Spring 2006 issue of Horizons

THE LIFE CYCLE OF YOUR BUSINESS

Selling Your Business continued

Preparing for the Sale

difficult to determine. A business' real value is market driven. It can be widely different from what a “classic mid-level” val- uation would predict. Accordingly, it is best to consult an expert when determining the financial value of your compa- ny. (See article: “Valuation and Succession Planning”) Generally buyers will talk about pricing “rules of thumb,” either as a multiple of annual earnings or as a percentage of annual sales. The amounts vary greatly depending on niche. In an aggressive industry segment, where acquisition activity is high, such pricing might climb to 8-10 times earnings. In a segment that appears to be strained, or where the future looks grim, such multiples could drop to 3-4. Also, in some segments, bottom line earnings are less important than gross sales volume. In those instances, gross sale volume will be the driving force in establishing the “rules of thumb.” As you try to analyze your own industry, keep in mind that various buyers may not consistently apply the “rules of thumb.” Some buyers talk of multiples on net earnings, after tax. Others talk of pretax earnings before interest and tax (EBIT), or even earnings before interest, taxes and depreciation allowance (EBITDA). Almost all sellers think they know which handful of compa- nies will pay the most to purchase their business. However, the best buyers are seldom the most obvious. Buyers should be considered from every possible angle. In many instances, the best buyers do not come from horizontal companies (those in the same business as the seller) or vertical compa- nies (suppliers or customers). Buyers come from all types of companies that want access to your customers. They include foreign buyers, conglomerates, emerging roll-ups, venture capital firms and joint venture combinations. Without careful study of the prospective buyer markets, owners invariably leave significant amounts of money on the table. It can be well worth the cost and time to hire help to thoroughly ana- lyze the markets, your business and potential purchasers. Even after getting good information on perceived values, it is still prudent to set the price for buyers. The most successful path to maximizing pricing is the “limited auction.” In this process, prospective buyers set their own price. The buyer should be made aware that there will be competition and that the price should be set as aggressively as the buyers see fit.

Avoid “stop-shop” agreements wherever possible. A seller can lose tremendous power the moment it agrees not to talk to any other potential buyers. A seller should not make a commitment until it has been determined that the buyer is capable and committed. Sellers can refuse to enter into a stop-shop agreement until the buyer has a nonrefundable deposit on the line. Usually this deposit is not entirely nonre- fundable, but it would take a major fraud, misrepresentation, or non-truth to derail the transaction. If the buyer needs to do general industry research or look more carefully at financial information to decide about going forward, the seller should encourage this action in advance of entering into the stop- shop agreement. Before you enter into a one-buyer commitment, it also is important to ensure that all key elements of the deal have been agreed to, at least in principle. For example, clarify pre- cisely what is to be purchased. Does the price entitle the buyer to all assets? What about cash? Is the buyer assuming all liabilities too? What transitionary time from the owner or post-closing employment requirements will be required to complete the deal? What will the seller want for key repre- sentations and warranties? Will they seek indemnifications on some matters post-closing? These are sensitive and diffi- cult issues, but the seller has maximum bargaining power to deal with these issues before entering into a stop-shop.

Starting

Business Life cycle

Growing

Selling

Questions? Contact John Price, Partner Tax Consulting Services Group 314-290-3314 john.price@rubinbrown.com

23 • spring 2006 issue