Selling firm in new economy brings special challenges

High corporate valuations in the markets during the late 1990s brought anxious buyers out in historically high numbers. Acquisition capital was readily available from numerous sources, and it seemed that all that was needed to obtain funding for an acquisition was a written business plan.

There was a definite departure from fundamental valuation models that analyzed basic financial health, synergies and opportunities of the business. Instead, the common theme was if we build it, "they" will come.

Well, the economy has softened and reminded us all that fundamentals are still the basis for good investment decisions.

The people who were buying companies for the sake of buying are gone. Many of the public consolidators are struggling to make things work, even spinning off entities they acquired within the past two years.

These factors have created softness in merger and acquisition activity during 2001.

However, there is still significant opportunity for business owners interested in selling their businesses to achieve attractive values.

Investment capital still available

There is a significant amount of capital available in the marketplace to be invested in quality businesses.

The buyers consist not only of companies operating in related industries, commonly referred to as strategic buyers, but also financial buyers with funds under management to acquire privately held companies.

Financial buyers acquire companies as investments and normally build a concentration in an industry to capitalize on the combined strengths of the acquired entities.

They also provide acquired companies with growth capital and financial management expertise.

Financial buyers look to existing owners or an existing management team to provide technical expertise and to manage the company.

Who's buying?

Who are the buyers in 2001? They are disciplined strategic and financial buyers who rely on fundamental financial and investment analysis.

Disciplined buyers were around before the late 90s boom and are the investors with the staying power to be around for years to come.

These buyers use focused acquisition strategies and extensive analysis to ensure "the whole is greater than the sum of the parts."

During the boom, many of these buyers found themselves sitting on the sidelines as the valuations climbed to what we now know were unrealistic and unsustainable levels. Now that the market is going through a shake out, these buyers are back and looking for quality opportunities.

They will still pay an attractive value, as long as it is supported by the opportunities available at the target company. Sellers now have to work harder and smarter to achieve higher market valuations for their companies.

How the seller can improve value

Through all of the highs and lows, there is at least one constant challenge. How does a seller identify the best buyer and improve value? Identifying the right buyer takes preparation and an organized process.

Negotiations in a transaction start with the initial contact. Therefore, it is extremely important to contact buyers in a confidential and professional manner. This contact should demonstrate that the seller has an organized process in place. To pursue the opportunity, the potential buyer should sign a confidentiality agreement and follow guidelines dictated by the seller.

Finding a buyer

Searching for prospective buyers takes a great deal of research and resources. A seller shouldn't assume he has already identified the perfect buyer.

Buyers can come from several areas. They may be competitors or peers in the seller's industry or they may be in a related industry.

Buyers may be in an industry requiring comparable skills and equipment and wish to diversify.

The search for a prospective buyer is not complete without talking to the financial buyers.

Competition to obtain the best value, structure and fit is extremely important for the seller to increase the value of the company.

To produce negotiating leverage for the seller and increase the value of the business, the sales process should be structured to simultaneously identify multiple buyers. This will provide the seller with choices in a controlled time frame and contributes to achieving the best fit, deal structure and increased value.

Sellers: know your strengths

Sellers should take an inventory of their companies' strengths and weaknesses. A buyer will give more attention and effort to a seller whose presentation of the business highlights opportunities that exist in the company and its industry.

Analyzing financial statements is an important step in this process. Often private business owners incur one-time and discretionary expenses that will be reduced or eliminated after a sale.

Identify these items and present them so they do not decrease the true earning capability of the selling company. An analysis of the seller's industry, markets and management also is critical. This will help the seller identify areas of value in the company and effectively communicate those to a buyer.

Preparation

Preparing company information for a prospective buyer is important. Enough information should be given to allow the buyer to make an initial evaluation, however detailed or confidential items should be held until the buyer demonstrates an additional level of commitment.

Selling a company is extremely time- consuming, and it is critical that the bus-iness be operating at its best level possible during the sale process.

By working with a professional team dedicated to the sale process, the business owner can focus on running the business and making the decisions for what could be the largest transaction of his lifetime.

(Bill Hammitt is a vice president and director of BKD Financial LLC, a division of BKD LLP, which provides corporate finance services.)