Identifying the intrinsic value of your company is an extraordinarily beneficial exercise, especially when business owners are looking to maximize the sale of their company, says Joshua Geffon, a shareholder at Stradling Yocca Carlson & Rauth.
“The crown jewel of an enterprise may be intellectual property (IP), the management team, key customers or brand recognition, and/or any combination of these ingredients. The key for an entrepreneur is to recognize, exploit and promote these attributes to gain maximum value for the enterprise during the acquisition process,” Geffon says.
Smart Business spoke with Geffon about what business owners should know before engaging in the acquisition process.
What are some mistakes owners make that jeopardize the sale of their companies?
A fairly common mistake is not doing enough to secure the company’s IP. Confidentiality and IP assignment agreements, patent filings and related IP protection should be in place to have clear and strong IP ownership and title.
Broad indemnification by the seller on contracts creates risk that buyers of companies don’t like. Material contracts that allow customers, suppliers, service providers or other partners to easily terminate can significantly undermine a seller’s value proposition.
Also, tax and planning is critical. Overlooking tax-related filings often leads to significant turmoil and financial hardship. Inversely, proactive corporate and personal tax planning for founders and executives also can create real economic benefits.
What’s important to have in order before initiating the acquisition process?
Be sure you are prepared to provide copies of well-organized and complete corporate, capitalization and financial records, as well as material contracts, as part of a due diligence review by the buyer. Being well organized on these matters ahead of time will buy a lot of credibility with the buyer. Messy or inaccurate records will cast doubt on the value of your company.
What legal pitfalls often trip up the sale?
Buyers are always concerned about risk. Risk comes from inside your company in the form of personnel — employees, consultants and others — and outside from lawsuits, warranty and return claims, supplier terminations and limits on business operations.
Employees are often the company’s greatest asset and typically a company’s largest expense. Sellers usually engage in pre-emptive measures to entice employees to stay by offering equity, cash and other incentives that require personnel to work as diligently for the buyer as they did prior to the transaction.
Your company’s value proposition may be significantly weakened, and deals have died, if buyers identify agreements that limit rights to develop, manufacture, assemble, distribute, market or sell products.
How do you determine a realistic price?
Depending on the stage of your business and the industry, there are a few methodologies available. The most common are discounted cash flows and price to sales, but this relies upon a history of revenues and costs and/or sales. Early stage companies have a harder time utilizing these valuation methods.
When traditional valuation models are inapplicable, recent transactions in the sector or the valuation of similar public companies can be used. Gauging your value proposition with board members, advisers and strategic partners can help you solidify an approximate value.
Remember that buyers are valuing your business on your financial statements, projections, business plan and opportunities in your industry, along with synergistic opportunities with the buyer.
Who should help a business owner in a sale?
Secure competent, experienced service providers. These people will help you get a better sense of the market, your company’s value and your risk exposures. Get them involved well before the sale to ensure the process runs as efficiently as possible.
A good merger and acquisitions attorney will lead you through the process, identify and mitigate risks, and explore potential resolutions to issues ahead of the transaction. An independent accountant who can review and audit your financial statements also may be needed.
Joshua Geffon is a shareholder at Stradling Yocca Carlson & Rauth. Reach him at (424) 214-7000 or firstname.lastname@example.org.
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Many of us have heard the saying, “By failing to prepare, you are preparing to fail.” While most business owners meticulously plan the ongoing management of their organization, far fewer prepare for a successful sale. If the sale of the company is a part of your exit plan, it quite literally pays to be prepared.
With merger and acquisition activity heating up, Smart Business sat down with Kevin Strain, Audit Partner at Sensiba San Filippo LLP to discuss what specifically businesses can do to ensure they are ready.
Why is it critical that businesses be prepared for an acquisition?
The current climate for acquisitions makes it more likely than ever that you’ll find yourself talking to a potential buyer. Acquisition activity has been ramping up since 2010, and is only expected to increase. Low interest rates and resurgent equity markets have left corporations flush with cash, and looking for opportunities.
Yet even in the current environment, the majority of deals still fail. More than 85 percent of prospective deals are never completed. Suitors come calling, but the process breaks down prior to execution, often because sellers are unprepared.
What is the first step a company should take to prepare?
It is critical to identify and document the areas that drive organizational value. Every organization is different, and what makes you an attractive candidate for an acquisition depends on the nature of your business. Some acquisitions are technology buys, driven by intellectual property. Others are organizational or revenue buys, driven by the desire to add personnel or future earnings.
Regardless of what drives the marketability of your company, it is important to recognize the value drivers and document them. For example, if you hold technology patents, it’s essential that these are defended and documented.
What financial preparations should be made?
A detailed examination of financial records and projections should be expected during the negotiation process. If you haven’t had an audit completed recently, that should be the first step. If you have been through an audit, you need to be ready to provide the same information on relatively short notice. Make sure to keep the information that your auditors ask for current.
The focus of the financial review may also be driven by the type of acquisition. If a suitor is seeking to buy a future revenue stream, you need to be sure your projections are tight and defensible.
What pitfalls can derail the sale of a business?
Areas of potential risk can provide bargaining power to a buyer or stop the process in its tracks. Whether it’s an uncertain tax position, legal exposure or patent dispute, exposure can damage or kill a deal. Ideally, you’d like to resolve these issues. But if that’s not possible, put them on the table as soon as possible. It’s best for buyers to know where you stand sooner rather than later so the investment in the process is not wasted.
What else should business owners keep in mind?
Understand your own expectations and limits. You don’t want to be deciding where you are willing to bend during negotiations. That will weaken your ability to negotiate the best deal. Are you comfortable with an earn-out? How much guaranteed cash do you need? Are you willing to indemnify the buyer against any contingent liabilities?
Finally, it’s wise to find an experienced adviser to help you navigate through the process. The majority of business owners only sell a business once, so it’s important to get it right the first time.
Kevin Strain is an audit partner at Sensiba San Filippo LLP. Reach him at (650) 358-9000 or email@example.com.
Blog: Visit www.ssfllp.com/blog for more insights on merger and acquisition best practices.
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