What can buyers do to increase the deal-making odds? Take the time to understand the seller's needs.
From both the buyer and seller perspective, concentrating on price alone can be deceiving because of the contingencies involved with a business acquisition. The buyer should ask the seller a number of questions to reveal what considerations could be made in lieu of paying the highest price. Considerations could include: (…continued)
A brief overview of what buyers may request from sellers
The following is a sample Due Diligence Checklist. It is for information purposes only. It may be indicative of the information buyers may request from a seller in order to complete their due diligence review of the company. (…continued)
Buyers may request extensive information from sellers prior to closing
The following is a sample Due Diligence Request List. It is for information purposes only. It may be indicative of the type and volume of information buyers may request from a seller in order to complete their due diligence review of the company prior to the final closing.
The accompanying is a preliminary document request listing of information required for due diligence procedures to be performed in conducting an analysis of financial and certain operational information of the target company. (…continued)
The difference between a company's Book Value of its assets and its Fair Market Value
Adjusted Book Value + Goodwill value = Fair Market Value
Often a chasm exists between the seller's expectation of Goodwill Value, market realities, and potential buyers' offers. To bridge this gap, the factors that determine Goodwill Value must be identified and quantified. (…continued)
A Letter of Intent should be a thorough document outlining buyer and seller expectations
Below is a just a sample of what may be included in a Letter of Intent.
(Seller's Name and Address)
Subject: “Name of Company” Purchase
Dear (Names):
This letter agreement outlines the intentions of (Buyer name) (“Buyer”) with respect to the purchase (the “Transaction”) of all of the issued and outstanding stock of (Seller Corporation), a California corporation and all of the assets of (Seller Sister Company) (“Company”) from the trustees of the (Seller Company Trust) dated (date here) (‘SSC') and from names (collectively “Seller”) on terms as follows:
1. Structure of Transaction . (Buyer) shall form a new entity (“Buyer”) in connection with the Transaction. The Buyer shall acquire all of the issued and outstanding stock of the Company and all of the assets of Seller Sister Company including, but not limited to all, accounts receivable, inventory. (…continued)
Understanding the complexities of Earnings Before Interest, Taxes, Depreciation, and Amortization
Although EBITDA is one of the common threads throughout the M&A industry it is not without inherent shortcomings. It is not the simple and accurate measure of a company's performance or value that most company owners or managers believe. Following are the five critical failings of EBITDA:
• EBITDA ignores fundamental changes in working capital and fails to correlate those companies that recognize revenues materially ahead of collection of cash. (…continued)
Letter of Intent Checklist
• Identification of buyer and seller
• What's being sold (as well as what is not being sold, and transfer of records and intangibles)
• Compensation (description of purchase price and how it is allocated, i.e.; asset portion, liabilities assumed, goodwill, non-compete agreement, consulting contract, etc.)
• Payment schedule (amount of money down plus any note and respective terms) (…continued)
Performing a valuation is a critical step to the successful completion of the sale of a company for the absolute top price
No owner should cut corners when it comes to something as important as selling their company. A valuation accomplishes several things:
? It helps us to gain a more thorough understanding of the client company. Trying to market, sell, and properly represent something as complex as a business without a thorough understanding of that business is foolish.
? One of the steps in doing a valuation is a thorough analysis of the company's true earnings performance, which is not reported on the bottom line. Every dollar in “Adjusted EBITDA” can count for four, five, six (or more) dollars upon the sale of the company. It is not uncommon for us to find an additional $500,000 (or more) in non-reported earnings which can yield an additional $2.5 million+ in the final sales price. (…continued)
Many businesses do not sell because they do not provide the information needed by the potential buyers. The following should be presented to the buyer.
Executive Summary: Concisely describes the key elements of the business and why the buyer should buy it.
This section may be the only section that is sent to a number of potential buyers and may be the only thing they read. It should describe the essence of the proposed transaction. It should convince a potential buyer to look more closely at your business. The Company: Provides background information on the company, owners, and management. If your business is not solely dependent on you and has good management under you, it will be more valuable and attractive to buyers. To add value to your business, prepare an organization chart and describe the function of each position. Summarize the experience, education, and accomplishments of each key manager. (…continued)
A pre-due diligence investigation
Acquiring a business can take a substantial amount of time. Therefore you should conduct a pre-due diligence investigation to identify any potential deal killers before very much time and expenses are committed. You should have a reasonable level of comfort that potential acquisition candidates fit your criteria and have a reasonable chance of being acquired successfully. These issues also affect the price that you may be willing to pay for a business.
Items to review:
The Company: Background information on the company, owners, and management. Why is the owner selling the business? (…continued)
This section may be the only section that is sent to a number of potential buyers and may be the only thing they read. It should describe the essence of the proposed transaction. It should convince a potential buyer to look more closely at your business. The Company: Provides background information on the company, owners, and management. If your business is not solely dependent on you and has good management under you, it will be more valuable and attractive to buyers. To add value to your business, prepare an organization chart and describe the function of each position. Summarize the experience, education, and accomplishments of each key manager. The Offer: Specifies what is for sale (assets, stock, or real estate), the price, and terms.
Selling all, or a portion of, your business is the single most complex and multifaceted transaction of your business career
Intermediary is the generic term applied to brokers involved in selling businesses. They come in all shapes and colors: Business opportunity brokers are intermediaries, merger and acquisition professionals are intermediaries; investment bankers are intermediaries. What is the difference between the various types of intermediaries? Intermediaries, who specialize in selling businesses, or portions of businesses, usually group themselves according to their involvement or the size of deals they undertake.
Finders
They only introduce buyers to sellers. A finder does not give advice to principals or help in negotiating the transaction. They typically work only on smaller deals involving a single, or very small number of financially driven private investors, or a single client company looking to buy another. Finders are not licensed nor are they regulated.
Business Opportunity Brokers or Business Brokers
They usually work on private transactions with sale prices under $1 million such as the local retail store, barber-shop, bar or restaurant. In California and many other states, they are licensed real estate brokers, or licensed real estate agents working under a broker. (…continued)
Learn how to avoid common pitfalls
The sale of a business is usually the largest single financial transaction of an individual's life. It may also be one of the most emotional decisions one ever has to make. On top of this overlay the probability that one only gets to do it once so there is no practice arena, no second chance. This makes it difficult to learn from one's own mistakes, so let us share some of the mistakes of others. Having pondered those thoughts, recognize that such a sale is often the beginning of a new and wonderful life for most sellers.
Poor Planning
