We Think We Want to Sell--Now What!
More and more family businesses are confronting the decision of whether to keep or sell their business. In previous articles in this series, we have addressed reasons to consider selling and how to discuss selling within the ownership group. Today we will narrow our focus to families who have decided that selling may be the right decision for them.
After reaching the difficult decision as an ownership group that you are ready to sell, you may be ready to breathe a sigh of relief. But, your next reaction is likely – Help, what do we do now? Anxiety and fear over what to do next is an appropriate reaction, even if owners are clear that selling is the best answer. Few families have the opportunity to sell a business more than once. Figuring out how to sell the business treads on unknown ground.
Calling for assistance is the right reaction. It is nearly impossible to sell a business without some outside help, even if that help is limited to a lawyer who writes up the sale contract. In most cases, the support a family needs to sell a business will be more extensive than a simple legal contract. In this article, we will discuss some of the advisors who can support the sale process, the pros and cons of involving them and the best use for their services. The extent to which you will want to engage these advisors depends upon your knowledge and comfort with the sales process, whether or not a buyer has already been identified and the size of the business you are selling.
If you want to expose your business to a large group of potential buyers, hiring an investment banker or business broker to market the business may be prudent. These specialists typically prepare an offering memorandum, a document that describes the business, industry, customers, competitors and financial situation, identify the most likely buyers and contact them to solicit interest. They will support owners in determining the appropriate sale price and terms and will negotiate on behalf of the owners in the sale process. Finally, they will help with the due diligence process (more on that later).
The benefit of involving a specialist is that the appropriate party will have extensive experience in selling businesses of your size. They will know how to position the business with buyers and should reach a much broader group of buyers than owners could on their own. The downside of involving a banker is that it can be very expensive. Fees for selling a business range from 1 to 5 percent of the sale price, depending on the size of the business.
On a deal where the sale price will be relatively low, around $10 million, the fee would typically represent 3.5 to 5.0 percent of total sale. For transactions where the company is valued closer to $100 million, the percentage would drop to 1 to 1.5 percent. Additionally, fees can be calculated on a flat basis or on a scale where the banker is paid more if they are able to get a higher sale price for the business. Many business owners like to pay a certain percentage if the specialist can achieve a certain value and then a higher percentage for any price over that value.
A drawback of involving investment bankers is that their interest is generally in selling the business because they are paid when the business is a sold. So, if owners are not sure they want to sell the business, engaging an investment banker can force them to a sale before they may be ready. That said, some bankers are more aggressive in the sale process than others. Gail Quick of Bulkley Capital, L.P., a mid-sized investment bank that specializes in working with family businesses, describes her firm’s approach. “Our approach involves careful evaluation of the alternatives first, including sale and other options. We do not come into the picture with a pre-determined recommendation. We focus on the relationship with the family business, educate them on the options and then work with them to implement the one that best meets the objectives of the family.” Interviewing a number of specialists is important to find one that has the right approach for you. And, make sure to ask for references and check them. It is ideal if owners can find a banker that is recommended by someone they know and trust.
Smaller businesses may engage the services of a business broker. Brokers generally have a narrower scope than investment bankers; they only sell businesses and often simply contact buyers or post a business on a list. However, they will work with businesses that are too small for investment bankers – typically companies with less than $10 million in revenues - and will work with sellers to determine an appropriate sales price. Good brokers will do a formal analysis to come up with the sale price, but won’t necessarily provide the seller with a formal valuation. The primary difference between a broker and an investment banker is that bankers provide a full range of services, including providing the expertise necessary to identify all of the company’s strategic alternatives and the ability and experience to execute any of these alternatives. Full service investment bankers work with sellers from the planning through the closing. Investment bankers are flexible and since selling doesn’t necessarily mean the entire family is out of the business, investment bankers can continue to work with the business to meet the ongoing needs of the company, which could be to pursue acquisitions or raise additional growth capital.
If owners do not engage an investment banker, they should engage a valuation expert to set a sale price (or acceptable price range) for the business. It is very important that owners go into the sale process with a consensus on the sale price they would be willing to accept. If owners are not in agreement on an acceptable price prior to inviting offers, the likelihood of a sale going through is low. A valuation expert can set owners expectations appropriately, and the valuation will help owners to evaluate the acceptability of offers for the business.
Beyond price, sellers also need to consider what terms they will accept. Will they be willing to accept part of their payment in an earn-out, where a portion of the sales price is paid in the future, based on the performance of the business? Another possibility is a seller note where they are paid over time, regardless of business performance. Is a portion of the management team willing to stay after the sale, and for how long? Depending upon the buyer, the senior management team may be expected to manage the business through the transition, or there may be an ongoing advisory role expected by the buyer or desired by the seller. Will the sellers accept a non-compete agreement and for how long? What are they willing to indemnify the buyer against, for how long, and up to what amount? Typically a valuation expert will only deal with the value of the business, but will not be involved in evaluating various sale terms. So, even if owners do not intend to engage an investment banker, it may be worthwhile to have bankers make a presentation to the ownership group to educate everyone on the terms that may be presented at a sale.
An attorney with expertise in mergers and acquisitions (M&A) may be helpful in evaluating sale terms as well. The lawyer used by the business for general business matters may not have broad M&A expertise. In that case, the business’s attorney can recommend someone with the appropriate experience. The M&A attorney may be engaged when a sale contract has been presented by a buyer. Or, he/she may be engaged earlier to educate owners on potential sale terms and help them reach consensus on what sale structure is preferred. This attorney can also represent the owners in negotiating the final sale contract. While a buyer typically takes responsibility for the first draft of the purchase documents, this is usually after extensive negotiations over the major terms and structure. The document is passed back and forth from buyer to seller with each side’s attorneys and investment bankers commenting and negotiating before a final agreement is reached.
Once a potential buyer, or set of buyers, is identified for the business, they will want to “kick the tires”, referred to more formally as conducting due diligence. The extent of the due diligence process will depend upon the size of the business as well as the sophistication of the buyer. In all cases, buyers will want to dig into the details of the financial history as well as projections for the future. They will want operational details on the business, including information on key buyers and suppliers, and will expect to see any contracts which the business has entered into. If the seller has not kept good business records, selling the business may require engaging an accountant to clean up financial statements and provide a certified audit. Financial statements may need to be restated to remove items that would not be incurred by a buyer (such as special compensation to owners, leases of property by the business to owners, etc.). Owners need to be prepared for the fact that they will need to disclose compensation and perqs they have taken from the business. And, depending upon the buyer, they may need to divulge business performance to competitors.
Finally, the support of a family business consultant can be extremely valuable in the sale process. As you can see above, there are a number of points where the sale process can cause conflict for owners, even if the ownership group unanimously supports selling the business. A family business consultant may be engaged to help owners reach consensus on sale, set an acceptable and realistic sale price and terms, and determine which, if any, offer to accept. While an investment banker will support the technical aspects of a sale, the family business consultant can support the emotional side of the sale process. If engaged early enough, the family business consultant can ensure that owners go into the sale process fully aware of the process and its implications. Fully informed owners are much more likely to achieve an outcome that is acceptable to all owners.
And, if a sale is consummated, owners’ work is not over. Then owners need to address the question – What now? A family business consultant can help owners think through the decision of what to do with sale proceeds and how to deal with the emotional aspects of letting go of the family legacy. The What Now question will be addressed in a future article in the series.
Warning: The decision to sell cannot be made lightly. Many business-owning families say: “Well, let’s put the business on the market and see what it will bring. If we don’t like the price, we won’t sell.” But selling is a strategic decision. When the word gets out that offers are being entertained (and it will), the owning family’s commitment to the business is immediately reevaluated by employees, customers, suppliers, lenders and others. They begin to consider their alternatives as well, often to the detriment of the business.