If you must sell

Modern Machine Shop, May, 1991 by George Spilka

Many executives regard the sale of their company simply as a financial transaction. Actually, acquisitions are a mind game. As an owner, to emerge with satisfaction from a sale, you must first know yourself, your company, the process, and your buying counterpart.

When entering the mergers and acquisitions field, I was under the mistaken impression that acquisitions were merely a financial transaction. Even with my financial background, approximately one out of every three of my deals would die between the letter of intent and closing. It was evident that I was missing out on the most critical aspects of the process. I knew the company, but I did not know the in-depth needs of my client, nor did I fully appreciate how much of a mind game sales and acquisitions are. I was not gaining a complete understanding and, therefore, control of my counterpart and his negotiating team's collective mind. When this became clear, the deals that made it to the letter of intent stage no longer fell apart before closing.

When embarking on the sale of your company, the four "knows" must be understood.

Know Yourself

First, ask yourself, "Why am I selling?" All other alternatives should be evaluated and eliminated before a commitment to a sale is made. Some other possible alternatives include: transferring the business to a younger family member; hiring an independent outside general manager to run the business for you and, eventually, your heirs; establishing an ESOP (employee stock ownership plan) to transfer the business to all of the company's current employees; and staying to operate the business until you are no longer physically able, and then allowing the consequences to unfold as they may.

It is not suggested that any of these alternatives are better than selling the company on the market. However, you should be certain the sale is what meets your needs.

The sale of a company is a long and grueling process that can take from six to twelve months between the time proceedings are initiated and the consummation of the deal. Time and money will be well invested if the truly desired objective is reached.

If there are partners, it is imperative that all owners have a "meeting of the minds" before proceeding. They should be clear on their personal and financial objectives, what is expected from the transaction, each partner's tax situation, how long each expects to stay and what salary each expects to receive after the sale.

It should be decided at this time whether the transaction should be handled by the owners or an outside advisory finn. The owners should decide whether their accounting and legal firms are capable of handling the tax and legal issues that will arise. Suffice it to say that there are many horror stories of owners who have seen the proceeds of a deal slip away years after an acquisition is completed due to a poorly conceived and drafted definitive purchase agreement prepared by a well-intentioned attorney trusted by the selling owner.

Using an outside merger/acquisition firm is advisable, and they should be able to locate competent legal counsel that has a proven track record in this specialized area. The owners should not overlook any of these points if satisfaction is to be achieved.

Know Your Company

The owners must understand how the company relates to the acquisition process. Current ownership or advisors must be able to determine the company's future earnings potential, and the risks involved in achieving it. The company's present market position and how that market is changing must be known. Such things as positions relative to competitors, quality of personnel, adequacy of location, and capabilities of the plant and machinery must be thoroughly understood because they interrelate to determine the actual market value of the company.

The most important thing to remember when establishing a company's value is not to price it so that many buyers desire it. The objective is to establish a value where perhaps three companies will realize the economic justification of buying the firm at that price. This is a premium but, nonetheless, realistic price and is a level referred as an "attainable premium price."

In establishing that price, assume that all potential buyers are intelligent. They are already in business and they will pay the premium because they expect to maximize your company's future, therefore, justifying the higher purchase figure.

Know The Process

You have completed an evaluation of yourself and your alternatives. You have decided to sell at a price. The next step is to proceed to the marketplace with a well-crafted memorandum of information (MOI).

The MOI is a combination information/sales tool. It concisely explains how a company markets its products, the capabilities of its personnel, the attributes of its physical location, and significant historical facts. Also included are historical financial results with true pretax earnings. The MOI discusses why future profits might be projected at a higher level. In special cases, it elaborates why profits fell below expectations. It should plant in a prospective purchaser's mind why your company will provide a good return on investment.