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.
|
