“Hello. We want to buy your Company.” Now what do you do?
If you are the owner or CFO for a small to medium- sized business, it is likely closely- held or family- owned, and this may happen to you. If not, you may wish to sell your company someday to enjoy your success. Do you know what to do and are you prepared?
The U.S. government reports there are about 5.8 million companies in the U.S. with at least one employee. More than 99 percent of those have fewer than 500 employees and 98 percent have fewer than 100 employees. For these companies, neither the owners nor their CFO is likely to have much experience in M&A discussions. Why should they? They have done their jobs and have built a company with value.
The prospects of being approached to sell or of becoming an active seller is higher than you might think. Estimates are that between 200k – 300k businesses in the US will actually sell in 2017 (about 4 percent). A recent survey of family businesses by PWC estimates 30% of family businesses will sell in the next 5 years.
All too often, I get a call from a CFO of a small company who says it has been approached. I hear “can you help me?” To maximize the value of the company, we should have started this conversation 2, 3 or even 5 years earlier. If you think you will want to sell in 5 years, then start your work now. There is much we can do to help you run your business better today and also increase its value in the future.
The first question to ask is “what do you want?” Are you motivated to sell? Do you want to keep working? Do you care about your employees or your legacy? These are some of the questions that get to your values and desires and we need to have this discussion before money is on the table. Every advisor will tell you money changes everything and bringing these topics up now provides a stable reference point as discussions progress. Many deals fall through late in the process because these issues are not addressed beforehand.
The next questions typically revolve around the buyer. Who are they and what do they want? A strategic buyer is likely already in an associated market and wants to use your company to expand its reach, products or services. Some may just want to acquire your brand, intellectual property or people. A financial buyer looks at improving your business, increasing the value and then, most likely, reselling it. Their motives, questions, flexibility and price will be different.
Eventually, our conversation will turn to price, the process and the documents. In almost every deal, there is a team of advisors, including consultants, accountants, lawyers and bankers. CFOs2Go helps you put this team together and provide experienced experts. The items to review and discuss in a sale will get long. What is the price and structure of the deal? How is it financed? What is the dispensation of cash, assets and liabilities in the company? What is covered in the buyer and seller due diligence? What are the quality of earnings and assets? What is the importance of critical employees, assets and accounts? What is the state of IT systems, data security, financial systems and operational systems? What tax and regulatory implications exist for all parties? Finally, how do we meet those personal values and desires we talked about in our first meeting?
These questions will be answered in the process of selling your company. The slower or more difficult it is to answer the buyer’s questions, the lower the value you will receive. I have been in discussions where changes in the market or economy, during the process, sank all negotiations, not only for this company but anyone in the market. The difference of one day can be enough. Being prepared can improve the pace of the negotiations, buyer interest and the price.
If you expect you may have an interest in selling in the next 5 years, the time to start preparing is now.
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Tom Sheppard is a strategic-minded CFO partner leading the Strategic Services Practice. He combines strategy, finance and operations to help companies build, grow and improve their businesses. He asks the right questions, gets to the answers and can execute on decision implementation. He is an advisor to senior executives on evaluating and driving their strategic business decisions and works on such issues as new businesses, markets and channels; financing; mergers and acquisitions; strategic partnerships; supply chain strategy and responding to changes in their business. Clients range from pre-funding start-ups to major multi-national corporations.
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