Three-stage plan enables profitable business sale

by John Qua

for the Business Journal

Merger and acquisition activity is hotter than ever. Deals this year have been strengthened by several factors: low interest rates, ample access to capital, a strong economy and high stock prices. Buyers are both strategic buyers, or companies that are looking to grow, and financial buyers who are looking for good returns.

If you're thinking about selling your business, now may be a good time. According to Securities Data Corp., up to 70 percent of merger activity occurs in the middle-market range.

By carefully planning and executing a sale, you can realize the most value for your business. Let's take a look at the three-stage sale process and how you can maximize the value of your business.

Stage 1: planning the sale. The sale process begins with a determination by you and your business adviser of how your sale will be structured, whether a negotiated sale with one buyer, a broad auction in which the bidding process is open to all reasonable strategic and financial buyers, or a focused process in which a limited group of the most logical buyers is approached.

If maximizing the value of your business is your goal, it can be a mistake to approach too few prospective buyers. Today, most businesses are sold in a broad auction or, to a lesser extent, a focused sale process.

In some cases, however, particularly when there is a quality buyer who has made an attractive preemptive bid, a negotiated sale can pose the best scenario. It may offer the quickest sale and be the most appropriate course of action when there is only one or a very few logical buyers, or when confidentiality concerns override maximizing value.

Once you decide on the sale strategy, you and your business adviser will prepare marketing documentation to present your business to potential buyers.

Your business adviser will prepare what is called a descriptive memorandum, which is intended to be a thorough disclosure and effective marketing document.

A full valuation analysis should be conducted, including an analysis of comparable public companies, acquisitions of similar companies and a discounted cash flow valuation.

Seeking a professional valuation that takes into account all relevant factors, including growth potential, can help prevent you from underselling your business by relying on historical figures alone.

A valuation should also consider qualitative factors such as the strategic positioning of the business within an industry, competitive strengths and weaknesses, contingent liabilities, off-balance-sheet assets and the strength and depth of management.

Stage 2: marketing your business. Potential buyers are contacted during this stage and interested buyers with proven financial capability are supplied with the descriptive memorandum under cover of a confidentiality agreement. At the appropriate time, these buyers are asked to provide a non-binding offer of what they are prepared to pay for the business.

The marketing stage should move along according to a precise timetable. If you don't create a sense of urgency about the sale of your business, a buyer may feel he has no competition and present a less attractive bid.

If your business remains for sale for months on end, potential buyers will wonder why your business hasn't sold. Your employees, fearing for their futures, may begin to leave, which can erode your company's profitability and make it unattractive to buyers.

To maintain credibility with potential buyers while your business is up for sale, make sure you can deliver on any promises you might make. For example, if you have forecast revenue and profit figures for the year, you will need to demonstrate each month that you are on track to meet your forecast, otherwise the value you'll get for your business may shrink.

Stage 3: meeting with potential buyers. In this stage, a handful of qualified buyers is selected to meet with senior management to learn more about the business and its prospects.

Any areas of interest or concern are addressed, and potential buyers are provided with additional information that will allow them to conduct their own due diligence review prior to making a formal offer.

Allow your business adviser to decide how much information you need to disclose at this stage. Business owners often are concerned about revealing too much financial information. If you don't provide full disclosure, however, a valuation range may be hard to establish, and you may have difficulty reaching a mutually acceptable price.

If you disclose sufficient information, buyers can establish how much they are willing to pay for your business. It is often a mistake to communicate to potential buyers what you think your business is worth.

If the price seems too high, you may scare off potential bidders. If it is too low, you may end up with less than your business is really worth.

(John Qua is senior vice president and director, business financial services, for Merrill Lynch.)