Step 1: Find a good adviser
April 10, 2007
If you own a midsized company, one valued at $2 million to $250 million, and you're thinking about selling, you should consider hiring a financial adviser to guide you through the process. This is likely to be the biggest and most important business transaction of your career, so finding an adviser who understands you, your business, and your industry is key in negotiating the best price.
If you're considering selling your company, your situation is similar to that of a person facing major surgery: The most important decision is selecting a surgeon, or in your case, an adviser. This decision likely will determine if and how quickly the patient returns to good health, or in your case, whether you achieve the most favorable terms, including a premium price with minimal risk of postclosing liabilities. If you are the owner or CEO of a middle-market company, one with a transaction price between $2 million and $250 million, choosing an adviser can be one of the most important decisions you'll ever make.
What are the characteristics of an adviser who will make a premium-priced deal? Eight key factors can help you determine if an adviser is right for you.
A Good Track Record. Your adviser should have an open and verifiable track record. He should be willing to discuss any nonproprietary information related to a completed deal except the transaction price and deal terms. The adviser should give you a thorough list of completed transactions involving both sellers and buyers. He should make his record available for your unrestricted investigation, as well as provide references that you can contact directly. You should talk to the adviser's former clients to decide if his record warrants hiring him to handle the largest transaction of your career.
From Start to Finish. You want an adviser who will guide you from the beginning to the end of the transaction. He must be able to help you plan and time the sale. In addition, he must control all aspects of the deal. His job must not end with a letter of intent (LOI). The adviser should be your lead negotiator from the execution of the LOI to the execution of the definitive purchase agreement (DPA).
To be effective, he must have specialized knowledge in the area of representations, warranties, and indemnifications. These are critical issues that have financial consequences that can be as significant as the purchase price. The normal terms that acquirers obtain in these areas are accepted by most legal counsel as adequate. However, normal terms in these areas can leave a seller in a precarious postclosing situation. Your adviser must have an intimate familiarity with these issues and the capability to control the deal process from LOI to DPA. This will ensure you have the maximum protection after the sale.
Willpower. If you intend to obtain a premium price, your adviser must be tough, aggressive, and determined. This is necessary to convince a strong-willed, sophisticated acquirer that the deal will be negotiated on your terms. The adviser must understand leverage points that will pressure an acquirer to provide your desired price and terms.
You might find it beneficial to retain a self-made person, an entrepreneur like yourself, because such a person will better understand your makeup and the factors important to you. This should enable your adviser to negotiate a deal that will fully satisfy your needs; in addition, he should be capable of helping you deal with the postclosing emotions that usually follow a deal's completion.
Beyond Financial Considerations. You want an adviser who takes a business-oriented, not a financially oriented, approach to the valuation and sale of your company. Most advisers believe the sale process is only a financial exercise. Nothing could be further from the truth. Ask yourself this question: "Do all publicly traded companies in a specific industry trade at the same multiple of earnings?" Obviously, the answer is no. This is due to differences in the companies' business foundations and what their foundations suggest for future growth and threats to earnings. The only way to determine a company's future growth potential and risks is by doing a thorough presale investigation of its business foundation.
This includes a detailed investigation of the factors that contribute to the company's value—its production capabilities and operational efficiencies; the value of its facilities and equipment; its experience and savvy in purchasing, marketing, and sales; and demographics as they relate to the industry. The adviser must thoroughly understand your business niche and how it correlates to future growth and profitability. This will enable him to make an accurate forecast of future profitability and EBITDA, which is earnings before interest, taxes, depreciation, and amortization.
Some advisers either do not have the capabilities or take time to perform a thorough business investigation. Using only a financially oriented approach likely will have a serious negative effect on your transaction price.
Cash, Check, or Charge?Your adviser should have a history of doing all-cash deals. An all-cash transaction helps to minimize your postclosing exposure. Except in certain unusual situations, there is no good reason for a seller not to do an all-cash deal. An adviser who recommends accepting anything other than cash is being overly accommodating to the buyer at your expense.
Strength and Fitness. You need an adviser who provides strong guidance. The adviser must have the strength of will, the breadth of knowledge of the acquisition process, and the diplomatic skill necessary to convince you, a successful, independent entrepreneur, to follow his advice. Although this means you must cede some control, this is necessary to maximize the transaction price. The ultimate success hinges on finding a qualified and proven adviser and allowing him to guide and direct the process.
This does not mean that you give up the ultimate control. Although the adviser should direct the process, you are the seller and you should always retain the unqualified right to make all decisions regarding acceptance or rejection of the price and deal terms.
Retaining an adviser you can control and dominate is a critical mistake. Any adviser who can be dominated by his client likely will be dominated by the acquirer also.
Patience. To negotiate a premium-priced transaction, you and your adviser must be patient. You don't want an adviser committed to a quick sale regardless of price. Your objective is to negotiate the highest price.
Although the typical amount of time necessary for a sale is six to 12 months (starting when the adviser begins to evaluate your company), in unusual situations it might take two to five years.
When interviewing advisers, ask about this. If the prospective adviser has not taken an extremely long time to complete a few sales, it might indicate he is more interested in making a quick sale than getting maximum value.
Diverging Opinions. If a company has multiple shareholders who have significantly different financial and personal objectives or personal problems with each other, it becomes even more imperative to find a strong-willed adviser. The adviser must have the expertise to develop a solution that will satisfy all shareholders, and the ability to articulate why the inherent compromises in his solution will benefit all shareholders fairly. This mandates not only a strong and forceful adviser, but also one who is compassionate and understanding. These two ingredients are necessary in understanding the personal objectives and conflicts and resolving divisive issues.
No single sales strategy is appropriate for all sellers. That aside, one tactic is crucial for any successful sale: The adviser must take time to research and understand you, your company, and your industry.
When you're selecting an adviser, you should not look for someone with the most pleasing personality. You should not choose one you've known the longest time. Selling your company probably will be the largest and most important transaction of your life, so you need to select the adviser most likely to get you the best possible terms and price.
Getting good results is a matter of having the right combination of characteristics—knowledge, experience, character, integrity, and toughness. When you find an adviser with these five traits, you likely will have found someone who can add 10 percent to 20 percent to your purchase price.