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