On the block Featured

9:47am EDT July 22, 2002

Where have been lots of other golden periods in this century to sell a company, but perhaps there’s never been a better time to do it than the last few years.

No less an authority than Mark Fillippel, head of mergers & acquisitions for McDonald & Co., recently called the current period “the best M&A market of the century,” and a “great sellers’ market.”

With so much capital chasing after so few remaining prime properties, a lot of business owners who once might never have considered selling at lower earnings multiples are now at least keeping an open mind about the possibility of cashing out. But how should they prepare their companies for the auction block?

Investment banker/business broker Nick Merkle, of Woodmere-based Falls River Group, which this year has brokered the sale of three companies with combined revenues of about $60 million, offers what he calls 10 timeless tips on preparing your company for a sale. Why timeless?

“I look back at what I said 13 years ago [when he got started in the field], and nothing’s really changed,” he says.

His pointers include:

Continue to operate the company as though you were not going to sell it.

It’s an age-old mistake: A business owner puts his company on the auction block, then gets so caught up in that process that he neglects to run the company as tightly as he once did.

The problem arises if the process takes longer than expected, as it often does. A first wave of buyers can easily fail to materialize, and since you’ve let the business slip, it might well be worth considerably less to a later group of bidders.

Besides, says Merkle, “you don’t want to unduly distract your employees by bringing people around for constant tours.” So just stick to your knitting during the sale process and pretend that nothing has changed. Or it will, for the worse.

Be able to give specific, logical reasons for selling.

It’s well-known in the investment-banking field that a lot of owners merely pretend to be interested in selling. Instead, they’re really just fishing for a free valuation or testing the waters for a possible sale years down the road, or appeasing their egos by seeing if their company might fetch as much as their buddy’s did.

“A lot of people claim they’re for sale, and they’re not. Selling a company is a lifestyle decision, not an economic one, because after taxes, they may not have much left,” says Merkle. Buyers, coached by their brokers, are generally skeptical of “sellers.” You can help allay those suspicions by preparing some solid reasons for selling.

Be prepared to note the pros and cons of owning a business.

Similarly, a balanced appraisal from a reputable source will boost your credibility with a potential buyer.

Clean up the premises.

This one’s pretty self-explanatory. As Merkle puts it: “Nobody likes to buy a dump.”

Clean up the books.

Before you hang the “for sale” sign, it would behoove you to go after past-due receivables, settle outstanding loans to officers, sell off old inventory, trim payroll, etc. While investment bankers report seeing fewer obvious no-nos than they once did, like ghost employees, most privately held companies still have their share of financial skeletons in the closet that would raise eyebrows for outsiders.

“You want to have a fairly simple transaction, so getting rid of all these things up front makes it easier” to do a deal, he says.

Purchase minority interests.

Not unlike the previous item, this suggestion goes to the heart of the deal’s simplicity. Buyers want to bargain with one seller, and they typically recoil at the notion of dissenting shareholders.

That makes the deal higher risk and less likely to close. You can shortcut all those headaches by settling up with old partners before you shop the company.

Eliminate related-party transactions.

One of the prime variables in setting the purchase price of a company is the degree to which the cash flow is directly transferable to a new owner. If the previous owner has been playing Let’s Make a Deal with all of his friends and family members for years, it’s bound to depress the price his enterprise would command from an outside buyer.

“If you’re giving special deals to your buddies or getting deals from your buddies, the new buyer may not get them. So they want to be assured that they’re doing business at arm’s length,” says Merkle.

Make a detailed list of all tangible assets to be sold and a list of those to be retained.

The process of selling a business is not unlike selling a home, insofar as buyers and sellers can differ greatly on who gets the curtain rods.

“Very often, the seller’s perception of what he’s selling and what the buyer’s buying are two very different things,” says Merkle. “Often, a seller has different lines [of business], and they might plan on retaining some of those.” So put it all on paper for everyone to see in black and white.

Given the time, report true earnings for at least one full fiscal year, not the profit you may have engineered to minimize taxes.

Only naïve fools and Boy Scouts would be surprised by some of the creative accounting that privately held companies engage in. But when it comes time to sell, it’s in your interest to have kept your sleight-of-hand to a minimum, at least over the prior 12 months.

“To the extent you can have your accountant show clean figures, that’s a big plus” to a potential buyer, says Merkle.

While most private companies, for instance, simply expense capital purchases rather than amortizing them over many years (as the tax code allows and larger companies typically would do), as long as you’ve been fairly consistent in your accounting, there shouldn’t be too much of a problem.

In the end, he says, when it comes time to talk price, “it’s to a seller’s benefit to show the largest profit over the last year, rather than saving a few bucks on taxes.”

Hire a professional merger and acquisition intermediary to help you. You will recapture the expense many times over.

Okay, so this one’s a little self-serving on Merkle’s part, but we decided to let him have it, partly on the theory that 10 tips sounds a lot catchier than nine.

John Ettorre (jettorre@sbnnet.com) is a contributing editor at SBN.