by Lonnie L. Sciambi, Managing Director and CEO
Hamilton Capital Group, LLC, Philadelphia, PA, USA

As we noted in Part I of this article, selling a business is not only an incredibly important decision in an entrepreneur’s life, but a complicated and emotional process. Previously, we addressed the key questions and considerations in the first two stages of the selling process – The Decision and The Plan. Part II will take you through the implementation of your plan through the ultimate completion of a transaction in the next two stages – The Approach and The Deal.

Stage III – The Approach

Now that you’ve made your decision to sell and developed your plan to proceed, you’re ready for "prime time" – finding the "right" buyer at the "right" price with the "right" deal for you. Your professional advisors will play a major role in helping you effect the transaction that will meet all critical requirements. In fact, from this point forward, you will rely more and more on them.

How Do You Find the "Right" Buyer?

If you want to sell but you haven’t been approached by a buyer with whom you are comfortable, finding the "right" one is a significant challenge and takes some effort.

More often than not, that "right" buyer comes out of your industry or one that is closely associated with it. You may already have a list of potential or prospective buyers. A list of names is not enough. Obtaining deeper background information relative to the profile you established when you developed your plan is key to evaluating who that prospective "right " buyer or buyers might be. This is both difficult and time-consuming. If you haven’t already gone through this process before, the data gathering should be put in the hands of an outside advisor who can assist in the reviewing and screening process.

Research is critical in understanding the prospective buyers on your target list. Obviously, review their website(s) to get a feeling for how they present their company to customers and the public at large. Don’t just look at product or service descriptions, but look at the management team they’ve assembled, where they come from and how long they’ve been with the company. This will begin to tell something about their culture. Also, take the time to check out their press releases. These are clues to what’s been happening with the prospective buyer’s company and what management judges to be important. For example, if the press releases tend to focus only on product announcements as opposed to customer announcements, they may more focused on technology or operations than marketing.

If some of the targeted companies are public, look at recent Security and Exchange Commission filings. Check out the free Edgar site - www.sec.gov/cgi-bin/srch-edgar, which lists all reports for the last ten years: quarterly – 10Qs, annual – 10Ks and proxy statements – 14As. There’s wealth of information there as well as in the 8-Ks, which describe major changes in the company such as acquisitions, change of accounting firms, equity infusions, etc. Try to determine what other companies they’ve acquired and how much they paid as a multiple of earnings or revenue.

From the research, you and your advisors can cull out the ones who don’t fit your profile and target a group of up to a dozen potential buyers. The question becomes how do you most effectively, and confidentially (more on that later) approach them? At this stage, anonymity is paramount and again where your advisor plays a major role.

How Do You "Quietly" Engage in the Selling Process?

Since no sale is complete until "the check clears," you’ll want to keep the process as quiet as possible, since it can impact employees, customers and suppliers, alike.

While your completing your preparation work for a sale, it’s going to be difficult to not have key employees know "something is up." Often, these key employees are ones you’ve cultivated and professionally grown over time, and are an important part of the business’ value. Further, they have a stake in the company, regardless of whether they have actual equity. You don’t want them to be surprised.

Whether you’ve been approached by another company that you consider to be a "right" buyer or are embarking on finding the "right" buyer, you’re probably correct to tell these key employees, confidentially, about what’s happening. This keeps them "in the loop," and can assuage their fears by describing your plan for their future roles.

A word of caution: keep the group with "the need to know" as small and as trustworthy as possible. No gossips. Nothing will bring a company to its knees faster than employee unrest over the "unknown," be it buyer or sale.

And what about customers and suppliers?

No and no! Whoever is told, the circle should be small and kept internal. Customers and suppliers can get very uncomfortable with the prospect of a sale, plus are often a direct pipeline to competitors. And you know competitors will use whatever they can to beat you. Your advisor, as a confidential "go between" providing the company with anonymity, is the most prudent way to approach any prospective buyer.

How Does the Process Work?

Prospective buyers on your target list are "blindly" contacted by your advisor via letter, e-mail or telephone with a broad description of your company provided, but without specifically identifying the company by name. After follow-up, if there is interest, typically, the prospective buyer is asked to sign a confidentiality agreement and is sent a summary document that highlights the company’s history, financial performance and forecast, products, operations and management team.

There are usually a series of follow-up telephone calls with questions and sometimes a request for more information or clarification of some of the information presented. If feelings are still positive, the next steps are typically a series of face-to-face meetings at your site and potentially at the site of the buyer. This may happen with more than one prospective buyer and it may happen in different ways, but once any face-to-face meetings take place, "chemistry" and "fit" are the determining factors as to whether "courtship" ensues.

How Do You Move the "Courtship" Along and How Will You Know It’s Really "Love?"

If your business is as valuable as you think it is, at some point, there will be either one or a series of prospective buyers who will "come calling." It will be "courtship," plain and simple. If possible, multiple "courtships" should be encouraged. It will take up a little more time, but will serve as both a good comparative analysis between prospective buyers, as well as an opportunity for competitive bidding.

During "courtship" everybody will be on his or her best behavior. Expect talk of some synergistic "nirvana" the combined companies can reach through a union with yours and the prospective buyer’s. Extraordinarily similar views of many things will be found, both professional and personal. Eye-popping potential purchase price ranges may be thrown around, raising unreal expectations. As in courtship - keep your head and don’t get swept off your feet!

Understand and learn as much as you can about your prospective partner. Review the earlier research. Ask hard questions. For example, if you have a unique employee benefit, ask if they have anything similar for their employees. Does their management style correspond with or conflict with your own? What is their strategic direction? How do they see your company contributing to that strategy?

Get to know some of the key executive management people on a personal level. What kind of personal values do they appear to have? Those will spill over into their professional values. Moreover, their corporate culture should be represented by those values. How do you feel yours will blend with theirs? How do they see the two companies working together? Besides price, it is the single, most important element of any successful transaction.

To further understand culture, when you visit their offices, talk to their staff while there. Judge whether the people actually enjoy working there, or are putting on a good show for you. If they’ve done acquisitions in the past, talk to prior sellers, particular those no longer with the company. Find out why they might have left. Your advisors should accompany you to any meetings or visits. They’ll give you a more objective opinion, with less-biased observations.

At the same time, provide the prospective buyer with as much information as you judge to be reasonable. Financial reports, and product literature are reasonable. A prospective buyer asking to conduct full-blown due diligence before making an offer is not. Remember, this is "courtship." Due diligence before "expressing true love" (a real offer) is not unlike asking to grill family members and reviewing bank statements while you’re simply dating. And don’t be pressured into naming your price to a buyer. It’s a sure way to get less. Let them tell you! Once you’ve put a number out there, it will only go down!

The long and the short of it is that the relationship with the prospective buyer must " feel right." It’s too important to you and your staff for it not to. They will have "warts" also. And theirs won’t get better, either. Be sure you can live with the "intended," warts and all, regardless of what the final offer might be.

How Do You Get the Best Proposal from the Right Buyer…in the Shortest Time?

Once it looks like a match, both in terms of what they’re telling you about their "ballpark" price and what you’re feeling about the kind of company and people they are, it’s time for a deal to come together. Most important: stay out of direct negotiations, if at all possible. Designate one of your advisors (the one with the most experience) to work with the prospective buyers in framing a deal. In negotiations over deal terms, sellers can’t be objective and are likely to be emotional - remember the "child up for adoption" analogy from the Decision Stage. In most situations you’ll be overmatched. Your counterpart will either be an executive who’s negotiated dozens of these deals over the last several years or a professional, hired for the situation, also with significant experience. That kind of firepower should be working on your behalf as well.

There will certainly be some preliminary discussions that outline what the prospective buyer is thinking about in terms of deal price and structure. Based on those general discussions, define with your advisors basic parameters of what you’re looking for and then give them some room to negotiate. Preliminary review with your tax advisors is important, to ensure that the structure and payment terms provide optimum tax benefit, allowing you to "keep" as much as possible.

A prospective buyer will want to delay making a specific offer as long as possible so they can continue gathering more information about you and your company. They will continue to press you for a price. A buyer wants to try to pay as little as possible and is looking for every edge. Don’t take it personally, that just the way it works.

Once it appears that there is genuine interest and serious discussions about terms have occurred, have your advisors push the buyer to commit an offer to paper as early as possible, with sufficient time for you to review it and react. If there is more than one interested party, clearly that will drive price. Here’s really where your advisors earn their money, by keeping as many interested parties at the table for as long as possible. An "auction" is good!

An offer will most likely take the form of a non-binding letter of intent or term sheet. Either should succinctly describe all of the key business deal points. This would include post transaction items like employment contracts or consulting agreements, but might only describe remuneration and term, rather than the specific details. Nothing major should be left "for later."

Words of caution about an offer. Wherever possible, get as much of the total transaction value as early as possible. The later the payment, the less likely it will occur, unless they are guaranteed in some way. Generally, it’s not because the buyer will renege, but more because those later payments are usually based on some future milestone being met. Shy away from "earn-outs," if at all possible. If much of your company’s value is still in the future and an earn-out necessary, keep it simple and try to base it on top-line revenue. This avoids haggling about how various costs are treated or assigned to arrive at some profit number basis.

Typically, an iteration or two will be needed to get the deal points to where everybody’s comfortable. Then, there are terms to which both parties agree, can execute and from which a definitive purchase agreement can be created. However, due diligence discoveries, lawyers from both sides, and time itself can make the deal go away. All three can work against completing a sale unless they have been anticipated and addressed in advance.

Now comes the hard part – getting the deal done!

Stage IV – The Deal

Unfortunately, signing a letter of intent does not a deal make. The document merely puts down on paper the agreement in principle between you and the buyer. Typically, a letter of intent is non-binding, since the buyer has yet to conduct due diligence to verify that everything that the offer was based on is as you’ve described…or as the buyer understood. These are, often, two different perceptions.

While the Approach stage can be analogous to courtship, the Deal stage is like the engagement period and planning for the wedding, rolled up into one. It’s when you both really get to know each other and all the "warts" are more closely examined. Further, it’s when your employees have to be briefed about what may happen with the company and what it may mean to them, personally and professionally.

It can also be a very stressful period with the seemingly endless demands on your time. Preparing for and living through due diligence can be disruptive. There may be legal hurdles. And through it all, the business must continue to run. If a seller is aware of the potential "hazards," they can be anticipated, dealt with and the outcome can still be the "right" deal.

What Do You Tell Your Staff and How Do You Keep Them Focused?

Once there is a signed the letter of intent and the buyer presents their due diligence plans, the potential sale can no longer be kept within your inner circle. Since the buyer will almost assuredly have people on site, there is almost have no choice but to disclose plans to employees. But what is said and how it is said will impact how well fears are allayed and employees’ focus kept on carrying out day-to-day responsibilities.

Employees should be told there is an offer leading to a possible sale. No need to go into how it came about. It should be treated as a positive reflection on the company. Clearly, if some or all employees are shareholders, a sale can be very positive, with potential cash in their pockets. On the other hand, fears are going to arise regarding change and job security. If specific requirements have been given to the buyer regarding staff and operations, discussing those with the employees will reinforce their importance if the deal is to be successful.

In no case should employees be told anything other than what has been explicitly agreed to with the buyer, particularly conditions that are still under negotiation. Explain that what is on the table is an offer, not a deal…yet. Frame for them the process ahead. Managing employee expectations is in everyone’s best interest. If a deal does not happen, all will need to continue working together, keeping the company successful.

How Do You Make Due Diligence Work for You Instead of Against You?

Due diligence is the process that is used to verify data gathered about the company. Buyers use it to better understand the company’s operations, finances and legal obligations. Typically this includes reviewing accounting and personnel practices, internal systems and policies, operational processes, contracts, backlog and sales forecasting, to name just a few. Your staff will be heavily involved. Customers may be interviewed, usually anonymously. Be aware that some buyers also use due diligence findings as a justification to reduce their offer.

Make due diligence an ally.

First, have the buyer provide a list of all data that they will need before the process begins. Next, prepare two binders with copies of all requested information: one for your files, one for theirs. Assign a work area, preferably a conference room or vacant office where the buyer’s due diligence team can be housed while they’re reviewing data and conducting interviews. Assign a "point person" from your organization, preferably senior management, to coordinate the effort with the buyer’s organization. Brief any staff member who might need to interact with the buyer’s due diligence team. Prepare everyone, covering what they might be asked and that they should respond honestly.

How do you avoid surprises?

If you’ve identified "warts," or even some "skeletons," prepare to discuss them in some detail and have a "fix plan" ready, if possible. If there have been "skeletons" in the history of the company, that may or may not surface during due diligence, take the prudent path and readily offer to describe each, including their disposition, to the buyer’s team.

If the buyer uncovers something unexpected during the process, perhaps something judged to have been unimportant or simply not mentioned previously, be as forthcoming with information and answers as possible. Defensiveness during due diligence is a natural reaction, although a red flag to buyers. Keeping cool under fire is critical for both you and your staff.

Are There "Skeletons in the Buyer’s Closet" – How Do You Conduct Due Diligence on Your Prospective Partner?

As the old saying goes, "what’s good for the goose is good for the gander." Unfortunately, few sellers do in-depth due diligence on the buyer. No law against it, it’s just that the buyer is the one committing the capital, and is usually better prepared. Most buyers have either done an acquisition before or are being advised by seasoned professionals who have.

However, you the seller also have much at stake, having spent a good deal of your working life devoted to this business, with most of your assets tied up in it. Isn’t it wiser to, at least, know more than you uncovered in your initial research and in some of the "courtship" meetings? Are you able to objectively assess your prospective partner?

Here’s another context in which it is best to use professional advisors. They will have had significant experience with both buyers and sellers. Together, draw up an equivalent list of data to be reviewed and questions to be answered by the buyer. While it may be an unusual request, it will prove its value as the process moves forward. Information gathered will help objectively clarify the buyer’s plans, culture, how they operate and how these compare with your own enterprise. This exercise will lead to a better understanding of real synergies versus ones expressed during courtship. Above all, a seller must answer the key question – how WILL we operate AFTER the deal?

Clearly, if the buyer is part of a larger company, focus on the buyer’s organization and gain some insight into its parent, but only as it relates to the buyer’s operation, since you’ll be in the same chain of command.

If the buyer has no problem with your team conducting due diligence, that speaks to confidence in who they are and how they’ve represented themselves. On the other hand, if they limit what you can know or ask, some "red flags" are being raised. If they turn you down completely, it may be time to re-think who your partner is and if this marriage can really work.

Don’t Spend the Money Yet - How Do You Make Sure the Deal They Offered Is the Deal You Finally Get?

The biggest mistake an entrepreneur can make in the process of selling his or her business is "spending the money" before the deal is done! This is not meant literally, but figuratively. That is, the seller begins to focus on either the deal or "the money," and the positive changes those will bring to his or her life and company, long before the deal is finalized. Far worse is that in more than a third of transactions, the deal that is initially agreed to in the letter of intent, changes significantly by the time it gets to the definitive agreement. Most often, they are the result of "surprises" uncovered in due diligence.

Once sellers begin to think of the deal as done before it is, they weaken their bargaining position, wanting the deal to happen, no matter what. And this occurs far more frequently than it should. This sometimes causes the seller to "cave in" on negotiating critical operational issues or even agreeing to changes in payment terms, in their haste to close the deal.

Ensuring that the deal that they offer becomes the final deal is to have the buyer’s offer based on knowing and understanding the seller’s "warts" or "skeletons" ahead of time, and for the seller to maintain the attitude of "business as usual" until the deal actually closes. That is, continue to operate the company and your personal life as if there was no deal.

Further, don’t allow any element of the deal you consider important left to be negotiated after the transaction is closed. Either in the zeal to get the deal done or because they will be in a stronger negotiating position once the contract is executed, the buyer may suggest a delay in the specifics such as how the companies will actually be integrated and operate, reporting structures or how bonuses will be determined, until after closing. If it’s important, it should be negotiated and documented…before closing.

Finally, any negotiations that deviate from the letter of intent to the ultimate definitive agreement should only be negotiated through professional advisors. This includes employment or consulting agreements. Sellers can be too emotional with so much at stake. Plus, negotiations could be with your future boss. Serious disagreements, which can and do occur, could jeopardize your post-deal relationship. Professional advisors, on the other hand, can wear "a black hat" and be tough negotiators representing their client’s interests. Once the deal is done, they’re gone. If the "hired guns" upset the buyer or his people, it will be irrelevant. You will have gotten what you wanted and won’t be tainted by the process.

Can You Live with the Result? – Re-Visiting an Earlier Question Before Signing on the Dotted Line and Preventing "Seller’s Remorse" Afterward.

As the process wends it way toward conclusion and the ultimate definitive agreement, it is time to conduct one more honest personal analysis of the potential deal - what it will mean to you, your future role and the role and position of the company you created.

Go back to Stage I and review the questions in the section. Can you live with the result?

There’s been a lot more time to think about why sell. As a result of due diligence, there are now a lot more facts about your future partners, their plans, their operations, their people and their culture. How comfortable are you about how the two companies really fit? And how are you going to accept not being "king?" It’s most likely to be a very emotional decision. At the end of the day, it has to "feel right."

Even if it turns out that it just doesn’t "feel right," or you just aren’t ready, you may have lost some time and spent some money, but you’re still in control of your major asset until the time or the circumstance is right.

Words of caution on the definitive agreement: don’t allow the legal process of "papering the deal" to get out of control. It can’t be allowed to scuttle a good deal.

Counsels for each side will be trying to protect their respective client. The buyer’s counsel will want to craft an agreement that is heavily weighted toward protecting the buyer and reducing buyer exposure. Seller’s counsel will want an agreement that is heavily weighted toward providing the seller with the best payment terms and least onerous representations and warranties. The buyer’s counsel will almost always win. The buyer is making the money commitment. Your counsel’s main responsibility is to ensure that the business terms that have been negotiated have been properly described with the proper protections for you. In short, if you want the deal to happen, so must your attorney.

Finally, expect that some portion of your front-end payment, probably anywhere from 5%-20% to be held in escrow for some period of time, probably anywhere from 90 days to one year. Don’t take this personally. This will be how the buyer protects himself from any representation or warranty that you’ve made about issues such as receivables, taxes or legal obligations. Keeping escrow to a minimum is how your counsel earns his money!

Post Close – A Brave New World, Or - How’s Your New Job and Do You Like Your New Boss?

It’s done. The deal’s is signed, the check has cleared and you and your partner walk off into the sunset, arms intertwined, living happily ever after. Well, mostly. As in all marriages, there are bound to be compromises.

You made your money, so no more financial worries. You have, in hand, the potential security of an employment or consulting agreement and the availability of capital for your company to grow. The buyer now has a solid revenue stream, good cash flow, a strategic set of products, cross selling opportunities, more intellectual property or entry into a key market, previously impenetrable.

However, along the way, someone else came in to control of your destiny. Control was traded for liquidity and financial security. There are different and new responsibilities. Now, there’s a boss, maybe for the first time ever.

Once the deal is closed, the buyer needs a return on his investment. The revenue and profit numbers signed up for have to be met. The buyer traded capital to leapfrog in either size or market by taking on a more nimble, profitable operation.

While many acquisitions have problems post-closing, many can and do work.

While there will be "bumps in the road," as in a marriage, a successful relationship needs ongoing commitment from both sides. In many deals that go sideways, either buyer or seller has forgotten the initial rationale behind the combination. The rationale was based on both parties making tradeoffs. The buyer’s bureaucracy may be troubling but can be worked with. It evolved before you happened on the scene. Your operation’s risk-taking style could trouble the buyer. But that was what they liked about the company before the deal. The seller remembers only the good of "running the shop," glossing over or forgetting about the pressures of making payrolls and dealing with the tax authorities. The buyer is likely to recall that before the acquisition they had their own plan to enter the market that you had successfully penetrated.

In the end, the success of the business relationship will be directly related to both sides’ ability to accept that the sale has effected changes to each of their operations. How well both plan for those changes, allow time for the cultures to find common ground and implement reasonable integration efforts will be the key elements for that success. Then it will become a "win, win" for both the buyer and the seller.

Conclusion

As initially noted, selling a business can be the single most important decision of an entrepreneur’s life. It’s highly emotional, often deeply personal. The entrepreneur’s business is not just a major asset of his or her life, but often the center, with relationships that have been built with partners, employees and customers that are nearly family-like. With so much at stake, it is critical that you, the entrepreneur understand the need to plan your exit. Beyond the emotions, it is a complex, time-consuming task fraught with many pitfalls.

This four-stage process should provide a framework for understanding what’s involved in planning your exit and executing your plan. It’s a guide for helping prospective sellers better understand why and when to sell, what’s involved in getting ready to do so and then the critical questions and steps for getting off the business ownership highway at the "right" exit.

Hamilton Capital Group, LLC is a US-based boutique investment banking firm comprised of former business owners and operating managers that have "been there." Hamilton provides M&A, capital raising and corporate advisory services to closely-held businesses, looking to maximize the return from their entrepreneurial efforts.