Owners of small companies, with annual revenues ranging from $2 million to $10 million, often undertake the process of selling their business themselves. Many have built these operations from scratch with the help of their can-do attitudes and take-charge personalities. An owner that leads his or her own mergers & acquisitions (M&A) process, however, faces difficult challenges throughout all stages of a deal. His or her focus really needs to be on continuing to run the business (if still active in the company), and to consider the variety of options available when selecting an acquirer.
In this article we'll take you through the stages a business owner must go through to find the best buyer for a small company.
To avoid business disruption, maintain confidentiality, professionalize the process and maximize dollar value for the company, owners often outsource the M&A process to an intermediary.
With the right M&A representative acting on behalf of the seller, owners can concentrate on operational continuity while occasionally being tasked to provide operational, financial and related information to facilitate the process. With the seller's acquisition/partnership preferences in hand, the intermediary initially focuses on reaching out to operating companies and financial investors to communicate the company's selling interest. The intermediary also has an important role in filtering through the initial interested parties, and presenting a few select choices to the owner. At this stage, the intermediary should be able to convey both the pros and cons of each group that have made the initial cut.
A proper filtering process saves the business owner a tremendous amount of time. There is typically only one final buyer (as opposed to selling the business piecemeal). As such, sellers must ensure that sensitive information is not disclosed to potential competitors, and should outline an approval process when dealing with entities in the same sector or industry. Typically, owners have a strong knowledge of their competitors, and will know outright with whom they would consider partnering.
Acquisition interest from operating companies deserves consideration time. If a complementary fit exists, the acquiring company may pay a higher acquisition price for anticipated revenue and cost synergies once the buyout is complete.
Management and Employees
The acquiring company can also bring in its own management to run the seller's business, freeing up the owner to completely exit from operations. An acquirer may also be in the position to further professionalize various parts of the seller's business, and to provide additional channels in which the target company can sell its products and services.
Owners should use this time to assess their current employees' job security, for when/if an operating company takes over. Sellers will often negotiate employment contracts for select employees as an act of loyalty for their service to the company or owner.
The seller should understand the potential buyer's motivations for acquiring the company and negotiate accordingly. Obviously, the more value drivers there are for the acquiring operating company - access to new markets, products, brands, services, capacity, favorable customers, etc. - the more it should be willing to pay. Therefore, the price the seller could receive from such a party could be much higher than from a buyer with purely investment aims, such as a private equity buyer.
When it comes to acquiring small companies, financial investors will typically require the owner to stay on and run the business for a specified timetable, either until a second sale down the road, or until a new manager can be transitioned in. This kind of deal structure often calls for the owner to sell a portion of his or her equity stake in the business, while allowing the owner to run the company based on agreed-upon roadmaps. Such a recapitalization enables the owner to get a "second bite of the apple." That is, the owner can receive a second payday after a few years by selling the remainder of the equity stake in a secondary transaction.
Company Culture Considerations
For both operating and financial buyers, sellers must not ignore the critical area of cultural compatibility. An operating company that is filled with layers of bureaucratic "red tape" may sap the energy and morale of an upstart, more innovative company. A demanding, hands-on financial investor also may clash with a proven entrepreneur who wishes to maintain control in executing growth initiatives. Cultural fit involves top-to-bottom chemistry, with reasonable, mutual expectations of accommodation in operations and "soft interactions."
While sellers are attracted to the highest bid price offered for their company, many choose a lower acquisition price due to cultural chemistry, geographic proximity, and/or an affinity for the acquiring company's management, products and services, reputation, or simply its way of doing business. Sellers often gravitate toward acquirers that have a proven operating track record, that have solid managers and leaders, and that get along with a diverse set of constituents, including employees, customers, suppliers and investors.
Sellers should also consider the tax implications of an asset versus a stock sale. While stock sales typically result in long-term capital gains, asset sales can trigger a reclassification of gains into ordinary income, which will likely lead to a higher taxation event. Financial contingencies can also affect whether a deal will move forward. While operating companies and established private equity firms have the necessary financial capacity to fund the close of a transaction, high net worth investors and management-led buyouts may lead to deal killers down the road because the proposed acquirer cannot obtain the full amount of capital needed to fund the deal.
Owners who sell their companies must assess a variety of factors in choosing the next round of managers and investors who will run their business. Having invested a significant portion of their life and wealth in a company means sellers will evaluate operational and cultural fits, in addition to the acquisition price offered. If the owner wishes to stay on with the business, agreement on go-forward plans, and their reasonableness, are critical to ensure a successful partnership between the newly combined operations. The M&A process requires left-brained analysis; sellers will benefit greatly from correctly assessing soft issues and from having appropriate "gut checks."
EntrepreneurshipDetermine whether your business is eligible to claim a tax credit for establishing a retirement plan.
EntrepreneurshipFollow these tips to ensure you get the most out of your hard work.
EntrepreneurshipIf you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.
EntrepreneurshipMoney in the bank and newfound free time make this grueling process worth the trouble.
EconomicsA company can recognize acquisition costs as those costs used to buy property and equipment.
Stock AnalysisUnderstand how the Yelp platform operates and how it adds value to the business world. Learn about the top five ways Yelp helps small businesses.
Mutual Funds & ETFsLearn about the differences between actively and passively managed mutual funds, and for which types of investors each management style is best suited.
RetirementLearn how much it costs to retire comfortably in Panama, and why it has become one of the most popular retirement destinations in the world.
Investing BasicsLearn about the ultra rich and what normally comprises their net worth; understand the top three alternative investments usually owned by the ultra rich.
Personal FinanceEnhance your small business loan eligibility by keeping these important tips in mind.
There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
Some mutual funds pay interest, though it depends on the types of assets held in the funds' portfolios. Specifically, bond ... Read Full Answer >>
Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>