If You are Planning to Sell Your Business, Preparation is Vital
WorldSpan’s initial public stock offering didn’t fly, at least at first. Google’s didn’t look like it would turn out to be as wildly lucrative as hoped – at least by Google.
While a few months have vindicated the Google offering, there have been plenty of others that didn’t quite measure up. Examples include eLong, Inc., an online travel services company (offered in October 2004 at $13.50 per share and trading at $12.96 as of late January 2005) and MHI Hospitality Corp., a hotel real estate investment company (offered in December 2004 at $10.00 per share and trading at $9.77 as of late January 2005).
One message from less than stellar IPO results might be that the immediate way to realize something worthwhile from your business is to consider selling it — or buying someone else’s.
Merger and acquisition (M&A) activity was on the rise in 2004 and now in 2005, with some of the largest coming in the wireless communications industry, like Cingular’s acquisition of one-time giant AT&T Wireless or the much-discussed Vodafone-Verizon run at Sprint.
The trend has been apparent in travel, hospitality and foodservice technology. Some of the biggest have included the British PE firms BC Partners and Cinven Limited buying Amadeus, Sabre buying SynXis Corporation and Southwest Travel Systems, and Cendant buying eBookers, Gullivers, Orbitz and many other companies.
Why All This Activity?
Well, for starters the markets and suppliers are fragmented. The sector’s industries are growing. The life cycles of emerging technologies are short and getting shorter, making investments risky and time-sensitive. Existing players are defending their turf and new market entrants are seeking decisive entry tactics.
Baby boomers are sneaking up on retirement age and maybe it isn’t worth all the blood and sweat to compete in a ruthless universe when a comfortable retirement might come with a properly negotiated sale. Others not facing retirement might not have the resources to make the investment in what the culture will require to succeed.
As a result, perhaps the happy days are here again for M&A and that means it’s a good time to be giving your business a once-over or even a make-over. To switch metaphors, it might be time to figure out whether to hold ’em, fold ’em or raise the bet. Another viable option could be to look for a combination of solutions. For example, exiting the current business but staying on with new, additional incentives to grow and contribute to a next generation synergistic solution.
How Do You Decide?
The second most frequently asked question I get from business owners, directors and CEOs is, “Is this business truly ready to go on the market?” Of course, the most popular question is, “What is my business worth?”
You can’t answer either question without looking deeply into the organization and its condition. You can do it yourself, but there’s always a danger that you won’t like what you see.
That’s where you might want the services of a professional investment banker, preferably a licensed company and expert specializing in your industry.
Your banker will assess the state of the business and determine if any adjustments are needed to increase the value of the enterprise and its attractiveness to help prepare the business for sale.
There are a series of basic questions to ask regarding the business, including:
• Strategically, is the business unique?
This question includes things like is it a leader, does it have sizeable market share, is there still potential to expand market share, are its products state-of-the-art, are there barriers to entry, what do the customers say and are your competitors for sale, too? This will tell if the company provides more than a commodity product. If there are many similar companies with few differentiators, the market valuation multiples could be average or below.
• Financially, is the business attractive?
Is the business profitable? Are revenues growing or declining? Is the client base diversified? Are there multiple products with varying streams of revenues? Are the revenues recurring and consistent, or do they come in peaks and valleys? Companies with a single product or only a few customers will see discounts to average valuation multiples, at least as ongoing concerns. There are exceptions though. A one-product company could still be sold at a premium if it is sold as a product line, thus an asset to a strategic player better suited to exploit the product line. A person’s aesthetically challenged waterfowl might be someone else’s auric avian.
• Are the books in order?
Bad books are a big red flag. It is essential to implement bookkeeping 101, even with a part-time CPA. Moving a company from cash-based reporting to accrual reporting using US GAAP is also important if the company is to be sold, especially to a publicly traded entity. Investing in an outside accountant to provide at minimum an accounting review or better yet, an audit of financial statements will give tremendous comfort to would-be acquirers. In general, three years of audited financials will be required. For smaller companies, an accounting review can be a sound first step in getting to an audit.
• Are business arrangements formalized?
Are there formal contracts in place between the company and its clients, suppliers and strategic partners? If not, a buyer will severely discount his value estimate for the company. Are the contracts long or short term and are they binding or loose? Most importantly, are contracts transferable to the new acquirer without having to ask the client for permission to do so?
• Are Sylvia, the general manager, Mark, the head of software development and Joe, the VP of sales, under contract?
How essential to the business are your managers? Will the buyers view them to be critical? Better lock them in now or they will be negotiating with the buyer for better compensation and terms 30 minutes before the deal closes. And guess what? They will, and at your expense. It will certainly cut the value to the owner if the buyer is forced to increase compensation to unanticipated levels. This can also be a deal-breaker to buyers.
• Did you set up the entity as a tax friendly entity?
What is the structure of the entity? If the business is a Schedule C corporation, you may be in for double taxation. Subchapter S corporations, partnerships and limited liability companies are, in general, friendlier at tax time. Seeking the advice of a tax expert now will help you down the road.
Proper planning now will eliminate the risk of unforeseen surprises. You should take special care to evaluate potential accounting issues; the choice of legal entities; tax planning strategies (e.g., for your heirs); voting and ownership issues; and other legal issues, representations and warranties. If you do all that, you will be a lot happier with any deal you make.
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