Tuesday, June 7, 2011

If You’re Thinking About Selling Your Business: You’re Going to Ask “How Much Can I Get For It?”

Here’s the situation: You’ve had your business for a number of years, you’ve assembled a good team, you’ve paid yourself well, but it’s time to think about selling.
Here’s what’s on your mind: How much is my business worth? How can I maximize the value and my return on investment? What makes my business desirable to a buyer?
All good questions – and there are more. Let’s have a look at the factors involved with business valuations and why it’s not as scientific as one might think.

David Braun, president of Maxima Divestitures says:
There are three approaches to the determination for fair market value, the income approach, the asset-based approach and the market approach.

The income approach, the most common approach, is used where the business is a visible going concern. This approach capitalizes an earnings stream into value using a multiple. Income is based on discretionary maintainable income under normal operating conditions excluding person expenses and reflecting salaries for management at market levels.

The asset-based approach is used when there is no expectation that a business interest will include goodwill value and value can be determined by directly assessing the value of the assets.
The market approach is based on value indications from comparable transactions. These value indications can be expressed using earnings or other benchmarks called “rules of thumb” including value as a multiple of sales units of production or number of employees. (end quote)

FACT: what a buyer pays is consistently different from what the business is valued at. So, why bother? Braun simply states, “Knowing the range of value is the first step in understanding what the business could sell for. A valuation educates the seller. It provides a benchmark for comparison purposes and helps prepare the seller for the negotiation process.”

FACT: The business seller has two critical risks: improperly valuing the business and not understanding the buyer’s motivation. Logan Day of Ernst & Young Orenda, corporate finance, suggests, “There’s a risk of engaging a transaction advisory firm that simply applies a rule of thumb to set the asking price without completing a thorough review. That almost always costs the business owner money. Secondly, understanding the buyer, the potential strategic fit and their past deal track record are important factors in getting a deal done.” Day adds, “The best way to avoid these risks is to work with a team that systematically determines the strengths and weaknesses of your company, and benchmarks that information against current market trends to establish an achievable value for your business.”

Braun says, “The selling price for a business can be affected by how the company is presented to the buyer. Buyers are looking for opportunities, but like every business owner, they’re also looking for the pitfalls – where’s the risk?”

Buyers scare pretty easily – surprises found late in the due diligence process can easily kill the deal. Presenting the business in a well-documented manner addresses benefits and risks in a positive fashion – it sets up the opportunity for the seller to get the best possible price for the business.

A good business has hidden assets that increase value. These don’t usually show up on the balance sheet but they contribute to the return on investment for the buyer. These include a strong client list, a seasoned management team, customer loyalty, in-house systems and processes, client satisfaction, patents and more.

But that’s not the end of the story, Maxima clarifies, “The selling price for a business has a lot to do with who’s buying it – what advantages the buyer gains. To get the highest possible price, you must be deliberate in identifying a target list of potential strategic buyers.”

Braun concludes that, “While Maxima focuses on working with clients having sales in the range of $2M to $15M in annual sales, the principals involved in selling any business, large or small are very similar. Business owners who have built up a successful business know their business well – but they may not know the business of selling their business.”

Business owners get a bigger win with a strong coach to help them stickhandle the transaction process. Successful business owners deserve to score a goal for their hard work!

Tuesday, May 17, 2011

Buyer or Seller of the Business – Who has the Advantage?

FACT: Most private business owners don’t actively buy or sell businesses. While they are expert at selling their products and services, they may only sell a business once in their business life.

FACT: Experienced buyers will know more about buying your business than you will about selling it.

Would a successful business owner go unprepared to a critical meeting with his top customer? Of course not! Unfortunately, many sellers are inexperienced at selling their business and not aware of the excellent resources available to them to prepare for its sale. The best way to learn the “rules of engagement” is through the experience of buying and selling businesses. While the “art” of the deal may be in the negotiation and deal structuring, what’s most important is to know what to look for and how to qualify what you find – the process of “due diligence”.

To the buyer, due diligence confirms the target company’s value. This is accomplished through the process of understanding and confirming the specifics of the business – corporate identity, management structure, finances, operations and marketplace. An experienced buyer will take the time to learn about your business with a critical eye towards what makes money, what costs money, what could be done “better”, what could be done to optimize hidden assets, and which additional opportunities could be pursued. Skeletons in the closet, surprises, or internal challenges will all be used to justify paying a lower purchase price. From a buyer’s perspective, due diligence is the acid test for the transaction.

How does the seller get what he or she deserves for their business?
David Braun, president, Maxima Divestitures suggests “The seller deserves to maximize their benefit when they sell their business. In many cases the seller has built his life around growing the business and has paid “many a price” to make the business work. The seller should and can be well prepared to present their business with a deliberate strategy to address the buyer’s due diligence requirements. It is all in how you prepare.”

Reverse due diligence…what is it and why does it matter?
Preparing for the due diligence process can provide major pay offs for the seller. A M&A Specialist defines the seller’s preparation as “reverse due diligence”. “The process of presenting the company in a constructive and accurate manner; addressing risks in a realistic yet positive fashion; building cash flow scenarios; and understanding their tax position, prepares the seller to negotiate from a position of strength”.

Logan Day, senior associate, Ernst & Young Orenda Corporate Finance explains, “Teaming with ‘experience’ helps the seller navigate the process of preparing and documenting the business while proactively addressing a potential buyer’s perspective and due diligence. The process requires anticipating deal structures, financial modeling, and personal and corporate tax planning. This includes addressing issues such as personal wealth, a family trust, real estate in a holdco, and the operating company.” Day adds, “For example: without exploring the tax consequences, the highest offer might not provide the best outcome if the offer doesn’t maximize the seller’s tax advantages”.

Maxima Divestitures maintains, "Being prepared and knowledgeable in advance of receiving offers is one of the key advantages to employing reverse due diligence. Reverse due diligence doesn’t just level the playing field; it puts command back into the hands of the seller… the person who deserves to be rewarded for their accomplishments!

Experienced transaction advisors all agree - reverse due diligence keeps the surprises out of the sell process. It’s a valuable process for the seller. But the value also accrues to the buyer – reverse due diligence directs the buyer to the true potential of the business being acquired."

Reverse Due Diligence:
• Business valuation and pricing strategies
• Developing a corporate profile
• Identifying market strengths
• Address corporate strengths and weaknesses
• Summary proforma
• Equipment and asset reporting
• Organizational strengths
• Identifying and approaching prospects that will gain strategically (getting a better price for the seller)
• Preparing for a Letter of Intent and Offer
• Negotiations, preparation of deal for legal

Wednesday, April 20, 2011

Three Business Valuations Myths by Mark Tygart

The Discovery Channel has a program called “Mythbusters” which seeks to debunk mythology dear to popular culture but that is baloney. In a similar spirit I offer the following valuation myths, desperately believed by business owners but upon examination as likely as a Loch Ness Monster or Bigfoot. 


Myth #1: Valuations determine the monetary value of a business for sale.

Absolutely not! The buyer ultimately determines the value of a business, as it determines the value of everything within the economy. The buyer may get a deal or may pay too much, anyone reading the business press can watch this happen every day. M&A professionals do not typically post a price of a business for sale, they simply contact buyers and wait for offers. The valuation is only an intelligent approximation of fair market value; smart intermediaries often use a variety of valuation methods and indicate a range of values.

The Valuation exercise is for the internal use of the intermediary and the client. The central exercise is to have the company’s financials “recast” to appear as they would if this were a public company, but this really is an exercise in proper accounting, not valuation, and is generally not subject to argument. 

Myth #2: The Valuation will convince the Buyer to pay a fair price.

Wrong again! The buyer will make his or her own estimation of value that will with goodwill comprise their offer for the business. The seller’s valuation is regarded as suspect by definition. The key figure is usually EBIT or EBITDA, which in layman’s terms are simply the amount of money the business has made over a recent historical figure. That and the stability of these financials coupled with the industry in which the business operates will determine the offer the vast majority of the time.

This is why properly audited financials are so important, good buyers run for the hills when confronted with shoe boxes or numbers scribbled on cocktail napkins. Wouldn’t you? 

And Another One…

Myth #3: The Value of my Business represents the Value of my Life.

This is usually the central problem a deal professional has to deal with in a valuation dispute with a client. It is usually unspoken and may not be consciously understood. As a valuation of anyone’s life work any rational economic number will fall short. However, some sense of personal vindication is usually lurking in the mind of the business owner when he or she reacts with outrage to an internal indication of value that will never be shared with the market and will not determine the value of the offers that the business receives. 

The idea that a valuation is more than a valuation is the greatest myth of all.

Thursday, March 31, 2011

Succession Stories: The Good, the Bad, and the Ugly

An article by Darren Dahl for Inc. Magazine:


"Entrepreneurs face steep odds in terms of successfully keeping their business in the family over the long term. Six entrepreneurs share their experiences–often wrought with emotion–while imparting lessons learned."

Wednesday, March 16, 2011

Warning to All Business Owners

They're back…

MAXIMA has received 4 calls since the new year from business owners concerning USA based Business Brokers or Merchant Banker groups that are calling them because they have a serious Buyer waiting to buy them.

The groups are primarily from Florida, Houston and Chicago.

The "snake oil" is the same as Alberta has seen many times before. While we won't specifically name them, we Googled these companies and can assure you - there are a long list of lawsuits in play.

The call follows the same sort of script:

1) We are calling you because we have a Buyer who wants to buy your business. All we need is a few of your financial details and we will help you sell for TOP dollar! Sign here...

2) We have a Buyer for your business, why don’t you fly down at our expense to
Houston and we will help you close the deal for BIG Dollars! Sign here…

3) We have thousands of Buyers across North America. We will get you the best price
for your business! Just sign here...

Even MAXIMA has received these types of calls and they can be pretty convincing... BUT this is a SCAM!

All they need is for you to sign their simple Work Agreement and provide your financial history and they will get right after this “once in a life time” opportunity.

The small print of this simple agreement obligates you to pay $30,000.00 - $50,000.00 US funds AND it provides them exclusive rights to your business for up to 5 years! You sell your business for any reason and you owe them up to 10% of the value of the transaction.

The truth is we all know if something seems too good to be true… it is!

As the business owner you have the right to sell your business any way you like.

When you get your call to sell your business be sure to DO YOUR HOMEWORK!

Pick a proven professional who can clearly demonstrate success in selling a business and can provide you with references and successes in Western Canada history.

After all it is your business, your money, and your future!

Monday, March 7, 2011

Types of Buyers: Who should you be targeting when you sell your business?

Buyer #1 is new to the industry and is willing to pay a premium for a company with stand-alone strength. They want the owner to be able to manage at an arms’ length from daily operations. This Buyer is not an expert but feels there is an opportunity in your business model so is primarily buying for the ROI.

You might want to consider how many buyers there could be that fit this profile, who feel your company provides the best, safest, and most reliable market rate of return. A LOT of time will be spent convincing this kind of buyer about risks and "how to" and education etc. The hand holding will consume a lot of energy and resources for a year or more.

The other challenge is when buyer does not know how a market sector/company works, they apply risk discount. They reflect that in how much cash on close verses vendor carry. The higher the perceived risk the higher the vendor carry will be.

Buyer # 2 is involved in a related or competitive industry now and is looking to buy market share. When Precision Drilling bought Kenting, Hank Swartout said he did not buy 100 more rigs... he bought 30% of the marketplace over night. That was worth top dollar to him. This Buyer has access to replace whatever skill sets necessary; the existing owners are able to stay for their work agreement and the buyer is able to replace their positions when the timeframe of their agreement is up.

This Buyer does not have to be trained on the ROI opportunities or educated in potential risks and upside because he is already aware of them. He is buying based on strategic advantages and possible higher rates of return.

Buyer #3 is someone or a group of people that is/are interested in having their own shop. Perhaps they tried to buy the shop they worked for but it was too big for a buyout, or the owner was too young (and not interested in selling), etc. These buyers have skills and a strong desire to make things work.

They will maximize how they use you and your partner for first few months, but they will move you out as soon as possible as they will want to do things their way.
This buyer requires the least amount of education and is looking for encouragement to take the risks. They will have desire to manage risk but charge forward.

Buyer # 4 is from the USA or Europe and is looking for a solid foot hold into the Canadian marketplace. They are going to keep everything status quo, except they will put in leaders from their existing operation somewhere in the world. It barely matters to them what the system is inside your group as they are going to change the model to fit with their other operations. They will spend top dollar to keep you and your partner around a long time as insurance of continued momentum. The only education required is the peculiar aspects of some of the Canadian work. This buyer already knows much about the marketplace.

This leads me to the question: If you do not know what a potential buyer is looking for your specific opportunity right now, why invest the next 3 years in preparing for buyer # 1 when the market place might have hungry #2, #3, and #4s determined to do a deal?

There are always buyers who feel they are smarter than sellers and looking for the right deal. With the average transaction taking a year from when you start, why would you not make progress on every strategy concurrently and cherry pick the deal that works best for you? The time to pursue one or two strategies at a time is MUCH longer than strategically testing the market for opportunities, while you're reinforcing your team and options.

Friday, March 4, 2011

Considerations when structuring your deal

While the basic deal price model is simple (i.e. when an all cash deal leads to a lower price and less cash; more financing leads to higher price) our goal is to work with the “pieces” of a deal structure that make a difference in the overall transaction value to the Owner.


Cash payment 
  •  Typically structured as a percentage of deal value.
  • Or, to hit a round number like $2M sound better than $1,999,000.

Stock and stock options, and/or warrants – while each deal is unique typically the moving pieces include: 
  • The stock portion of the transaction is calculated based on the share value formula identified and negotiated for the final sale agreement. 
  • Stock goes up as well as down so the stated stock benchmark price is a critical part of the process. All public companies will model deal based on stock going up. Obviously this works if the initial stock offering is priced below market price.
  • Typically after a significant successful transaction, stock will be positively impacted in the short run. 
  • The negotiations process to determine how much of the stock is free-trading versus hold periods, should be specifically addressed early in process. 
  • The strength and the merit of the stock issuer will drive the strategy for addressing the stock portion of the transaction value.
Vendor Carry (VC) has several driving factors from Buyers perspective 
  • This provides the Buyer some form of control to keep the Vendor at the table and interested in the outcome and future success of the business after the deal is done. 
  • This allows the Buyer to hold back some of the VC balance owing if material differences arise going forward i.e.: Vendor represented next 12 months would generate $5m in sales and the new Owner only gets $4m in sales. The Buyer has some leverage to renegotiate the deal and hang onto some of that cash. 
  • The VC funds and control of those funds saves the Buyer legal hassles of trying to claw some money back if the Vendor turns around and spends it all or moves it out of easy legal reach. 
  • The VC amount is normally linked to some mutually agreed milestones (i.e.: performance or date) which allow the Buyer to show his investors or management or shareholders they have negotiated the best deal. Note: This is not the same as future performance bonus.

VC has several driving factors from the Vendors perspective 
  • This can reduce Tax consequences by deferring some chunk of cash to the next tax year. Note: in some cases this leads to very significant tax savings.
  • This can allow the Vendor to structure a higher price by having the purchase price increased to reflect the risk of not receiving the cash on closing. This becomes very good leverage when the Buyer is using next year’s cash flow to pay off the purchase price.
  • During the term of the VC the Vendor can insist on having access to regular financial statements to allow Vendor to be aware of how the business is performing. If business is in line with proforma everyone will be happy. If Buyer starts stripping out assets or cash, the Vendor will know about that sooner than later. A good Sale Agreement will provide protection to Vendor if that becomes an issue.
Earn out
This typically comes up when the Buyer wants to hedge the company’s future by keeping the exiting Owners vested in the game. This is not the same as VC because with VC the Vendor receives his payment regardless of how the company performs. With Earn Outs you meet X objective and you get paid a premium dollar above what the original payments covered.

Bonus
This would be above the Earn Out. You meet and exceed the bench mark goals and you receive a clearly identified bonus structured around a clearly specified working agreement.

Salary or compensation for working for company after change of control 

Every Buyer expects a certain amount of Vendor participation to assist the new Owner in moving the company forward. The time frame should be negotiated early in the process to avoid any misunderstandings on expectations.
 
This negotiation process should also identify the terms and conditions for remaining within the operating company for a period of time beyond the initial training. The negotiation process for those salaries should address the concern of work expectations versus compensation versus market value for those skills and services. No one would agree to work for low wages, complete the same amount of work as when you were an owner, and have the rewards go to the buyer.

Working capital calculations 
The working capital calculation will peg the amount of cash or cash equivalents that are considered necessary to include in the structure of the transaction. No Buyer wants to write a check to the Vendor and then start writing checks to operate the company unless the price has been discounted to make up for the shortfall and working capital.  

Some business owners leave redundant amounts of cash in the company for a rainy day. This Redundant Capital (RC) calculation must be established and planned for outside of the transaction value. This may create tax consequences for the Vendor which should be identified and planned for early in the process.

Redundant capital is normally removed prior to transaction closing date.

Formula to represent typical Transaction Value (TV) for vendor
Cash + Stock + Stock upside + VC + EO + salary/compensation terms + performance bonus = TV + RC.


Ottawa plans crash courses on financial literacy

An article by Tara Perkins, Financial Services Reporter for the Globe and Mail:

Will the Bank of Canada's interest rate policy affect your business?

Here is the latest press release from the Bank of Canada:

http://www.bankofcanada.ca/en/fixed-dates/2011/rate_010311.html

Wednesday, March 2, 2011

Why do Business Valuations Vary for the Same Business?

Business valuations are completed for a long list of reasons. The results of the valuation will vary significantly based on the purpose of the valuation. The purpose will determine level of detail, complexity of analysis, degree of due diligence, and the amount of legal reps and warranties required etc. In the market place most times you will hear a business value described as 2.5X normalized income before tax, or 5X net profit after tax, or 1X gross revenues, etc. While you develop a sense for what a business might be worth, you must also develop an understanding of what type of valuation process makes the most sense.

For simplicity we will demonstrate a simple valuation based solely on normalized Earnings Before Interest Taxes Depreciation & Amortization or EBITDA. This is not meant to address the multiple variations and calculations a Certified Business Valuator (CBV) would process and calculate. This model simply demonstrates the impact of the most common rule of thumb/snap shot estimate of value: EBITDA times some multiple.

For this model we take the last 5 years Total Sales and EBITDA:


When you only look at the last years EBITDA (2010) you can see the results of the multipliers.

This method would be the simplest to calculate however when you only look at one year you have the greatest risk of misrepresenting the real value of the business. For example: if the last year was the best year ever, you are most likely over valuing the business. If the last year was the worst year ever, you are most likely under valuing the business.

You will develop a better sense of value by applying some form of weighted average for a period of time. Our chart makes use of 5 years however you can use as many years as you like. We have also demonstrated 4 variations on what that weighing per year might look like including throwing out the highest year and the lowest year.

When you look at the graphs demonstrating the difference in valuations, you see how much impact the method you apply can have on the estimated value of the business. With this variance you develop a sense for why the appropriate valuation becomes such a critical part of the process.



Wednesday, February 23, 2011

Looking for a Small Business Acquisition Loan?

Five Key Components to Include in Your Planning…
Qualifying for a small business acquisition loan can be quite an ordeal to say the least. If the business being sold is not making money or demonstrates significant variances over previous three years, lenders can be difficult to find even if the underlying assets being acquired are worth substantially more than the purchase price. Here are 5 major challenges you'll typically have to manage to secure a small business acquisition loan.

Asset Sale Versus Share Sale

For tax purposes, many sellers want to sell the shares of their business. However, by doing so, any outstanding and potential future liability related to the going concern business will fall at the feet of the buyer unless otherwise indicated in the purchase and sale agreement. The fact is potential business liability is a difficult thing to evaluate. This can create a higher perceived risk when considering a small business acquisition loan application related to a share purchase.

Financing Goodwill
The definition of goodwill is the sale price minus the resale or liquidation value of business assets after any debts owing on the assets are paid off. It represents the potential future profit the business is expected to generate beyond the current value of the assets. The challenge becomes determining what time frame is appropriate for future profit.

Most lenders have no interest in financing goodwill. This effectively increases the amount of the down payment required to complete the sale and/or the acquisition. Or this requires some financing from the vendor in the form of a vendor loan. Vendor support and Vendor loans are very common elements in the sale of a small business. If they are not initially present in the conditions of sale, you may want to ask the vendor if they would consider providing support and financing. There are some excellent reasons why asking the question could be well worth your time.

In order to receive the maximum possible sale price, which likely involves some amount of goodwill, the vendor will agree to finance part of the sale by allowing the buyer to pay a portion of the sale price over a defined period of time within a structured payment schedule.

The vendor may also offer transition assistance for a period of time to make sure the transition period is seamless. The combination of support and financing by the vendor creates a positive vested interest whereby it is in the vendor's best interest to help the buyer successfully transition all aspects of ownership and operations. Failure to do so could result in the vendor not getting all the proceeds of sale in the future in the event the business was to suffer or fail under new ownership. This is usually a very appealing aspect to potential lenders as the risk of loss due to transition is greatly reduced.

This speaks directly to the next financing challenge:

New Owner Transition Risk
Will the new owner be able to run the business as well as the previous owner? Will the customers continue to do business with the new owner? Did the previous owner possess a specific skill set that will be difficult to replicate or replace? Will the key employees remain with the company after the sale?

A lender must be confident that the business can successfully continue at no worse than the current level of performance. There usually needs to be a buffer built into the financial projections for changeover lags that can occur. A proforma that does not reflect some form of decline would normally raise a few eyebrows.

At the same time, many buyers will purchase a business because they believe there is substantial growth available which they think they can take advantage of. This growth opportunity must be supported by realistic models based on market intelligence and real life data, not simply gut feelings.

The key is convincing the lender of the growth potential and your ability to achieve superior results.

Market Factors/Risk
Is the business in a growing, mature, or declining market segment? How does the business fit into the competitive dynamics of the market, and will a change in control strengthen or weaken its competitive position?

A lender needs to be confident that the business can be successful for at least the period the business acquisition loan will be outstanding. This is important for two reasons:
1) A sustained cash flow will obviously allow a smoother process of repayment.
2) A strong going concern business has a higher probability of future “sellability.”

If an unforeseen event causes the owner to no longer be able to carry on the business, the lender will have confidence that the business can still generate enough profit from resale to retire the outstanding debt.

Localized markets are much easier for a lender or investor to assess than a business selling to a broader geographic reach. Area based lenders may also have some working knowledge of the particular business and how prominent it is in the local market.

Why is your Personal Net Worth so Important?
Most business acquisition loans require the buyer to be able to invest at least a third of the total purchase price in cash with a remaining tangible net worth at least equal to the remaining value of the loan. This is over and above what the business is worth on its own merit. The business has to support its own credit facilities.

Statistics show that over leveraged companies are more prone to suffer financial duress and default on their business acquisition loan commitments. The larger the amount of the business acquisition loan required, the more likely the probability of default.

Strategically You Can Prepare
To prepare for a possible transaction, the prudent Buyer will begin the process of fund raising “with the end result in mind”. This requires research, preparation, and developing relationships with potential funders prior to executing a transaction.

The MAXIMA Divestitures Group Inc. can assist you. We have resources and models to help you identify your credit suitability, model your personal financial snap shot with net worth summaries, and prepare for your credit discussions.


At which point our team members and systems can help you model your target acquisitions financial strengths, weaknesses, opportunities, and risk factors. We also provide Charter Business Valuation reports to support your business case.

This is one area where solid preparation pays dividends and enables your dream to own a business.

Wednesday, February 9, 2011

Current Alberta Economic Activity and Influencers

ATB Financial Economic Bulletin – Todd Hirsch, Dan Summer, Will Van’t Veld

This is an informative and easy to follow update on:
  1. Economic Leading Indicators (some good news here).
  1. Real impact of Retail Spending.
  2. What are Wholesale Trading levels in Alberta?
  3. Bank of Canada Monetary Policy update – what interest rates will impact you?
  4. Mortgage trends and the new qualification requirements.

Well worth the few minutes to confirm what you are feeling about the Alberta economy.

Link to article (will open a pdf document in your browser):

Friday, February 4, 2011

Keeping the Owner of the Business on as a Consultant When Buying a Business

Questions from Venture Magazine to the MAXIMA Group:
For the prospective buyer of a business, the decision to retain or refuse the services of the current owner as a consultant is one that should be carefully considered. Why part ways with the guy who established a well-functioning, profitable business? He may be the one with all the business contacts and relationships you’ll need to succeed. But what will that relationship look like? Will the owner be comfortable in the new role? Will he be co-operative? How much do you have to “give” to that relationship and how much do you get to “take”? Overall, the transaction involves much more than money. It’s about personalities and emotions, as well as practicalities.  

MAXIMA's Reply: A positive working relationship with the Buyer and Seller would include considering each of the related stakeholders and their priorities:
1. Staff
2. Clients
3. Suppliers
4. Bank
5. Landlord
6. Sellers exit plans and time lines
7. Buyers strategic plan for buying the business

These priorities should be considered within the negotiations process as one of the building blocks for a successful deal. Sharing expectations of this critical role after the deal has been finalized can be viewed as an additional grab by the buyer and could challenge the working relationship going forward.

The majority of deals require the Owner to stay on for a period of time except in case where existing team members take over (i.e.: Management Buyout). While there is no specific matrix to calculate the duration of the exiting relationship, typically the “Work Agreement” time frames are driven by complexity of operations, relationships involved, how well the company is positioned to perform without the owners involvement, and how well the Seller has developed the product and service offerings to consistently meet market expectations. Typically the larger the company, the better the processes and less hands on required by the owner. With smaller companies the owner may be the drive gear that keeps everything working.

Different Buyers have different priorities:
• A newbie Buyer to the Sellers marketplace will want the time to confirm everything from “how” and “what” to “who” and “for how much” “from where” and “for how long.” This requires time and access to the knowledge base.
• Even a Buyer experienced in the company’s products and services will want to be comfortable with the company’s offerings and reason why clients are loyal. The challenge is there is no easy way to transfer the history of all the relationships, history, and experience.
• Typically the hidden asset in a sale; staff, suppliers, alliances, customers, and even the bank will need time to evaluate and measure the impact of the “new guy”. It is common to somehow link the Vendor financing to some kind of “work out” term. No Buyer wants their new opportunity to crash and burn because somewhere someone stops doing what they should be doing or starts changing the “secret herbs and spices” that made the transaction worthwhile in the first place. The ideal position for the Buyer is where the Seller has some form of vested interest in future continuity of the business. While the terms of the financial structure are negotiated in the structure of the deal, Seller participation provides a confidence factor to the Buyer (and the Funders) when the Seller is willing to remain in some role going forward. How much is this worth to the Buyer when this role demonstrates to all the stakeholders the business is “running steady as she goes”?

Things to remember:
1. Buyer and Seller should strike a fair deal to allow for a mutually acceptable working relationship going forward. Whether justified or not, an unhappy Seller typically has a lot of influence with all the stakeholders at the table.
2. Suppliers will use their historical relationship with the Seller to discuss the merits of the Buyer and what they might expect from their future working relationship.
3. Staff will meet off site with Seller and ask questions like what kind of future do they have with the new guy, or ask for the Sellers impressions on the new guy. That Sellers opinion can have a big impact on whether the staff stay or take the opportunity to refresh their career path. When they leave so do the contacts, history and bits and pieces of a system that worked well enough to justify buying.
4. The bank will often get a first impression and verify it with a conversation with the Seller where they measure the Sellers experience and impressions so far.
5. Many of the stakeholders will be looking for a “nod” from the Seller whom they may have worked with for years.
6. Alliances or product suppliers in a Distributor situation often have clauses where they have the right to veto or terminate future supply based on their comfort level with the Buyer. Part of this will typically include a private conversation with the Seller whom they have history and probably a trust.
7. While review of the Top clients is always a consideration in the valuation and negotiation process, it is definitely in the Buyers interest to ensure continuity as these relationships carry a heavy weight in the future. A Buyer needs time to develop some of their own track record with the top clients. Typically a positive relationship with the Seller helps ensure the baton passes seamlessly.

All of these potential stakeholders’ opinions warrant including a strategic plan for how the Seller will assist the Buyer through the transition process. Typically good planning should include some form of “fit for purpose” role for some time frame for the Seller. The truth is the Seller knows more about that business, the people, and the history than any outside consultant ever will. The access to that information requires the relationship to be based on a degree of trust and integrity. Every Buyer has to decide how much that is worth to the deal going forward. While every business model is unique, the expectations from both sides should to be included in the negotiations and legal papering of the deal, not after the fact. This clear agreement of expectations between the Buyer and the Seller should assist the “changing of the guard” to be appropriately managed.

Performance expectations to be addressed in some form:
 a) Role / title / and how presented to all stakeholders.
b) Clearly identify what knowledge to be transferred and how this will be managed.
c) Clearly model how internal day to day functions of Seller will be transferred over to the new leadership.
d) Hours of work.
e) Meetings expected to attend.
f) Introductions to key stakeholders with clear agreement of what will be covered.
g) Introduction to bank relationship even if Buyer intends to change.
h) Wind down schedule for Seller to include the milestones required to meet all the expectations.

Financial compensation:
a) Strategically the basic Work Agreement should be framed in negotiations process with compensation for the Sellers work out term as part of the building blocks of a fair deal.
b) Rate of pay; which is usually tied into how milestones are achieved. Typically we see full time for a period, down to a few days per week for appropriate term, then one day a week, then formal exit, then only occasional special functions i.e.: senior employee retire etc.
c) This is generally easiest to manage when the structure of the deal somehow relates performance of company to compensation. i.e.: Maintain or exceed the same volume with Top 10 Clients for a year would allow for some form of bonus at end of term.

In the end the Buyer wants to have bought a company that meets and exceeds previous performance history. What could possibly go wrong with this? The fact is every Buyer eventually thinks they are smarter than the Seller. Every Seller has a very high opinion of the value of their experience and business savvy. During the negotiation process the expectations should identify what expectations were mutually agreed as realistic. This is where common sense should reign and allows both parties to develop a sense for whether or not they can work together. When either party is operating with a great deal of personal restraint in order to get the deal done, it makes no sense to stay working together for one minute longer than required to pass the baton.

On the other side of the coin, we have seen over confident Buyers who decide “how hard can it be” only to find out the value of business is declining everyday as staff leave or Clients decide to test other service providers, or all the energy is going into solving new problems rather than maintaining course long enough learn what it takes to really get the job done. In cases where the role and expectations are not clear or simply tied to time (i.e.: 12 months) the opportunity for frustration and challenges to the business can escalate dramatically.
a) While Seller knows he has cashed the cheque so the business is sold, having the Seller involved at the same level as prior to sale, can trigger many opportunities to conflict with Buyers ideas of how operations or decisions should be made.
b) In some cases the Seller has been mandated to “run” business as usual. In most cases the real purpose of having that Seller around is to allow the Buyer to identify the critical dots to be connected and assist in managing any damage control required for the stakeholders.
c) If the Buyers goal is to work together to insure the best knowledge transfer and have the Buyer take full reigns as soon as possible, at some point the situations start repeating themselves and two decision makers are redundant. Both parties should agree how to address that before it becomes a problem.
d) In most cases the Sellers world has significantly changed. While he was responsible for the business outcome for years, now he has “the money” and it is a whole new world. If the expectations were not discussed early in the negotiation process any new suggestions of “we need you to do this or that” can lead to significant disagreements and frustrations.
e) While the Seller is on their way out anyway, the fact is a lot of the stakeholders have some form of loyalty to the Seller. Few people, including the Seller have the discipline to keep their opinions to themselves, so now everyone is hearing bits and pieces from the disgruntled Seller... and the Buyer is focusing on damage control instead of running the business. Keeping them on or cutting them loose? Answer: This should be a deliberate and integral component of the strategic planning in the negotiation of the deal... or leave this to the end only to find the consequences more painful than the process.