Archive for category: Must Knows About Business Sales

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Here at Apex we pride ourselves on giving ethical presentations of the businesses we represent. Unfortunately, there are some individuals who try to sell a business without holding themselves to our standards. Here are some common ways they can hide crucial information from buyers.

Misleading Inventory

There are a few ways inventory can be misleading, starting with basic human error. Bad systems and careless employees can create inaccurate data. But more frequently, we run into inventory that includes obsolete or worthless materials marked at their purchase price. Just as bad as obsolete inventory is inventory that may be expiring or earmarked for a client prior to a sale closing (and is not otherwise marked as “work in progress”).

Inventory is one of the basic measures of value in a business, so if it’s misrepresented, there are implications for valuation and the chance for a deal to get sidelined or derailed.

Personnel/Legal Issues

Not everyone’s labor problems are as public as say, Boeing’s. Most Main Street businesses that are prepared to sell are run by competent staff. But just because staff are competent doesn’t mean that they will stay with a new owner. Oftentimes even the nicest new owners can’t change the feeling that “it’s time to move on” for employees (and customers) so it’s important to make sure that, as much as can be estimated within the bounds of confidentiality, any personnel issues are fully disclosed. The same goes for any legal issues. On more than one occasion a seller has pledged to deal with an ongoing legal issue on his/her own dime as part of the negotiations pending a sale. That sort of honesty and willingness to compromise helps to get deals over the line.

New Technology/Competition

Often buyers will be entering an industry/market for the first time by buying a business. That means sellers need to be their eyes and ears for the state of the industry: what technology is coming up (or could come up) and what competition is present or could come soon? If you have grown complacent in past years, just staying in your business lane, it’s important to do some research into these subjects so that even if you miss something, it won’t be for lack of diligence on your part.

Unclear Financials

While clean books are a gospel we preach, when we say “unclear financials” we are less referring to the types that are incomplete or poorly categorized and more the ones that have dramatic changes with no context. Examples include:

• Large, unexpected expenditures
• Major changes to employee compensation
• Uneven expenses (or revenues)
• A significant amount of “miscellaneous” expenditures
• As mentioned above, inventory swings

The goal with financials shouldn’t ever be: “Hey, you’re the buyer; you figure it out.” Sellers should give as much context and explanation for financials as possible. No buyer yet has ever complained about receiving “too much information” about financial statements from a business.

Are you worried about getting fooled by some of these techniques? Let us help you in the process. Give us a call today.

Be honest. Just hearing the word auction sets off familiar sounds in our heads: “$300 do I hear four, bid-up bid-up bid-up…” It’s exciting. While a “controlled auction” may not sound as exciting, nor will it feature said “bid-ups,” it’s an excellent way for businesses valued at $1M and above to accept possible interests and proceed to a sale that maximizes value for everyone involved.

Preliminary Steps

As you might have guessed, a controlled auction is not a DIY process. You’ll want a professional to help you through the process, which includes:

• A marketing timeline: begin with the end in mind in terms of numbers and closing date
• Preparing a comprehensive buyer package
• Outreach to potential acquirers across multiple channels and platforms
• Execution of generic NDAs then a more specific NDA
• Offering preliminary details to interested parties

Indications of Interest (IOI)

After your M&A professional has done all of that, he/she will start gathering IOIs. Think of this as a dossier of “who we are, why we’re interested in you, and what we’re prepared to spend.” An IOI should include, but is not limited to:

• The credentials and philosophy of the acquiring individual or team
• Breakdown of working capital expectations
• Plans for current employees and management team
• Expectations of current owner participation post-sale
• A due diligence schedule and a list of required documents
• Target closing date
• Price range and transaction structure and the assumptions underlying them
• Additional issues (e.g. real estate, non-compete, licenses, etc.)

Narrowing Down the Candidates

With the IOIs in hand, the seller and broker can have calls and/or face-to-face meetings with the interested parties and move to the final stage, which is a submission of a formal LOI by a specific deadline. Competing offers puts a seller in a frame of abundance, allowing him/her to choose the best offer amongst ones that can value in total amount, structure, and cultural fit. It also puts the buyers on notice: they are not the only interested party; ergo they are on alert to put their best foot (and offer) forward, lest they lose out to someone more thoughtful (or aggressive).

A controlled auction isn’t for every type of business. As we said, most businesses that engage in this are worth at least $1M and may go up to $100M in value. Often, these businesses offer unique technologies, synergies, or market positions.

Just as business owners may have had decades building and growing a company but have had zero experience selling one, they will have even less experience running a controlled auction. The hidden weapon in the process will be your M&A specialist, who will leverage his/her expertise to guide you each step of the way, give you context for decisions, and offer second opinions on interviews and data when you are unsure.

Do you think a controlled auction might be the right fit for your business sale? Let’s chat.

Now if we are telling you there are five more items for your business closing checklist, you’ll probably want the first five, which you can find here. As with that list, this list is full of items that are logical, but don’t occur to most first-time sellers, so don’t feel bad for not knowing them.

Inventory

If you do have inventory that is included in the purchase, you will likely already have drawn this up and had it properly valued. That’s not what we’re referring to here. We’re talking about an “annotated” inventory list.

For example, if there’s a particular product that you’ve been using but know there are different/more expensive/less expensive versions, you might want to share that information. If there’s a vendor you like to buy these parts from (or one that you couldn’t be paid to do business with) you should list them and give reasons.

One time we shared the possibility of doing this with a seller and his response was, “I’m not going to do that.” We were a bit stunned, given how long he had taken to build this company and how much this little bit of effort would help the new owner in a little way. Instead, the seller decided to take the low, entitled road, drawing a line on what he would be “willing to do” instead of setting up the future owner for success, which is a reasonable expectation of anyone passing on his life’s work.

Working Capital

It’s true that on the day of closing, you’re going to have purchases and payments going into your bank account as the new owner. But you’re also going to have bills and purchases due, with money coming out. That means you’re going to need some working capital in the business.

This is going to vary significantly on the type of business you’re buying, but the very best person to ask is going to be the seller. If, for whatever reason the seller isn’t helping you here (see the “I’m not going to do that” example above) you could ask for a monthly statement of the business bank account to see what amounts are coming out when. If you don’t get that either, then consult with your broker and put in your best guess.

You need working capital on day one, but you’ll need to line it up before then.

SWOT

It’s very likely that your broker will have helped develop a SWOT analysis as part of the sale process. The Strengths and Weaknesses are less important as you move towards closing; it’s the Opportunities and Threats part of the analysis you should be focusing on.

If the seller is willing to meet with you, a focused discussion built around, “What would be the 1-2 opportunities you would pursue if you were me, given sufficient time, energy, and resources?” The other matching question would be “What are the 1-2 biggest threats I should be aware of?” Again, this will likely have been gone over during the sale process, but this is your chance to go deeper with the seller as you move towards the close of the transaction.

Family Commitments

Believe it or not, we once had a deal fall through because a spouse threatened a divorce if the deal went through. The buyer had not done the necessary work to get her onboard. This may not have been about the business at all, but it sure identified problems at home!

While you may be the sole person funding/guaranteeing/paying for the business, no one ever builds a business by himself/herself. Make sure that your family is fully onboard with what you have planned and that you’ve done a realistic assessment of what your new life will look like. Their buy-in isn’t necessary for your success, but it can really make a difference when the going gets tough.

Licenses

We’ve shared before that deals were sometimes jeopardized because a license could not be transferred to a buyer and/or one can take a while to obtain.

Never assume that a license can simply be transferred, either to your business or to you personally. Assuming the opposite means that you will highlight this early on in your diligence process and not get burned weeks or days from closing.

Trust us, our closing checklist is a lot longer than one or even two articles with five items each. Call us today to get a list of what you should be doing as you move towards the close of a business transaction.

Partnering with private equity firms has become an increasingly popular choice for entrepreneurs who are looking to take their companies to the next level but are not yet ready to sell entirely.

And why not? It offers access to capital, expertise, and resources that can encourage growth and expansion like never before. But before you jump headfirst into a deal, it’s essential to understand the potential downsides of selling to private equity.

Understanding Private Equity

Private equity firms are essentially pools of capital from high-net-worth individuals, pension funds, and other institutional investors. They invest this capital directly into private companies with the aim of generating high returns. Typically, they purchase a majority stake in the business, and the business owner retains the remaining shares.

Before we touch on the downsides of private equity, let’s first look at the benefits. There’s no doubt that these firms can provide hefty cash injections, strategic guidance, and expertise. Many business owners are intrigued by the potential for rapid growth and increased market share that teaming up with a private equity firm can bring.

Partnering with a reputable firm can also give credibility to your company. The backing of a well-respected investor could improve your reputation, attract top talent, and strengthen relationships with customers, suppliers, and other stakeholders. It can also open doors to even more strategic partnerships, joint ventures, and other growth opportunities that may not have been possible otherwise.

The real upside in having the right private equity partner is that the value of your share of the business could be worth much more than the original shares sold to the equity group.

However, it’s crucial to consider what this type of partnership could mean for your business.

The Risks and Challenges

One of the most significant concerns for business owners considering a private equity deal is the loss of control. When you sell a portion of your company to private equity, you’re essentially inviting new stakeholders to the table. This can lead to differences of opinion over strategic direction, operational decisions, and even company culture.

Business owners may find themselves with a smaller ownership percentage and less influence over decision-making processes. This shift in ownership dynamics could strain relationships between existing stakeholders and lead to conflicts of interest regarding the company’s direction and priorities.

Private equity firms are notorious for their short-term focus on profitability. While this can lead to quick wins like increased revenue and streamlined operations, it may come at the expense of long-term sustainability. As an entrepreneur, you must ask yourself whether you’re willing to sacrifice your vision for short-term gains. What could it mean for you, as the owner? What about your employees?

They may impose changes to your operation’s structure, processes, and even personnel in pursuit of their growth objectives. Private equity firms tend to implement strict performance targets and timelines to achieve returns on their investment. This pressure to deliver quick results can create a high-stress environment, which will negatively impact your team. Most of these firms are much more concerned with turning a profit and may not even consider what it could mean for your company’s culture.

What’s more, unrealistic growth projections will inevitably disappoint the firm if your company fails to meet certain targets. It’s understandable — who can work well under such stressful conditions?

Mitigation Strategies

Given these challenges and risks, business owners must approach private equity transactions with caution and careful consideration. That said, if you’re still keen to sell to private equity, there are ways to mitigate the risks.

First and foremost, thorough due diligence is key. Take the time to research potential partners, understand their track record, and assess their compatibility with your company’s goals and values. Be ready to negotiate terms that protect your interests so that you can find a middle ground between your vision and the firm’s objectives.

Seeking legal and financial advice is also essential. A seasoned business broker can provide invaluable guidance throughout the transaction process, helping you navigate complex negotiations and safeguard your company’s future.

While selling to private equity can offer significant benefits, it’s not without its drawbacks. Business owners must carefully weigh the pros and cons and proceed with caution. When you understand the challenges associated with private equity sales and implement specific mitigation strategies, you can increase the chances of a successful partnership that benefits everyone involved.

Remember, you don’t have to go it alone. As experienced business brokers, we’re here to help you navigate the sometimes murky waters of selling to private equity. Get in touch with us today to learn more about how we can help.