DONíT LEAVE MILLIONS of dollars on the
table because you donít fully understand the process of marketing
and selling a business. There are many common denominators leading to Maximum Value regardless of the type of business
you may be selling. They apply across the board whether your business is in aerospace, biotechnology, distribution,
engineering, Internet/e-commerce, manufacturing, or retail sales.
Maximizing value begins at the moment youíre ready to put your lifeís work on the market. At the close of the day, the
right price is a "fair price" for you and the buyer. The essential
point is to
insure that you get your fair price, which if
handled correctly, can be a higher price.
Every seller asks, "What is my business worth?" In turn I ask,
"What is the maximum a buyer will pay?"
Multinational Company A made an offer to buy a particular business for $35 million. Multinational Company B looked
at the same business and offered $60 million. Why the disparity?
Each prospective buyer had a different "perception of value." Disparity in perceived value, although not typically
this large, occurs everyday in the marketplace.
Another business received an offer for $11 million. That was followed by two comparable offers from other prospective
buyers. At the close, after the bidding stopped, the company sold for $16 million.
There may be considerable swings in the value meter during the time a business is on the
"For Sale" block. Note that
these swings are likely to happen during the sale of your business as well.
A brief overview of how businesses are valued will begin the process of helping you understand how to increase
perceived value in your buyerís eyes.
The bottom line is that all buyers have to economically justify the purchase price. The buyer arrives at that price by
becoming confident in his or her mind that after the acquisition
the business will generate sufficient cash flow to provide a reasonable rate of return on the investment.
For example, if a buyer requires a 20%pretax return on investment, that buyer would be willing to pay 5 times the
annual cash flow of the business (100/20 = 5). A business that generates $2 million per year in cash flow would be valued
by that buyer at $10 million ($2 million x 5). The key number, 5, that is used as a multiplying factor of cash flow, is
called the Valuation Multiplier.
Depending on the nature of your particular business and the current mindset of the buyer, the Valuation Multiplier
can range from 1 (small service company) to infinity (Internet companies with no earnings). After eliminating extremes
on both ends, the range of multipliers "generally" sways between 4 and 10. But donít immediately apply this to your
Main Factors Affecting the Valuation Multiplier:
1. Financial Performance (past and projected)
2. Management (depth and experience)
3. Market/Product Strength
4. Customer Base
5. Cost Savings from Merging
A "strategic" buyer will generally pay more because a merger within the same industry saves money and adds
synergy through consolidation. Larger companies have more resources and may be willing to pay a higher purchase price
if there will be a positive effect on their price/earnings ratio.
"Financial" buyers - or investors looking primarily at the rate of return on investment
- and smaller purchasers generally
will pay less for a business. Additional insight regarding
business valuations can be obtained by reading the Valuation
A Business Broker
Choosing the right business broker is one of the most important decisions you will make in maximizing the value of
A Skilled Business Broker Will:
1. Assist with a preliminary valuation of your business.
2. Help prepare the Selling Memorandum.
3. Provide guidance during negotiations.
4. Bring qualified buyers to the table.
Expected Qualities and Characteristics of a Top-Notch Business Broker Include:
1. Working with companies of a similar size.
2. Familiarity with your industry and its key players.
3. A good blend of financial and marketing expertise.
4. Extensive experience in marketing and selling companies.
5. Resources to conduct in-depth market/industry analysis.
6. Extensive database of prospective buyers, including but not limited to investment funds and other
7. Engaging personality and superior negotiating skills.
Your business broker must have high marks in each of these seven categories. A deficiency in any of them will translate
into less dollars for your business.
The Selling Memorandum
It took a lot of ingenuity, hard work, and perseverance to build your business. Now that you have arrived at the point
in time that you are ready to sell, you need to be properly rewarded for your efforts. Unfortunately, some business
owners believe that prospective buyers should automatically appreciate how difficult it was to build the business and how
valuable the business really is. This misperception usually leads to one of two results: (1) the Selling Memorandum is too
brief; or (2) the Selling Memorandum is lengthy, but contains mostly
"fluff" and very little in the way of supporting facts.
When selling a product or service, you probably presented detailed information on how it works, its competitive
advantages, etc. Those same marketing techniques must be applied
to the sale of your business. The phrase, You only have one chance to make a good first impression should be paramount
in your mind when preparing the Selling Memorandum. Maximum Preparation (MP) will result in Maximum Value
(MV). Repeat this mantra often, "MP = MV," to achieve your goal.
Preparing the actual Selling Memorandum is often a source of frustration for sellers. Unrealistic expectations can cloud
your clarity. It is not a document that can be prepared all the way through by your business broker. It is incumbent upon
you, the seller, to provide significant input for the Selling Memorandum. The goal is to have a Selling Memorandum
that virtually transports a potential buyer into accepting your Maximum Value. No one can convey the true essence and
value of your business better than you can.
While the business broker can give you the framework for the Selling Memorandum, provide in-depth market and
industry research, and edit and produce a sharp final product, your keen insight into the potential of your business has to
bleed through this key document.
You selected the ideal business broker and wrote the worldís best Selling Memorandum. Now itís show time!
You will receive the greatest value for your business by having the largest number of qualified buyers bidding on
your treasured enterprise. The term "qualified" is so
important because you canít waste valuable time negotiating with
individual buyers - or buyer teams - who do not have the resources or the proper motives to close the deal.
You and your business broker should agree on the marketing approach. If your Selling Memorandum is highly
confidential, as it is in many cases, you should pre-approve all
recipients of the document. You should not, however, restrict your brokerís style of working. Placing too many restrictions
upon which potential buyers can be contacted severely limits outside interest.
One common sellerís mistake is not allowing the broker to market the business to competitors. This can be a
deal-breaker since many privately held businesses are sold to
competitors. While prudent precautions should be implemented when providing information to competitors, they generally
should be included in the marketing process.
A direct-mail campaign to stimulate interest usually precedes the distribution of the Selling Memorandum. Your business
broker then sends the document only to "qualified" buyers who respond to the mailing. Prompt phone follow-up is
critical. You never ever want to lose any potential buyers at the front end of the marketing process. Your business broker
will not only insure that the appropriate parties receive Selling
Memorandums, but also will engage in preliminary negotiations with prospective buyers to ascertain which are the
best candidates to buy your business.
Expect this process - preparing the Selling Memorandum, marketing the company, identifying the most likely buyers,
and completing the transaction - to take from 3 to 12 months.
Your Selling Team
Selecting the right business broker is essential. But reaching your Maximum Value can only be obtained if other
players on the Selling Team are in place.
Other Selling Team Players Include:
2. Estate Planner
3. Investment Advisor
4. Mergers & Acquisitions Attorney
It is important to establish lines of communication with each of these four players when you begin the marketing
process, and certainly before a Letter of Intent is signed. Each
of these advisors can not only give specific professional advice, but can also provide valuable business insight into the
selling process and final negotiations. Please read the Team
Brochure for additional information on fielding your Selling
Your M&A attorney will be a key player from start to finish in the acquisition process. An experienced M&A attorney
can help spot and avoid potential pitfalls as well as guide you safely through the selling process. The M&A attorney
provides this guidance, in part, by helping you quickly and
easily understand and resolve issues and obstacles that may come
up during the course of the transaction.
Sellers often ask, "Well, why canít I just use my corporate attorney to handle the sale?" In return, I ask,
call your general practitioner if you required delicate brain surgery?"
A sharp M&A attorney is a seasoned specialist who searches out solutions that not only maximize value, but also assure
you of the successful completion of the transaction. Most importantly, a skilled M&A attorney can simultaneously deal
quickly and efficiently with minor issues while keeping everyone focused on resolving major issues.
"Majoring in the
minors" will usually drive everyone insane and more often results in reducing, instead of maximizing, value. Worse; that
kind of preoccupation can kill the deal!
Your M&A attorney should be involved at the very beginning of the selling process. He or she should definitely review
the Selling Memorandum before it is mailed, as well as be involved in the preliminary negotiations before signing the
Letter of Intent. The drafting of the final, bulletproof Letter of Intent should be the collective expertise of all five of your
Your Letter Of Intent
Itís now or never. Itís the bottom of the ninth and youíve got
to drive in the winning run.
The negotiations leading up to the Letter of Intent (LOI) and the terms and conditions set forth in the LOI are the most
critical stages in achieving Maximum Value. The LOI should address the price and all the other major terms. Although not
all of the terms are contained in your LOI, as a seller, you should not assume that the excluded terms can be used as
leverage points to increase the purchase price or to change other key terms during negotiations and preparation of the
final agreements. Sellers and business brokers who do not take the LOI seriously up front can later find themselves
struggling to get to the deal they wanted at the outset.
Even though an LOI may be non-binding, there is a good-faith obligation on both parties to consummate the transaction
as set forth in the LOI. Buyers do not look kindly on sellers who try to tweak the LOI. The buyer may terminate the deal
or may become confrontational and suspicious because the seller is no longer trusted.
The LOI should address major terms only. The parties must avoid protracted negotiations over minor issues. These will be
addressed in the preparation of the final agreements.
Remember that price is only one element. Other factors to weigh include payment terms, security,
employment/consulting agreements, lease terms, post-closing liability limits,
non-competitive clauses, purchase price allocation, and
allocation of deal costs. The terms of sale can be effectively
negotiated only if the discussions are undertaken with a thorough
understanding of the business, legal, tax, securities, and other
issues that impact the transaction. Please refer to the Letter of
Intent Brochure at for a detailed explanation of the LOI.
Negotiation Skills To Maximize Value
The sellerís involvement and my involvement in negotiations varies from deal to deal. In some transactions, I have
negotiated the entire deal, while other deals have been brought to me after clients have negotiated most of the major
terms (performing their own brain surgery).
But Beware: Performing your own brain surgery can be dangerous to your health. Having an experienced business
broker and M&A attorney at your side, thoroughly immersing themselves in the transaction, is essential to maximizing
your sales price and should always be to your advantage.
Negotiating skills are much more intricate than simply putting on a good show. The parties sitting across from you
didnít arrive there by being slouches. They are probably skilled negotiators so just
"putting on the Ritz" wonít accomplish much. Instead, expert negotiators operate from
a point of reference knowing what is the best resolution of each issue. This intuitive skill comes from prior M&A
experience and being armed with the facts and legal expertise to
support each proposal and each resolution.
For example, if a buyerís position is to make each selling shareholder
"jointly and severally" liable for any post-closing liabilities, the attorney needs to know the customary
resolution of this issue; i.e., who generally is liable and for what
amount, and be able to persuasively present the case for limited
liability. This is just one of many imbedded issues that requires prior legal experience and knowledge to help assure
you get the best result. This same frame of reference lets the M&A attorney and the business broker know when to press-to-yes, when to say no, when to gently back off issues, and which issues are salient to maximizing value and
successfully completing the transaction.
Negotiators should have an acute understanding of timing and protocol: when and how quickly to respond, whether to
respond verbally or in writing, when to meet or have phone conferences, when to address key terms or negotiating points,
and how to time communications and responses to heighten the interest of as many buyers as possible.
Other negotiating skills include knowing whom to meet, what information to provide each level of buyerís
management, how to present information clearly and concisely; how
to gain the trust of the buyer, and how to read and decipher negotiating techniques.
Additional subtle details in the negotiating process - where to meet, where to sit during a meeting, and knowing how to
read body language - can all make a difference in this high-stakes
Let me illustrate. This example is based on an actual
negotiating session in which I was representing the buyer. Eight
people sat around the table. There were four on our side and four on the sellerís side.
After hours of negotiation, my client, the buyer, offered an increased purchase price that was still $500,000 less than what
he was prepared to pay. A brief pause and some subtle but noticeable body language by the seller and the sellerís advisors
indicated to me, ever-so- briefly, that they agreed to our offer.
After this brief pause, the seller raised some additional
objections to the offer. Immediately, I requested a brief adjournment.
Away from the table, I explained to my clients that the brief pause, body language, and other factors suggested that we had
met, or were extremely close to meeting, the sellerís expectations. At that moment, I recommended that the buyer stand
firm (even though they were willing to up the ante another $500,000) and should actually ask for some concessions.
When we reconvened, it became readily apparent that my assessment was correct. Following some additional, but
unsuccessful, maneuvering by the seller for a higher price and
further negotiations, both the buyer and the seller left satisfied
with the deal. Not only did my client save $500,000 in the purchase
price, but he also benefited from additional seller con-cessions
worth several hundred thousand dollars.
Bottom Line: The seller lost almost $1 million because of the manner in which he and his advisors handled the
negotiations. Donít let this happen to you.
You, the seller, should meet with your business broker and M&A attorney before meeting with buyers or going into these
types of negotiating sessions. It is important that each party clearly understands its role and you know what to expect.
Sellers should also insist that their advisors be well armed with the necessary facts before entering negotiations.
The essence of negotiating is understanding and meeting the needs and desires of the buyer. The value of your business
increases with each additional benefit you bring to the buyer. Remember the mantra MP = MV (Maximum Preparation =
Many times the buyer hasnít done the necessary due diligence
to fully appreciate the value of your business. Before the negotiations begin, you and your advisors should learn as
much information as possible about the prospective buyer or buyers. That information can then be used to present a
convincing game plan to show how the buyer will benefit conceptually
and financially by acquiring your business.
Additionally, nurturing good relationships between buyer and seller and their respective advisors can enhance each
element of the negotiations. Discussions based on respect and integrity are not only more productive, but also more enjoy-able.
Good relations will benefit you during the transaction and will pay additional dividends as you work with the buyer
following the sale.
Other Value Factors
There are also several "nuance"-type factors that must be
thoroughly weighed as you step back and examine the big picture of selling your business. Here are eight key points to
help enhance the value of your business.
1. If possible, have audited financial statements available. Most business brokers concur that
audited statements will help increase your purchase price. If an audit is not possible, be certain your financial
information is accurately maintained and presented in a professional manner.
2. Getting paid is important! The highest price may not be the best offer. Many factors affect value, such
as security for future payments; method of payment, i.e. cash, stock, or property; contingent payments or
performance payments; and future participation in the buyerís business. These factors are described as
Security - Assurance that deferred payments will be made is essential. If the buyer is a newly
formed subsidiary, then the seller should go to the parent company for guarantees and security.
In some cases, highly leveraged transactions do not provide any security for deferred payments. If this
occurs, the seller needs to step back and carefully weigh this potential red herring to evaluate the real
value of the offer.
Stock Payments - Seller beware! If the buyerís stock is accepted as payment, it is usually done as
a "tax-free transaction." If you sell the stock soon after the sale, or if the transaction fails to meet the
requirements of a "tax-free transaction," your tax benefits disappear.
The defining question is this: Do you want to risk your entire lifeís work (sales proceeds) on a business
(the buyerís business) that you probably have little knowledge of and do not control? Receipt of stock
of an established company that is readily traded may have some merit. But, as a rule, sellers and sellersí
advisors need to carefully analyze any stock proposal. In a stock transaction, the selling price will usually
be higher because of the speculative value of the stock received versus the fixed value of a cash
payment or adequately secured note.
Contingent Payments and Performance Payments - Many sellers who have structured their sale
with performance payments have second thoughts and generally advise against it. Contingent payments
and performance payments are different sides of the same coin: each requires making a portion of the
purchase payment contingent upon future performance. Sometimes that performance is dependent on
numbers that the seller guarantees to justify the selling price. Sometimes it consists of revenue and/or
profit targets that will provide payments to the seller above and beyond the original purchase price.
When payments are based on future performance (as either a guarantee or an incentive), thorough
and careful analysis must be applied to assure that the seller gets the
"value" intended. This is a mushy area as there are many variables and financial considerations
to evaluate. They may also be difficult to account for or control. Future changes in operations
and management could have a major impact on how contingent payments or performance payments are
calculated and paid. Some other factors to consider include:
- Could your business merge immediately or perhaps
later with the buyerís business?
- Could product lines be discontinued, altered,
- Could the buyerís method of accounting for overhead
and other expenses differ significantly from yours?
Contingent or performance payments should not
automatically be excluded, but you must investigate them with great caution.
Future Participation in Buyerís Business - Sellers should not focus strictly on the value of their
"business" while overlooking their "individual"
value. Added value may be reaped from finding ways the seller can participate in the buyerís business.
The seller can negotiate significant financial incentives - on top of the purchase price
- to expand or otherwise contribute to the buyerís business after the sale. This is a lucrative opportunity
that is often not explored.
3. Listen to the market and execute precise timing. Sometimes sellers miss their best deal because it
is not the deal they want, only to settle later for a lower offer. If knowledgeable buyers have evaluated
your business and negotiations have resulted in final offers, itís likely these offers reflect the true value of
your business. If these potential buyers are not considered seriously, you may face a protracted
marketing process that only attracts lower offers later.
Or it may be best not to sell, and instead continue operating the business until market conditions turn
more favorable. Even if market conditions do not brighten, you will have gained the profit generated
during the additional time you own your business. If you hold pat, however, you continue to run the
inherent risk of operating a business in addition to gambling on maintaining or increasing its value
when you re-enter the market at a future date.
Unacceptable offers may indicate bad timing. As in most selling, timing plays a significant role
in obtaining Maximum Value. Before going to market, consider the general economic trends. Then consider your industry and related industry trends to
flesh out any potential buyers. Also, examine closely the most probable buyers and see if they are actively
engaged in acquisitions.
4. Provide solutions for the buyer. With an objective eye, search for any negatives or problems in
your business and be prepared to provide solutions for the buyer. Be sure to maintain balance in what
you disclose to the buyer and when you disclose it. As a rule, be candid with the buyer. But if you
present negatives, immediately have a ready supply of two or more solutions or positives.
Do not let the buyer leverage those negatives to beat you down until the purchase price is driven
into the ground. Remember the formula MP = MV and be ready to launch from all sides with your
solutions, emphasizing a positive and profitable long-term strategy.
5. Avoid post-closing liability. The sale is completed. The champagne is popping. Youíve taken a big fat
check to the bank (or it arrived there by wire transfer). Maximizing value means not giving back any
portion of that check to the buyer.
To insure that wonít happen, make sure all of the transaction documents are properly prepared and
completed. Attached to the primary purchase agreement will be disclosure schedules and/or numerous
exhibits. These allow the seller the chance to make disclosures and
"representations and warranties" relating to the business. The representations and
warranties, will address 25 to 35 different areas of the business.
Post-closing liability usually stems from improperly drafted representations and warranties and from
the sellerís failure to properly reveal items in the disclosure
schedules. The manner in which each of the representations and warranties is made must be
carefully addressed, as there are numerous legal and business issues to consider. The structure of the
representations and warranties will then dictate the nature and extent of the disclosures required.
Even though the buyer may be fully aware of any misrepresentation(s) or item(s) not disclosed, you
as the seller can still be liable for misrepresentations and failure to make proper disclosures. Buyerís
due diligence does not relieve or reduce the sellerís responsibility or liability. Please refer to the
A Business brochure for details on this most critical process.
Sellers should always negotiate for a "deductible" to offset future buyer claims. With a deductible, the
buyer cannot make claims against the seller until the aggregate of those claims exceeds a specified
deductible amount. When the claims do exceed that amount, the buyer should only be able to recover the
amount in excess of the deductible. Sellers should be on high alert that buyers will almost always want to
change the "deductible" concept and seek compensation for 100% of their losses if the buyerís claims
exceed the deductible.
For example, if total claims are $300,000 and the deductible is $250,000, the seller will want a provision
that allows the buyer to only recover $50,000. Of course the buyer will want a clause that seeks the
entire $300,000, since the amount of the deductible was exceeded. (Buyers often use the term
"basket" for this approach.) General rules of thumb govern
the amount set as a deductible and whether or not the "deductible" or
"basket" approach will prevail.
Establishing and maintaining a smooth working and mutually respectful relationship with the buyer is
the best way to avoid post-closing liability. It is simply amazing how many difficult issues can be fairly and
readily resolved if the parties have established a trusting relationship from the outset. And if the seller
continues as an employee or consultant of the buyer, the ongoing opportunity to work together can ensure that
minor issues do not become major hand grenades.
6. Unity of sellers. When the seller has numerous shareholders or owners, it is important that everyone
Even though each ownerís goals may vary to some degree, the buyer must not be allowed to manipulate
that to his advantage while negotiating the purchase price. Owners should have one
"point person" who communicates on their behalf. Each of the owners,
however, has the right to participate in seller discussions with counsel, to receive full and complete
information regarding the transaction, and seek their own legal counsel.
7. Protect your business during the selling process. Selling your business becomes a second career. For
most sellers that means finding more time in their current 60-hour week. The sales process can become
a major distraction from running and promoting your business. When this happens the business can suffer.
That can directly impact your value during the 3- to 12-month selling period needed to complete the trans-action.
If the transaction unravels at the end, you may have sacrificed not only part of your current value,
but also up to a yearís growth of your business. As difficult and time-consuming as it will be, stay
focused on what brought you to the dance floor.
DO NOT let your business slide by the wayside. The buyer needs the perception and the reality that
your business is heading north, not south. This much-needed upward momentum will make it easier
for the seller to prevail on many of the transaction issues right up to that joyous date of closing.
8. Gain more value by staying on the train. Often, a seller will retain an equity position in the buyer
following the sale. This occurs frequently with "financial" buyers who need current management
to continue to grow the business. That same management team may also be positioned prominently
to attract other synergistic companies. Even though your retained equity interest may only be 10% to
30% of the sales value, that ongoing interest could produce additional value that exceeds the initial
For example, a seller sells his business for $20 million and retains a 20% equity in the future growth of
the buyer. If the new owner is on an aggressive acquisition and growth path that leads to a much larger
company with increased value of $100 million, the seller will receive
another $20 million at the time the buyer elects to sell. In some cases, the sellerís retained
interest may generate added value through an IPO by the buyer and registration of sellerís interest.
Maximizing your value may mean more than just receiving the highest purchase price. A very significant human or
emotional element exists in most transactions that should be addressed. Value may be determined, in part, by how well the
seller fits into the company culture of the new owner. You must determine if working with the buyer will be a
rewarding and satisfying experience, or one of constant stress and
frustration. Ask yourself these questions up front in the
negotiations to make sure youíre making the correct decision.
Frequently sellers want to protect their employees. This can be a
highly charged issue. Therefore, the sellerís desires in this area should be direct and clear early in the negotiations.
Both of these cultural and employee issues can be evaluated in economic terms. You may want to seek a higher selling
price as compensation for a buyer work environment that you believe will be more strenuous. You may also want to
deal for a higher purchase price and pass on the increase to loyal employees who you know are going to be terminated.
Finally, have you emotionally disconnected from not having day-to-day control of your enterprise? And are you ready to
move on with the rest of your life? The answers to these
questions affect sellers at staggered times and with varying impacts. Sometimes the seller experiences a great sense of
relief and satisfaction. Other times, the entrepreneurial spirit
lives on and the seller struggles with letting go.
Like many major decisions, your feelings will run the gamut from
"Get me out of here as soon as possible!" to simply
"Why am I selling?" It is so crucial to determine at the outset whether
you are fully committed to selling your company.
But once you have made the decision to sell, seek the very best professional guidance you can find. You will learn that
excellent advisors can walk you smoothly through the process. That guidance will help you get Maximum Value and
successfully launch you.
Roger L. Neu, J.D., CPA
Cash InÖCash Out
Roger L. Neu
This brochure was prepared by the Law Offices of Roger L. Neu, Inc.
Mr. Neu specializes in privately held company mergers and acquisitions. With over 20 years of experience, Mr. Neu
has been involved in successfully completing mergers and acquisitions for over
150 privately held businesses. Mr. Neu was a CPA with Price Waterhouse, later attended Loyola Law
School, graduating with honors, and worked with a large Orange County law firm for four
years before establishing his law firm in 1982.
Law Offices of Roger L. Neu, Inc.
Specializing in Mergers and Acquisitions, Entity Reorganizations,
Business Contracts, Capital Formation and Business Tax Planning
2040 Main Street, 9th Floor | Irvine, CA 92614
Phone (949) 863-1700 | Fax (949) 863-1701