How Does It Really Work? The Sale of a Founder-Owned Private Company
First in the Series
The focus here is on middle market businesses (under $100 million in revenue) owned by the founder, family and management, rather than a sale by a corporate parent or a private equity investor
What do business owners wish they knew before starting the sale process?
No matter what, the deal won’t go the way you think it will.
Allowing specifics to be worked out later (after letter of intent/term sheet) is a bad idea.
Management distraction leads to missed forecasts and then the buyer drops the price.
How does the sale process start?
You are approached by a large strategic buyer which should pay more than equity players.
A private equity firm entices you to get cash now and a lot more later.
If it is your idea to sell, your board or CFO or lawyer begin to suggest how to proceed.
Why are there so many surprises?
You probably won’t be realistic about potential problems until it is unavoidable.
Only real nitty gritty due diligence by the buyer uncovers the unexpected.
Even if you have sold a business before, values, processes and taxes have changed.
Why do some people seem to do so much better than others?
They know exactly what they want and clearly lay that out to bidders.
They disclose potential deal killers up front to buyers and offer realistic solutions.
They understand deal dynamics and then all the stars become aligned for their deal.
What determines price?
Your company’s strategic contribution to the buyer’s business.
Deal structure and buyer’s profile govern financing limitations for the prospect.
The buyer knows that you have another prospect ready to take its place.
How do buyers decide what to offer?
They ask what you expect and gauge how much competing buyers will offer.
If you don’t tell them what you want, they will rely on conservative analysis.
If you allow them to confirm your earnings growth or cost savings, they will stretch.
What should the founder-owner know about the agreement of sale?
It will be much more detailed and complex than you think is needed.
The term sheet is the roadmap, so make it comprehensive.
It is best to thoroughly read the contract and exhibits of a relevant deal before you start.
Why can’t the Founder-Owner get a clean break at closing (or take the money and run)?
Because the post-closing price adjustments have serious consequences.
Representations and warranties insurance has limitations and exceptions.
Private equity buyers nearly always have a roll-over investment requirement.
How does a Founder-Owner know whether a deal is fair?
Your deal can be compared to others that are most relevant.
A well-orchestrated process produces an accurate reflection of the market.
Experienced advisors will have informed opinions that you can rely upon.
What other topics will the MidMarket Q&A Series include?
Details and nuances on company valuation and deal structuring.
Negotiation of acquisition agreements and debt and equity agreements.