Planning the purchase or sale of a closely held business - Wisdom from Wharton

Chief Executive, The, June, 1993 by Robert J. Chalfin

There are many reasons for the purchase or sale of a closely held business. For an individual, or a group of individuals, the purchase of such a concern may be a way to fulfill the American dream of owning and operating a business. (This is especially pertinent, given today's climate of downsizing and plant closings in almost every sector of the economy, including some of the country's largest employers.) At the end of a career, a properly planned sale may help a businessperson to achieve financial security in retirement. Meanwhile, on the corporate side, a company may buy a private business to achieve synergy, to alter its product mix, and/or to increase profits and shareholder value.

Whatever the motivating factors, some basic ground rules help to expedite the process. Setting the correct price, of course, is particularly important. For example, if a seller thinks a corporation is extending a "low-ball offer," the corporation's credibility may be damaged, and further negotiations may be futile. In contrast, if a firm offers and pays too much for a business, it may have to finance the purchase through heavy debt, which, in turn, may decrease corporate income and value.

In sum, evaluation and analysis are crucial. A carefully planned purchase can benefit all parties concerned.

Robert J. Chalfin is president of The Chalfin Group, a Metuchen, NJ-based firm that specializes in valuation and consulting services for closely held businesses. He is also an attorney, a certified public accountant, and a lecturer in management at the Sol C. Snider Entrepreneurial Center at the Wharton School of the University of Pennsylvania.