accounting system in place. So internal accountants, external accountants, can help with putting all that together and identifying issues that a buyer might pick up on if they’re doing really good due diligence. Identifying those issues early and fixing them before somebody from outside starts looking at them.
Pat Niekamp: The potential buyers are going to conduct due diligence and Leibmann recommends doing it on the business yourself before potential buyers begin to come in and comb through the documents. Of course, locating all the documents tied to the business, things like articles of incorporation, by-laws, operating agreements, and board meeting minutes is critical. By locating all the documents in advance, it can keep surprises to a minimum.
Will Liebmann: The other thing that you’ll find is when you go through your minute book and find out who are all your partners, who are all the owners of the business? Maybe there’s more than one owner and maybe you need to bring them into the loop. I’ve seen situations where right about closing somebody shows up at the closing table with a 10 year old offer letter that says come work for us we’re going to give you 25 percent of the company. Well they came to work. Maybe they worked for a few years. Things didn’t work out and they left. And now you’re selling the business and maybe you’ve got a great price for it. And here comes somebody that you haven’t seen in years showing up waiting for their quarter of the purchase price because they think they’re an owner.
Will Liebmann: The checklist also includes reviewing customer and vendor contracts to make sure they will transition with the business Liebmann advises those clients and supplier contracts should not currently be up for renewal. Debts, liens, permits, legal claims, and retained assets also need a look over.
Will Liebmann: You may have assets in a business that really aren’t for sale. And I’ve seen things everything from personal vehicles that are owned by the business to artwork hanging in your offices to maybe something more substantive like the the real estate that your business is using to operate. You may not want to, may not need to sell that stuff but it’s better to identify that ahead of time and get it off. Never never have it presented as if it’s for sale or as if it’s part of a business because I’ve seen this happen before too late in the stage of negotiations. Where the seller wakes up and says “oh I don’t want to sell that” or “I want to hold that back”. And then it looks like you’re renegotiating the deal retrading the deal the buyer might say well what are we going to get in exchange for you’re not selling that asset to us.
Will Liebmann: Now one of the biggest challenges to closing a deal according to Liebmann can be environmental liabilities.
Will Liebmann: Probably nothing scares buyers more than environmental liability. Maybe you’re lucky enough to be in a business that doesn’t have any environmental exposure. But trying to deal with environmental liability is scary. It’s often be extremely expensive and long lasting. And so if you are in a business that has potential environmental exposure it’s best to really identify the extent of that risk ahead of time, hire an environmental consultant maybe do your own Phase 1 evaluation and get to the bottom of it before a buyer discovers it and the whole deal just comes to a grinding halt.
Pat Niekamp: The financial buyer will be private equity firms, family offices, or venture capital firms. When it comes to your management team a strategic buyer will likely keep less of the existing management team because they have expertise in the industry. In the case of a financial buyer they will likely hold on to the management team for a longer period of time. For the Texas CEO report, I’m Pat Niekamp.
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Pat Niekamp is the founder & publisher of Texas CEO Magazine. Pat began her career behind the microphone as a daily talk show host, then moved to the sales and marketing side of broadcasting. She has two decades of senior management in sales and marketing culminating in managing ABC affiliate TV stations in Ohio and Minnesota before launching her own business. You can learn more about Pat HERE.