How to sell your company without going (too) crazy

Copyright 2008 Michael Lisagor

Being acquired is the preferred exit strategy of most company owners/shareholders. The potential pay-off can be enormous, but the challenges are far from trivial. In this article, I've compiled lessons from hundreds of my own business assessment interviews and acquisition experience, and my notes from a very informative panel discussion sponsored by the Association for Corporate Growth (http://chapters.acg.org/seattle) in downtown Seattle.

Sales strategy (exit strategy)

• Almost every company is for sale at some price. So, it is better to have a well thought out plan then to crisis-react to an unsolicited offer. By anticipating an offer, you can be prepared for all the detailed steps that follow. For instance, who will be in charge of the acquisition process? Which members of the management team will be involved?

• It is important to know why you are selling. This will help you to understand what the key stakeholders hope to get out of a transaction.

• I have noticed too few privately held business owners have an exit strategy. Yet, the company's strategic plan should reflect this. The financial, operational and marketing plans need to be in sync with the desired end game to maximize return on investment.

• Don't lose sight of your company's value statement. Are you willing to sacrifice your employee's welfare and job security for a maximum owner pay-out? Are you telling your key staff one thing but planning something else? An enlightened manager balances personal benefit with caring for others. Know your limits before you enter into the acquisition process. Hopefully, avoid being a very rich but despised ex-owner when you could have won on both fronts.

• Try to prepare for an eventual sale by keeping a file of everything that might be needed in a due diligence disclosure (even before the process becomes a reality). This will minimize the need for last minute scurrying around to find data. Common due diligence items are listed later in this article.

Positioning for maximum value

• Position your company to maximize competitive and financial value. Ideally, you will have several suitors vying for your company.

• It is important to pick the right investment bank -- one that has experience in your vertical, the right chemistry and that can get you into the key decision makers in the companies that might be interested. It should also bring innovative acquisition ideas to the table.

• Get as many suitors as possible (within reason). Having just one suitor isn't a very strong negotiating scenario. Get as many as possible up front. Make buyers hungry and excited. Help them see new things that explain why you are so valuable.

• You will need a well written executive memorandum/prospectus. It needs to be the highest quality and, in most cases, should be prepared with outside support.

• Areas that can increase valuation include potential revenue growth beyond your competitors, key personnel, key customers, irreplaceable assets, market share, and intellectual property.

• If relevant to your business, try to be Sarbanes-Oxley compliant. Also consider other company certifications and security clearances that might increase your value (ISO9000, CMM, etc.). These add value to a buyer and decrease the time it takes to integrate your business into a larger public company. Staff certifications and security clearances, in some markets, are also very valuable.

Managing the sales process - externally

• Try to understand what a potential buyer is seeing in your company. Will they want to disassemble (integrate some or all of it into their operation) it (strategic buyer)? Leave it as is (financial buyer)? Sell key assets (cash hungry)? Take you from public to private (private investors)?

• If possible, identify a set of board members who are authorized to approve aspects of the deal as they come up. Otherwise the deal can go south while you try to get approval from the whole board on a last minute detail.

• The sales process needs to be carefully managed. Company owners rarely make effective points of contact. The same is true with board members. Clearly identify who will negotiate and who will be the interface for data exchange. This can be done through your investment bankers. You want to avoid any back door communications (for instance, between your board members and the buyer).

• Make sure the Owner(s)/Board members know what they want from the deal. Lay out all assumptions that are being made to come up with internal valuation. You will need this in negotiations. Why are your growth projections more realistic than the buyer's? Why are your margins improving by 200 basis points over the next three years? These negotiation assumptions must be well thought out and defensible.

• Use banks to help develop alternative valuations based on comparable company deals (maybe peers have been selling at 9x leading or trailing ebitda - you can use this with internal valuation to make your case). Multiple scenario analyses can help too - best case, worst case and most probable. If doing full valuation, think carefully about discount rate and perpetuity calculations (growing perp, ebit, ebitda, etc).

• Don't leave money on table. Look for additional financial factors such as any deal structure tax benefits that may be available.

Managing the sales process - internally

• Internal data coordination and communication is a legitimate place for the senior control freak in your organization to be put in charge! This cannot be managed by committee. There is too much opportunity for mixed messages to be sent to the prospective buyers. Any loss of control of the entire process can have a negative impact on price or terms.

• Limit the number of people involved in the process including during due diligence. You don't want to distract your key operational staff from staying on plan. Keep employees motivated but manage what you tell them without losing your credibility.

• Deals can easily take a year or more to consummate, so be realistic. Also, remember to set attainable financial and sales objectives and then make sure your staff hits them! Hitting your numbers is critical to maintaining a strong negotiating position and ensuring your buyer gets full value for their investment. This might be a culture change for companies that have a history of setting huge stretch goals that they never hit.

• Work with your outside advisors and investor bankers to determine who in your company will benefit from the deal. This includes key middle management team members without whom the company won't make their plan. Also consider retention payments. All of these factor into valuation negotiations.

• Try to clear up any contingent liabilities (risk exposures) and assets. Voluntarily disclose any unresolved liabilities.

• Know your payout threshold parameters (stock and cash blend). Due diligence of the buyer will be necessary in the case of stock swaps.

• All financial documents should tie together. I haven't always seen that and it's the quickest way for a buyer to lose confidence in your numbers.

• Set up a virtual (or physical) data room for due diligence. This is a good governance practice for all companies. This can be used to track prospective buyer visitations. You can sometimes determine who has lost interest or is satisfied with what they have seen.

• Here are the types of items often required for due diligence:

• In my experience, and apparently everyone else's, owners always think their company is worth more than it is. They have invested many years of sweat, blood and tears and they know the amount they would like to get. Too many times, a stubbornness to accept a lesser but fair amount will be followed by a fire sale a few years later. Also, I've seen sellers who claim they want to sell but back out. After a few times of crying wolf, the word gets out and potential partners shy away.

Lastly, be patient and stay the course. Mergers and acquisition are not for the faint of heart (or mind)!

Michael Lisagor founded Celerity Works in 1999 to provide strategic, business and risk management advisory services to industry, association and government executives. His book, The Enlightened Manager, can be downloaded for free at www.celerityworkscom. He also has a GSA MOBIS contract. He can be reached at lisagor@celerityworks.com or (206) 780-4202PST.