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SBRI - Southbridge Business Resources, INC.

Mergers Acquisitions & Divestitures


Within mergers, acquisitions and divestitures, business people who are interested in acquiring other firms or even selling their own firm, should be cautioned. There are specific strategies that must be implemented if a business is interested in merging, acquiring or selling with appropriate results. It makes absolutely no difference whether you are on the purchasing end or the selling end, as far as the development of a strategy is concerned. If you want to achieve desired results, you need to be strategically prepared because there is one thing for sure, the entity you will deal with, will be prepared to deal with you!

There are three separate areas that must be considered and looked into by anyone trying to buy or sell a company. In this article we will briefly explain the importance of each area and then will examine, in-depth, each area and the purpose it serves in the overall realm of mergers and acquisitions. It is imperative that all interested parties understand, to the fullest extent possible, each of the following topics.

How To Attract Buyers

The first phase in preparing a business for sale is knowing how to attract potential buyers. Knowing what a prospective buyer is looking for in a company, and properly preparing a presentation package that includes adjusted financial statements, are essential elements for attracting a potential buyer. In addition, a business plan must be in place for the prospective buyer so they know what they are acquiring.

Knowing how to attract a buyer and having an understanding of what they are looking for are the cornerstones of this area. In order for you to obtain a solid understanding of this concept, think of preparing a business for sale as you would prepare your house for sale. If your house needs painting, the faucets are leaking, or if the roof has a hole in it, the house will not be sold at a best fair market value until you fix the problems.
Consequently, if a business is having a downswing in sales, or if it is overloaded with inefficient employees or it has a lot of obsolete inventory on hand, then that business is not in its best position for sale.

The seller must be in a position to provide the buyer with documentation that will explain the major components of the operation. The following are the five overall areas that must be taken into consideration in preparing a presentation package about your business:

1. A brief history of the company that includes what entails the major aspect of the business, the overall size of the business and the ownership interests. It is very important that a precise explanation of how the business arrived at its present position be explained to the prospective buyer.

2. Organizational structure and operational aspects of the company should be provided. A summary of how the company operates is of great assistance. If the organization is not in a form that can be readily understood by a potential buyer, then more detailed information must be included.

3. An analysis of the overall market position of the company should be provided. The market position of a company is one of the prime motivations for prospective buyers. The market position of the company not only should be well known by the current owners of the company, but should also be communicated to a potential buyer. Keep in mind that a strong market position enhances the dollar amount that a potential purchaser will pay for an ongoing business.

4. The financial aspects of many businesses that are presented to a prospective buyer can hurt as much as they can help in obtaining a proper selling price for the company. It should be recognized, however, that in a closely-held corporation, one of the primary objectives is to keep the profits as low as possible lowering taxes while at the same time enhancing the cash flow position of the company. In closely-held companies, many personal expenses taken by current owners may not necessarily be allowed by an outside owned company. Validated non essential expenses should be reflected within recast financials so that the financial statements presented to a prospective buyer will reflect the company in its best light. Purchasers will not buy a company if the company will not be able to return a satisfactory profit on an investment.

5. The key personnel, background information and specific duties of each employee should be supplied to a prospective purchaser. In many situations, over a period of years, owners of companies forget that they have very qualified individuals performing valuable services for their company. A review of the key personnel in the company will also reveal any weaknesses that may exist. This may be presented as an opportunity for economic growth, as well as being able to present strong areas of the business by all of the items listed above. These items should be spelled-out as specifically as possible to provide the purchaser with a strong indication of where the business is going and the growth capabilities of the company. A presentation package attracts buyers to your business!


What Is Your Business Really Worth?

The second phase is how to determine the value of a business. Buyers are reluctant to buy a company when the value has not yet been determined and substantiated. Consequently, anyone involved in a merger, acquisition or divestiture must be familiar and knowledgeable with regard to the methodology used to value the business. An Independent Business Valuation that utilizes a minimum of six IRS recognized valuation methods should be completed on any business considering sale. Factors to be considered include determination of asset values, recalculation of earnings, cash flow, projecting the growth of the company and intangibles that create revenue value.

The value of stock in a closely-held company should be important to anyone that has an ownership interest in a business. During the existence of every business, at one point the ownership will be transferred, resulting in the need for placing a value on the company. The valuation process of determining what a company is worth is not simple. The problem derives from the fact that the company itself is closely-held. There is not a readily determinable value to place on each share of stock, and most of the time it is even hard to find a buyer for such a company.

There are however, several methods that are available to businesses in determining their business worth. Each method carries its own set of advantages and disadvantages, dependent the purpose for which the valuation is being done. While some methods are more appropriate than others, an understanding of each of the methods is necessary since the Internal Revenue Service, as well as the Tax Court insist that more than one method be used when valuing a company. Since no single method will satisfy the desires of all parties, multiple methods are considered in the valuation process.

Recognized Methods:

1. Net Worth Method: As the name implies, book value is considered in assessing how much a company is worth. Net worth is considered to be the easiest, but not the best method available since it only shows the net value of each asset after any tax deductions. This is not the true fair market value of the assets.

2. Underlying Value of Assets: This method requires that all of the assets owned by a business be revalued utilizing current market values. The restatement, coupled with a calculation for goodwill, is a valid indicator of the value of a business.

3. Capitalization of Earnings: This method takes into consideration the past earnings of a company and projects those past earnings with an estimated growth factor, as well as a present value factor. It is a method that both the Tax Court and the Internal Revenue Service accept and consider important in determining the value of a business.

4. Price Earnings Multiplier: The price earnings multiplier looks at the value of stock of comparable companies that are publicly traded. It is stated that the value of the publicly-held corporation is directly related to the relationship between the price that the stock is selling for on the stock market, and the earnings that are reported by the company. This relationship is then applied to the private, closely-held company.

5. Discounts: The Courts and the Internal Revenue Service have stated that more than one method needs to be taken into consideration and various discounts should be allowed in the valuation process. Discounts for lack of marketability, as well as for minority interest, are estimated and allowed. Finally, the Courts have also considered a premium for a stockholder acquiring minority interests to become a majority stockholder.

6. Goodwill: In any valuation, goodwill should be considered. Specific procedures are utilized in calculating the value of goodwill as a component of the total value of a business. The additional value is then added to the tangible value of the assets of a company to arrive at a total worth.

7. Weighting: In the final analysis, the valuation process must consist of more than one of the above recognized methods. The weight given to any particular method however, is dependent upon the relevancy of that method to the specific valuation. Consequently, the determination of the weight given any method is up to the evaluator. The evaluator however, cannot assign weights to the different methods arbitrarily. The evaluator must be able to justify the weights given any method as a result of the importance of that method to the total operation of the business.

Negotiating the Transfer of the Company

The third and possibly the most important step of the process is negotiating with an interested party. There are certain steps that must be followed each and every time you are considering acquiring, merging or selling a business. This includes what type of information to present, how to present the information, when, where, and how to negotiate as well as the necessary steps to take during the negotiation process.

As discussed above, once the selling price of the business has been determined, this provides the basis for the beginning of negotiations. Negotiating the sale of a business is an art and not a precise science. When ownership becomes involved in the sale process they should be aware of the following six steps.

1. Select a price that is approximate to expected sale value with allowance for negotiations between the buyer and seller leaving the buyer with a sense of an appropriate sale price.

2. The second step is directly related to the first one. The seller needs to realize that the higher price is negotiable and the seller should not insist on getting the very last penny out of the asking price. This causes tremendous difficulties during the negotiation process and often stops the deal from being completed.

3. The third step involves a determination of whether or not the sale should be a sale of assets or a sale of stock in the company itself. This is an effort to bypass the double taxation that comes into play when selling a business. On the other hand, buyers are better off acquiring assets since a stepped-up basis is achieved. Also, the buyers may not be liable for any debts that they do not assume, as well as be held liable in lawsuits against their predecessors.

4. Another important factor to consider in the negotiation strategy is the manner in which the payment of the purchase price is going to be made. A typical scenario is buyers wanting to partially pay out of future profits, while sellers want to receive as much cash as possible at closing. The seller therefore must predetermine the minimum amount of cash that will be accepted up front in case the whole payment will not be paid on the front end.

5. The art of negotiation also includes consideration of many items beyond that of price. In many situations, individual sellers are concerned about security and future benefits. The loss of participation in the company's group medical plan may be one of great concern to a seller. In addition, different forms of security should be considered in the negotiation process.

In conclusion, the art of negotiation for the sale of a business depends upon the extent to which the selling party is willing to be organized. The more the seller understands and is organized, the easier the process of selling a business. The seller however, should be aware of the fact that potential buyers may have already made initial evaluations not only of the worth of the company, but also of the means of payment prior to entering the negotiation stage. Therefore, if the seller is well prepared, the process will move smoother, faster, and save both parties a lot of time and frustration.

 

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