How To Sell Your Business, Part Six — The Due Diligence Process

by Eddie Davis, Partner at Harvest Business Advisors

We’re now at 90 -120 days into getting your business sold and things have gone as expected. Let’s review what’s happened:

  1. You’re familiar with the “process” followed to sell your business
  2. You’ve identified your advisory team
  3. You’re familiar with the pricing expectations
  4. A market was created and the confidential information was delivered to buyers
  5. The buyer search concluded and you have a signed Letter of Intent (LOI)

Next step: the due diligence process.

 What is Due Diligence?

Included in the LOI (above #5), you agreed to provide the buyers/advisory team, information they request so they can complete their review, ask questions, and fully understand the business before signing a binding purchase contract. This is also a great opportunity for you and the buyer to get to know each other on a more personal level.

Key Points:

  • The diligence process has to be aggressively “managed”.  In general, for small deals it takes 2-4weeks for buyers to complete their diligence; for larger deals it takes 30 – 90 days.
  • Procrastination by either party leads to “deal fatigue” and is a deal killer.
  • The fact is, buyers are searching for hidden “surprises” to “reprice” the offer.  Make sure the information presented to the buyer/buyer’ advisors will withstand their scrutiny.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

 What Happens During Due Diligence?

The buyer/advisory team will deliver a due diligence checklist that contains both non-financial and financial information they want to review prior to signing a final purchase agreement. Depending on the industry, buyers at a minimum will request/review:

  • Non-financial information
    • Business culture – will everyone be able to work together?
    • Corporate minutes, Articles, ownership and registration requirements
    • Lease terms and conditions
    • Real estate appraisals (if applicable)
    • Vehicle repair history and condition
    • Machinery repair history and condition
    • Insurance information (business and employee)
    • Bonding information (contractors)
    • H/R records and related document
    • Key staff history,  job descriptions
    • Pension plans
    • Technology and software applications used
    • Business and personal licenses
    • Franchise agreements if applicable
    • Authorized manufacturers reseller agreements
    • Patents and trademarks
    • Web site and social media use
    • Lawsuit, tax compliance and HR compliance
    • Operations and marketing programs
    • Meetings/communications with key staff and key customers
  • Financial information
    • Accounting records – are proper accounting principles used and consistently followed?
    • Accounts receivable review
    • Accounts payable review
    • Inventory methods used
    • Working capital analysis
    • Unrecorded liabilities
    • Customer sales history and contracts
    • Supplier history and agreements
    • Bank/third party loan documents
    • Financial projections
    • WIP schedules (contractors)
    • Changes that may impact future results
    • Changes in historic trends and financial results
    • Changes in debt and equity balances
    • “Capx” required for new/additional equipment, vehicles, etc.

Key Point:  It’s a given that problems/concerns (between buyers and sellers) will occur during due diligence.  They just will. Don’t panic. It’s a long process.  We’ve been there/done that and will manage it for you.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

How to Sell Your Business, Part Three – Pricing Your Business for Sale

Now more than ever, we are getting calls from owners of privately owned companies who are seriously thinking about selling their company.  Here’s our view on pricing your company.

Key point: Understand the seller’s goals … it directly impacts the pricing

Early in the process, sellers have to decide if they are really “serious” or just “curious”:

  • What’s the motivation? Why now?
  • Are the expectations reasonable?
  • Is the time frame reasonable?
  • Will sellers be flexible during the negotiations?

 Key point: Know the “value drivers” that determine the pricing of privately owned companies

First question from a seller: “What’s my company worth?  I hear it’s worth x-times something.” It’s just not that simple.  A realistic value depends on several things, and it takes more than 30-minutes on the Internet to obtain an answer.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

The value drivers for privately owned companies include:

  1. Cash flow (the “x-times something” reference)
  2. Key staff
  3. Business processes
  4. Recent trends (3-5 years)
  5. Additional investment in equipment (“capx”)
  6. Working capital requirements
  7. Current market conditions / cycles
  8. Recent transactions (“comps”) for completed transactions
  9. Financing requirements
  10. How the business compares to the industry norms
  11. Terms and conditions of the deal
  12. Buyer “type” – is the buyer someone in the industry or is it someone looking for an opportunity to own a business? Values will vary depending on the type of buyer.
  13. “Saleability”, a catch phrase for everything else

Key point: create a market with realistic pricing

Realistic pricing will encourage buyers to consider buying your company.  There is no absolute price (until you agree), but there is a realistic price range.  You can “offer” at a price that is at the upper end of the range, it just needs to be reasonable. Don’t waste time marketing your company with an asking price that makes no sense; no one shows up, no offers are made.  Buyers conclude you aren’t serious and won’t waste their time when they have twelve other deals they are considering.  Sadly, you lose potentially good buyers and risk losing them forever.  And bringing them back to the table is really hard to do.

 In general, we often get the most, though not always the best, inquiries during the first 90-days on the market. After that, if the interest is lacking, it might be time to revisit, redirect the efforts and consider if repricing is needed.  Companies consist of bundles of assets and the market, thought unpredictable, will be the judge.  Selling a privately owned company takes time and management.

 Key point: Sum-it-up

  • Serious sellers will prevail
  • Pay attention to the key value drivers and price the business properly
  • Give it time and follow the process
  • Close with prices, terms and conditions you agree with

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

This article was written by Harvest Business Advisor Partner Ed Davis, CPA, CVA.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business

How to Sell Your Business, Part Two – Selecting a Business Broker and Other Team Members

When selling your business it is important to select the correct sales team, the business broker, transaction lawyer, CPA, and financial advisor that are going to work with you to “get the job  done.”

Now that you’ve thought about selling your business and what you need to do to get ready, it’s time to think about the team that will get you to the finish line.

By their very nature, business sale transactions are complex. They require a deep understanding of a broad range of activities from sales and marketing to technical tax rules. For this reason, most transactions require a sales team to ensure the best outcome for the Seller.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

So who is on your business sale team?

Obviously, a seller and a buyer. Then your business accountant and your attorney.  And, of course, a business intermediary or business broker like the people on the team here at Harvest Business Advisors.

If your business has complex business assets, you may want to bring on a tax expert. And possibly a business valuation expert – as we discussed in the last post – to help you understand the value of your business.

But how do you know when or if you need outside assistance?  And if you need outside assistance then just when you need it?

Let’s take a look at the members of the team.

Accountant or CPA

The accountant plays a vital role in any sale by reviewing or preparing the documentation that the valuation is based upon.  Further, they are responsible for auditing, reviewing, and preparing the financial information used to negotiate the transaction.  They are involved in tax planning and ensuring that the after-tax financial results you seek can be obtained.  They often participate in due diligence and problem solving.  The accountant’s role is to make sure that financial information is accurate and that tax consequences are minimized.

You’ve most likely worked with an accountant over the years and assuming that you have, this person will have all the financial information you’ll need to present your business to potential buyers. This will be one of the first people that you work with.

Attorney

Attorneys are often viewed as the deal breakers.  However, this is not the case when you use an experienced attorney who is familiar with business sale transactions.  The attorney’s job is to protect you as much as possible, and to make sure you understand the deal’s risks and what escape routes may exist if things go wrong. They may make you feel uncomfortable but it’s their job to focus on the ugly.  You must make the final decisions.  All business activity and actions, including when you sell your business, is a series of risk and reward equations.

Business Broker

Brokers go by many names, Business Brokers, Investment Bankers, Intermediaries, Acquisition and Merger Specialists.  These people perform a variety of functions — usually anything not being done by another specialist. The primary goal of a broker is to increase the sales value of the business through appropriate planning, marketing, sales, and negotiation during the sale period.  The International Business Brokers Association estimates that Business Brokers on average add 15-20% to the value of a transaction.

Brokerage fees are usually a percentage of the transaction value and that percentage usually decreases as the transaction gets larger.  Often there is also a minimum fee.  A common fee structure for a small transaction might be the higher of a $15,000 minimum fee or 10% of the sales value.

Sales value tends to include cash, liabilities assumed, non-competes, owner’s compensation — in effect, every way the seller is making money from the transaction.  Commissions tend to be collected in full on notes taken back by the seller at settlement.  If an earn-out is involved, the commission will typically be paid as the money is received since it is speculative.  In many cases the broker will barter a reduced fee on earn-outs for payment at settlement to simplify everyone’s accounting.

On larger transactions, the minimum fee might be $75,000 and a fee schedule of 10% on the first million, 8% on the second million, 6% on the third million, and 4% above that.  This is known as the double Lehman.  Very large transactions over $10,000,000 in sales value are completely negotiable.    Just remember the important question is not what does the service cost you, it is how can the broker help you make or keep the most money after paying all expenses.

 Valuation Expert

A valuation expert is sometimes independent, and sometimes associated with the broker or accountant.  The valuation expert’s job is to make sure you understand how potential Buyers will view your business.  Typically, they produce a financial analysis based on your Seller’s discretionary earnings or EBITDA, and the likelihood of those results continuing.  Well done valuations can cost anywhere from $2,500 to $15,000 for most small to mid-sized businesses.  Make sure you understand exactly what the valuation expert is doing in term of standards.  For a market sale, often a limited use valuation that leaves out some of the general economic analysis and endless text explanation will be sufficient and save you money.

In conclusion, each of these team members understands a part of the whole transaction process and each has experience assisting people in your situation. By combining their expertise before, during, and after the business sale process, you dramatically improve your financial results and reduce your risk.

This article was written by Harvest Business Advisor Partner Greg Caruso, J.D., CPA, CVA

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia.
Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

How to Sell Your Business, Part One – Preparing To Sell Your Business

The length of the business sale process is different for every business and depends greatly on the current condition of the business and on general market conditions. It may take up to a year to prep the business for sale and then another six to twelve months to find a buyer and close the deal.

So naturally, the first step in selling your business is to ensure that it is in the best possible shape.  It should be financially viable, on a track to grow, and with solid operational practices in place that will ensure a smooth transition to a new owner.

If you are unsure and if you don’t know the value of your business, you may want to consider having Harvest Business Advisors assist you in doing a Calculation of Value. This will help you determine whether your business is or is not ready to sell.

If it isn’t ready to sell, Harvest Business Advisors can provide you with some ideas as to how to improve your business so it becomes more valuable. If it is ready to sell, read on.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

First, ask “What makes my business attractive?” 

This is an important question – for in the answer lies your strategy for marketing your business.

Is it the type of business? Is it the quality of my staff? Is it the specialization of my business? Is it my customer base? Is it my recurring revenue or repeat customers?  Knowing what makes your business appealing also sets the stage for attracting buyers once the business is on the market.

Once you know what is appealing to a potential buyer you may need to implement some changes.

It’s possible that you might need to:

  • Increase profitability,
  • Increase the size of your business,
  • Develop a stronger management team,
  • Expand your customer base to avoid the issue of customer concentration.

Next, assess the readiness of your business for sale.

There are essential elements of your business that need to be in place in order to sell your business.

Take a hard look around your business and ask yourself these questions:

  • Are my books in order?
  • Do I need to tie up loose ends such as ensuring that my key employees have non-competes?
  • Are my facilities clean, tidy and showing my business in the best possible light?
  • Have I implemented and recorded essential business systems so the next owner can step right in?
  • Have I documented the sales and marketing process?
  • Do I have a clean balance sheet?

Finally, maintain confidentiality

Until your business is sold and the transaction has been completed, it’s important to maintain complete confidentiality. It is unwise to let vendors, customers, lenders, and/or your landlord know of your intentions. While you may think these parties are capable of keeping a secret, there’s a good chance that they aren’t.

At the same time, do not tell employees (other than those who need to know) that you plan to sell. Employees may lose motivation, may not like the new buyer, and could also leak word of the sale. The best practice is to not tell them at all.

Once you have prepped your business for sale, you will need to assemble your business exit team. We will discuss that process in our next blog post Assembling Your Business Exit Team.

This article was written by Harvest Business Advisor Partner Richard Stopa.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Selling Your IT Business With Harvest Business Advisors — Ben Gerenstein, Founder and Former CEO of Zyedge, Talks About the Sale of His Business

Harvest Business Advisors recently helped broker the sale of Zyedge, LLC of Reston, Virginia to Fuse Engineering, LLC in Gambrills, Maryland. Ben Gerenstein, the former President and CEO of Zyedge, talks about his experience working with Ed Davis a Partner with Harvest Business Advisors and what in the process amazed him.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000