General Exit Strategies
This week’s article is for the benefit of owners of Inland Empire-based, closely-held companies who are thinking about selling their businesses in the next 2-3 years. Exit strategies are a complex subject matter and it is impossible to cover it all here. My goal for this article is to provide a brief overview of some of the most important issues.
Who might your potential buyers be?
A strategic buyer such as a competitorA financial buyer such as a private investorYour current management teamEmployee Stock Ownership Plan (ESPO)Family membersPrivate Equity Fund/GroupInitial Public Offering (IPO)Franchising
Each of these possible buyers might have slightly different purchasing criteria but the common denominator is they want a good return on their investment in the form of lucrative profits.
How do I get top dollar for my company?
Recognize that in the next 2-3 years the supply of businesses for sale will exceed the demand to purchase, (“buyers’ market”). By definition in a buyer’s market as a seller you will have a lot of competition in your quest to attract the attention of would be buyers. To make your business standout amongst the crowd you will have to be considered a very valuable business which is largely a function of a solid annual EBITDA and other factors.
What are other factors that would drive the value of my business up?
Strong customer relationships with high retention rates
Diversified customer base with no concentrations in excess of 5%
Proprietary products/services that are legally protected
Strong management team especially for a financial buyer (private investor or PEF)
Skilled employees with low turnover
Equipment and business facility in good condition
High quality accounting/financial statements, both internal and external (CPA)
Strong value proposition or unique selling proposition versus the competition
Operating processes that are efficient and automated
If your business lacks many of these factors now is the time to start with your “business makeover.”
What are the purchase structure options?
Stock purchase versus an asset purchase. Generally buyers prefer an asset purchase whereas sellers prefer the stock purchase option. An asset purchase involves the purchase of the selling company’s assets i.e. facilities, trucks, vehicles, equipment or inventory. A stock purchase involves the purchase of the selling company’s stock only. In an asset purchase the buyer is able to specify the liabilities it is willing to assume while omitting the ones they do not want. In a stock purchase the buyer purchases stock in a company that may have unknown or undisclosed liabilities. There are many other pros and cons which a CPA can advise you on.
What is the most common financing structure?
In most cases the potential buyers do not have sufficient resources to buy a business with all cash and thus they need some type of financing to consummate the purchase. Based on my experience a common structure would be the following (Assume a $7,000,000 purchase price). Buyers “skin in the game “is represented by a 10% cash down ($700,000). To facilitate the closing, seller agrees to carry back a promissory note for 20% of the purchase price or $1,400,000. Usually the note is short term in 2-4 years range. Buyer then obtains a bank term loan (5-7 years) for 70% of the purchase price or $4,900,000. The bank term loan is secured by the acquired company’s assets and the seller note is unsecured and subordinated to the bank loan.
Most banks would like the buyer to keep the seller on as a “consultant” for at least 12 months and both the bank and buyer would want the seller to execute a covenant not to compete for a certain time period. My suggestion is that banks you seek for the acquisition term loan be an Inland Empire based bank as they are more knowledgeable about the local economy, property values and the buyer’s future competitors.
Who should comprise the group of professionals I hire to assist me in the sale of my business?
M & A professional, investment banker or business opportunity broker
CPA or Tax Advisor
Commercial Insurance Broker
Part Time CFO
Personal Wealth Manager