Key Synergies Strategic Buyers Seek Through Acquisition
When purchasing a business, buyers tend to fall into two categories, Strategic Buyers and Financial Buyers. Financial Buyers are made up mainly of investors, like private equity or venture capital firms. While Strategic Buyers tend to focus more on the synergies the potential acquisition can create. These synergies can fall into various areas and lead to increased revenues or costs savings that would otherwise not be realized as a single company.
According to the Corporate Finance Institute, below are just a few synergies that companies may benefit from:
COST SAVING SYNERGIES
Information Technology: The cost of purchasing existing software can be very expensive and doesn’t always provide the perfect solution for the business. However, developing a proprietary solution custom to the company’s needs can be even more costly and time consuming. For these reasons, technology is one of the key strategic synergy’s buyers look to acquire through another firm. Regardless of size or client base, if the target company has a great production system solution that would work well for their needs it can be very valuable to a strategic buyer. (more…)Read More
When is it Time to Sell Your Business?
As a business owner, there will often come a time when the decision is made to sell the business you have worked so hard to create. For owners that have had a predetermined exit strategy in place and have met the target goals they set for themselves, this can be the final step in what has been a successful venture. Other times the sale may be out of a desire to pursue more exciting or rewarding interests when the current business is no longer providing this result. While other reasons could be more negative and out of necessity to try to salvage what they can from a business that may be in trouble or in an industry that has evolved to a point where the product or service they provide is no longer relevant. This can be a very difficult decision for most however, regardless of the cause there comes a time when it is common for many owners to decide it is time to sell. Below are some common reasons behind the owner’s decision to sell their business.
1. Burned Out.
Just like any other career choice, business owners may reach a point where they have simply become burned out in running their business. Many owners are entrepreneurs that are driven by the initial steps of starting the business which can include searching for the perfect location, analyzing target demographics, and finding (more…)Read More
Maximizing the Value When Selling a Business
Many factors go into the valuation of a business. From industry type, to revenue and EBITDA totals, to longevity of the company. As a result, it can be an arduous process to get to the final number where both buyer and seller will be satisfied. Below are a few steps to consider that would help the cause:
1. Reduce Risk Through Semi Absentee Operation
Many businesses rely heavily on the owner’s skill set for their success and require full time hours from the owner to operate. Buyers may consider this situation more of buying a job than a business. Companies that do not need an owner to run the day to day operations will demand a higher price since they already have management in place.
2. Aligning the Financials
Consider having the financials completed by a professional CPA. This will clean up the statements and provide (more…)Read More
The Importance of Confidentiality When Selling a Business
One principal concern a business owner has when deciding to sell a business is confidentiality, and rightly so. Selling a business is a time-consuming process that can take months depending on the level of preparedness the owner has put into their exit strategy. During this process, it is important that the company maintains discretion when getting the message out to prospective buyers or going through initial due diligence. Word getting out prior to the sale can spark undesirable reactions not only from employees but also from clients, vendors, and competitors.
Once an employee finds out about a potential sale, the word can spread throughout the operation which can reduce workforce leading to the reduction in capacity. Employees will question their future which eventually triggers poor performance and early attrition. This could have a domino effect on the rest of the company and lead to poor quality and customer service. Not to mention a damaged company culture.
Word can also spread to clients who may begin to question why the business is for sale in the first place. For example, could the company (more…)Read More
Key Items to Include in a Letter of Intent when Buying or Selling a Business
One of the first significant steps in the route to buying or selling a business is the signing of the Letter of Intent (LOI). The purpose of the LOI is to express certain understandings and agreements between the buyer and seller of the prospective business and can be viewed as the first step in formalizing the negotiation process. The LOI is non-binding contract between the buyer and seller but may include some binding provisions such as an exclusivity period and confidentiality provisions. This document represents the end of preliminary due diligence and the beginning of the formal due diligence process where the buyer and seller will determine whether this company is the right fit.
While the letter of intent should be detailed enough to ensure that the main material issues are brought to light and potentially negotiated early on, it is also important to understand that more detailed discovery’s will happen during the formal due diligence process. During the formal due diligence process additional issues may surface that were previously not outlined in the LOI and may need to be negotiated prior to the final purchase agreement. Generally speaking, the more that is covered in the LOI the smoother the process will tend to go.
It is common that the LOI will be prepared by the buyer’s attorney and presented to the seller’s Business Broker or M&A Advisor. While it is the M&A Advisors role is to manage the negotiations of the purchase price and deal terms of the agreement, it is strongly recommended that the seller engages a transaction attorney to review and approve the agreement prior to execution as the LOI will set the tone for transaction going forward.
While information will vary depending on the business, some specific items to include in the LOI are:
This section should outline the price offered based on the perceived value of the company, often determined by a multiple of EBITDA as well as many other factors that are specific to the business. Some LOI’s will include an explanation of the assumptions that were used to come to the purchase price. This amount could vary by the time the actual Purchase Agreement is signed and could be subject to change based on various findings during the formal due diligence process. Therefore, including an explanation of the method used could help with any potential adjustments if required. One option to reduce the likelihood of a buyer reducing their purchase price later in the process is to provide additional preliminary due diligence information prior to buyer prior executing an LOI. We have found this especially useful when receiving offers from multiple buyers.
Transaction or Deal Structure
The transaction structure outlines the deal and will determine how the sale of the company will occur as well as cover debt terms and forms of payment. The deal structure can become a (more…)Read More