First in the Series
“How It Really Works: Sale of Founder-Owned Private Company”
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.