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Tips To Help You Get The Best Price In A Down Economy - AZ Business Magazine Jul/Aug 2010

If You’re Selling Your Business, Here Are Some Tips To Help You Get The Best Price In A Down Economy

The past 18 months have been extremely difficult for participants in the mergers and acquisitions community. Purchase and sale transactions in 2009 were at their lowest levels since shortly after the dot-com bubble burst at the beginning of this decade. The main culprit? Most observers agree that the lack of debt financing to fund (or leverage) buy-out transactions stymied deal-making in 2009. Further, valuations (or more accurately, the multipliers that drive valuations) took a nosedive as well. Finally, a general lack of uncertainty caused both potential buyers and sellers to approach any proposed transaction with a great deal of trepidation.

The result, of course, was a down market as both buyers and sellers sat on the sidelines waiting for conditions to improve. Many of the deals that did occur were fire sales (often in connection with liquidation proceedings), rather than the culmination of a well-planned and profitable exit strategy.

Although the economy is showing signs of recovery in 2010, many industries remain depressed (real estate, construction, and manufacturing, to name a few) and unemployment remains high. Many economists and dealmakers are cautiously optimistic about the future, but down in the trenches things are still very tough. As a result, a business owner who might otherwise desire to develop an exit strategy for his or her business is likely working 24/7 just to keep the business afloat. From the “glass half full” perspective, however, the depressed economy presents the foresighted owner with an opportunity to get her house in order, so that when market conditions improve she will be in the best position possible to seal a deal quickly.

You should begin preparations to sell your business at least 12 months prior to the date on which you anticipate completing a sale. If you are lucky enough to receive indications of interest in your company, you will discover quickly that selling your business is a full-time job in and of itself. However, the time demands will be much more manageable if you have properly prepared your business for sale long before you receive the first inquiry from a potential buyer.

As the owner of your company, the first thing you should do is step back for a moment and consider how indispensable you are to the business. If you take a week’s vacation, does it take you a month to get the company back on track once you return? Likewise, are you the primary contact for your company’s most significant accounts? If the answer to either of these questions is “yes” (or even a strong “maybe”), then you are in a difficult position. Buyers, especially financial buyers, generally prefer acquisition targets without significant “key man” risks. Start now to wean the company from you by developing a plan to delegate authority to other individuals and automate company operations. If you don’t, you will likely find yourself saddled with a burdensome employment or consulting agreement after the sale is complete in order to mitigate the buyer’s perception that your departure would lead to the company’s imminent demise. On the other hand, if you want to continue to work for the company after the sale, your “key man” status is a sure-fire way to ensure your continued employment.

In a similar vein, does your bottom line reflect your company’s true profitability? Put another way, once your potential buyer begins its due diligence, will it be required to restate your financial statements in order to get a true picture of the company’s cash flow, balance sheet and net income? Many entrepreneurs find it difficult to separate their personal financial situation from their company’s. Although it may be tempting to run personal expenses through the company’s books in order to obtain expense deductions, this practice often clouds the true performance of the company and can limit your return on the back end once you are ready to sell. If you have not done so already, adopt tax strategies for your company that are transparent and, above all, legal and that won’t require your buyer to do back flips in order to get a true understanding of the business’ financial position and results of operations.

Think carefully about your existing arrangements with key employees. Are they properly incentivized to stay around once the company is sold? Would it help to lock some of them into long-term employment arrangements if they are key contributors to the value of the business? On the other hand, do any employees have change of control or “golden parachute” agreements that will burden the business, or that the buyer will insist be bought out at or prior to closing? It is often best to deal with these types of issues before the rumors of a sale start circulating among the employees.

Does your company own the real estate on which its facilities are located? If so, you may want to consider spinning off the real estate to a separate company owned by you (as opposed to being owned by the operating company). Buyers often do not want the real estate associated with an operating business unless the property has some strategic value. As such, much time and effort often is spent detaching the real estate from the operating business as part of the acquisition transaction. This process can be tedious and time consuming, as it requires new title insurance commitments, appraisals, or assignment or renegotiation of financing arrangements. Also, if your business is a corporation, there are very good tax reasons to transfer ownership to a non-corporate entity. Finally, the real estate component of the transaction can also be another source of income for the owners through the negotiation of a valuable long-term lease of the facility to the buyer.

As you begin to consider a sale, be sure your company is properly positioned from a tax standpoint. Sit down with your tax adviser and discuss the tax ramifications resulting from either an asset sale by the company or a sale of the equity by the owners. Generally (for tax and other reasons), buyers prefer asset sales and sellers prefer equity sales. Further, the legal treatment of a transaction often does not coincide with how the transaction is treated for tax purposes. For example, to meet both buyer and seller preferences, an equity sale for state law purposes can be treated as an asset sale for income tax purposes. While a full discussion of income tax treatment is beyond the scope of this article, it is imperative to involve your tax adviser as early in the sales process as possible, and it may be well worth the time and upfront costs to restructure your business now in a manner that best positions the business from a tax standpoint for a potential future sale.

Make sure there are no skeletons in your closet before you commence negotiations with your buyer. Do you have audited financial statements for your business? If not, consider engaging a certified public accountant to conduct an audit of your company as of your most recent fiscal year, or at the very least take steps to put the company’s financial affairs in order so that an audit can be conducted quickly later. Most buyers (or the lender providing the financing to the buyer for the acquisition) will require at least one full year of audited financial statements. An audit requires a thorough review and cross-check of the company’s books and records, and will likely result in certain additional management controls being put in place for your business. These controls may be outside the norm of the company’s historic business operations, but will likely result in increased efficiencies once implemented.

In addition to getting your financial records up to speed, you should also prepare for the legal due diligence review that the buyer (and its lender) will conduct of your business. Make sure your contractual relationships are all documented and well organized. Do you operate with “handshake” agreements? If so, take the time to enter into written, legally-binding agreements with your vendors and customers, even if these agreements are fairly simple. Also, make sure none of your important agreements is set to expire shortly before or after the time you expect the transaction to close. By renegotiating expiring contracts now you may be able to take the buyer out of the negotiation process later on. Documenting or renegotiating contracts will take the concerted effort of your management group, including all employees who have authority to enter into contracts, as well as the assistance of legal counsel. Remember that the only thing worse than an unwritten agreement is a written agreement that does not actually reflect the agreement or course of dealing between the parties.

Finally, if you have not already done so, consider preparing a procedures manual for your business and engaging an attorney to prepare an employee handbook and significant company policies. The existence of well-drafted manuals, handbooks and policies will give your business credibility and make the transition to new ownership less difficult. You should do this well in advance of closing to give your management team and employees adequate time to adjust to any new procedures or protocols that may need to be implemented.

Like the financial markets in general, potential business buyers crave certainty and stability in an acquisition target. Engaging in the preparation and organizational exercises described above will go a long way toward injecting stability in your company, which in turn will instill confidence in your buyer and enable you to negotiate the best price possible for your business.

Arizona Business Magazine Jul/Aug 2010

money squeeze

Tips On How To Navigate The Current Credit Crunch

The credit crunch is making its way from Wall Street to Main Street and squeezing businesses across all industries. There are some proactive steps Arizona companies can take to prepare for potentially challenging days ahead.

Cash is king

If you have cash on your balance sheet, you have a greater degree of flexibility in your decision making.

Issue: In a slowing economy, understanding and managing cash flow are paramount.

Action Steps: Negotiate aggressive credit terms with suppliers and customers. As soon as invoices are late, begin subtle but firm collection efforts. In the short term, it may be wiser to sacrifice profitability in order to generate cash.

Be relentless on cost control

Look hard at discretionary expenses and remove unnecessary spending — but don’t compromise business strategy.

Issue: To maintain your current levels of profitability, you will almost certainly need to cut costs and spending where possible.

Action: Employ zero-based budgeting to review all costs carefully in terms of their value to the business.

Evaluate customers and suppliers

Understand the financial well-being of customers and suppliers. Look for signs of financial distress and express concerns.

Issue: Challenges in credit markets have put increased pressure on the purchasing power and credit worthiness of customers, resulting in a tightening of credit terms and product availability.

Action: Reevaluate credit terms with customers and negotiate the shortest reasonable terms.

Get smarter on taxes

It is important to look at how to manage those costs and the related impact on a company’s cash flow.

Issue: Taking appropriate advantage of the opportunities available to reduce tax liabilities.

Action: Take advantage of available tax credits, such as the fuel tax credit or deductions for domestic production or property depreciation. Take extra care when considering the calculation of quarterly estimated tax payments.

Reconsider capital investment plans

Is now really the time to invest in new capital assets?

Issue: Investing in new assets in a downturn can bleed you of cash. Carefully consider capital investment plans, and question the proposed value and timing.

Action: Take into account the timing of investments. If it isn’t mission critical, consider delaying or deferring.

Get closer to banks

Take a hard look at your reporting and accounting systems. If these are not quite what the bank would like to see, consider improving them.

Issue: Banks will be more cautious and concerned about credit quality. Borrowing will likely come at a higher price — both in terms of interest rates and fees — and will almost certainly include more restrictive covenants and require increased monitoring and transparency.

Action: Treat the bank as a partner by keeping it informed about the status of the business and giving it plenty of notice if you need help.

Consider financing options

Talk to a professional about arranging financing and consider alternatives to traditional lenders.

Issue: Having issues with your bank can result in a severe restriction in your borrowing capacity. It’s not as easy as it used to be to secure an alternative source of capital.

Action: Consider other financing sources such as leasing, asset-based lenders, factoring companies or even government-supported financing programs. Look at negotiating payments on long-overdue accounts receivable or obtain financing through trade vendors.

Keep an eye out for bargains

Be alert to opportunities where business valuations are falling and where business owners are looking for quick exits.

Issue: The current feeling of uncertainty will drive many shareholders to seek an exit rather than hunkering down and trying to weather the storm independently, creating buying opportunities at depressed prices.

Action: Whether playing the stock market, engaging in real estate or considering acquisitions, the best buys are made in a down market. But make sure the action makes sense with your growth plan.

Protect personal wealth

Before agreeing to become more personally exposed for the sake of the business and less diversified personally, think about options.

Issue: It is likely that businesses will have greater borrowing needs. Solving business cash needs with personal assets will reduce diversification of overall personal net worth and further expose you to the recessionary economy.

Action: Equity financing provides resources if the economy does not improve as quickly as expected. If debt financing is the best course, avoid personal guarantees and pledges of personal assets. Employ experienced counsel to help with the transaction.

Worst case scenario

Get help far in advance of a financial crisis, if at all possible.

Issue: The future is uncertain and trade credit is contracting.

Action: Look at your business without its existing debt and determine its debt capacity based on the most current financialprojections. Do not wait until you are almost out of cash.

The more time you have to identify your options and craft a plan, the better your chances of success. Contact your professional services advisors immediately to discuss your current situation.

Ed O’Brien is the managing partner of Grant Thornton’s Phoenix office. For more information, call (602) 474-3444 or visit www.grantthornton.com