EXIT STRATEGIES: The acquisition process – business brokers

To be successful at closing a sale of the firm, you have to know how the various buyers will approach the acquisition. There is a range of potential buyers: individuals, trust funds, private equity firms, superannuation funds and private and public corporations.

Each of these will have their own preferred process and specific objectives. Some will undertake the investigation and negotiation themselves while most will work through professional advisors.

Usually, small acquirers and individuals seeking to buy a small firm will work with a business broker. Larger acquisitions and larger buyers will typically involve the merger and acquisition services (M&A) of an accounting or legal practice or the use of a boutique investment bank or corporate advisory firm.

All business brokers typically approach the sale of a business in a similar manner. Since they often act for both buyers and sellers, the process they use for one is simply the mirror of the other. More sophisticated buyers, such as investment funds, private equity funds and corporations will normally have internal M&A departments which have systematic processes for evaluating and executing the acquisition. Understanding how these entities go about their processes can provide a very useful insight into how you should position your firm and the key criteria you have to meet to be seriously considered.

Business brokers typically sell businesses which have a value of $3 million or less. Larger deals will typically go to established corporate finance houses or investment banks or the corporate finance divisions of large professional accounting or legal firms. Larger businesses tend to be more complex to prepare for sale, require a larger due diligence activity and often involve overseas buyers.

The contracts tend to be longer and more complex and often several experts are involved to assess specialised aspects of the seller’s business.

Business brokers

Business broking has its roots in the real estate market. Thus brokers might one day be selling a commercial property and the next a small business. Their approach to one is not dissimilar to the other. They work with the vendor to prepare a description of the business, advertise the business for sale, deal with enquiries and then help the parties with the necessary formalities of transferring ownership. Few of them understand how to develop a business for sale or how to price a business which has growth potential. Since they work mostly on commission, their motivation is to proceed to a sale as quickly as possible.

The process normally includes a selling memorandum, basically an information pack about the company with sufficient detail to enable a prospective buyer to assess its worth and potential. Interested parties indicate an expression of interest followed by a letter of intent. The potential buyers would then conduct due diligence on the business. Finally, a deal would be negotiated and a sale and purchase agreement signed by both parties.

More sophisticated broking firms are prepared to work with the vendor to structure the business for sale. These firms often act as business advisors to assist the business to prepare itself for sale. This type of work would normally be undertaken on a consulting basis.

Some broking firms specialise in a specific industry and are more likely to have knowledgeable potential buyers on their books. Also experience within an industry can be very useful as it can provide the vendor with very useful tips on how to clean up the business before the sale. Such brokers are also likely to have a database of both buyers and sellers within an industry and can use their contacts with both to seek out potential buyers. For example, if they have just sold a comparable business they may have a list of potential buyers which were not successful with that deal but would consider looking at another opportunity.

Alternatively, they may have a register of frequent buyers who will seriously consider any selling firm which meets their investment criteria.

By taking these steps, you can not only increase the perception of value to your buyer, but also convert into cash and improved figures, many items which would otherwise be handed over at “no value” to the buyer on settlement.

Tidy up your stock. Sell off obsolete, or slow moving stock items. This will improve both your sales and your gross profit. Your buyer will be impressed that you are not holding any unsaleable stock. And it will eliminate any possible arguments over the valuation of such stock during the sale.

Tidy up your plant and equipment. Make your workplace into an efficient working environment. Add a little paint here and there to make things look well maintained.

Ensure that you eliminate oil leaks. Anticipate health deptartment requirements, and sell off and convert into cash any scrap, redundant or obsolete machinery and parts that are cluttering up the place.

Tidy up your staff. Where possible, get your staff to take up their leave and other entitlements prior to sale. Get them to wear uniforms, and make sure they wear safety gear when required.

Tidy up your premises. Have a look around with the eyes of a prospective purchaser. What would it look like to a critical new observer? The condition of your premises can say a lot about your profitability.

Tidy up your debtors. An area of great concern to a prospective purchaser is the state of your debtors. Based on your figures, the buyer will have to do his cashflow and working capital forecasting to justify the purchase, and may be very nervous about taking on customers who look as though they take forever to pay their accounts. Now is a good time to bring them into line.

Tidy up your creditors and even take those early-settlement discounts. This will create a positive impression of the inherent strength of your business.

Tidy up your balance sheet. It would also help if you could remove from your balance sheet any items which are unrelated to the business being sold, and include, possibly through an asset revaluation reserve or similar, any assets which are not currently listed at their proper value.

Source: https://www.lloydsbus.com.au/bestprice.html Accessed Sept. 2005

Brokers often provide check lists to their clients to assist them to prepare their businesses for sale. This type of checklist is a useful guide to elements of your business which you should be examining as part of the sale process.

Choosing a broker to assist you is not that easy. There are numerous to choose from and their methods can differ markedly. Some advertise in “Business for Sale” magazines, others in the financial newspapers, some have extensive websites and others have extensive databases of prospective buyers. You need to undertake your own due diligence on the broker.

• Do they have experience with your industry?
• Are they willing to provide references of similar sized businesses they have sold?
• Can they provide you with references to both buyers and sellers in the same deals?
• Do they have staff with commercial experience in your industry?
• How long have they been in business and how many businesses of your size have they successfully sold or purchased?
• Are they able to provide you with access to creditable legal and accounting professional services firms to assist you if you need that help?
• Do they have national, international or regional coverage? What do you need?
• How do their fees compare to other Brokers?
• Are they competent to offer business advisory services?

You might shortlist brokers and have them provide you with a proposal for selling your business. Conduct reference checks and decide for yourself whether you feel you can work with them. Make sure they are able to up sell a business with growth potential – don’t be talked out of growth potential as part of the sales value. If they are not convinced of the case, find another broker who has experience selling more than real estate.

Most business brokers would be well out of their depth selling a small business to a large corporation. If you believe your most obvious buyer is a large corporation and the anticipated sale price can justify a more sophisticated and knowledgeable advisor, you will be much better off working with a large professional services firm.

A deal which involves very significant strategic value where the expected sale price bears little relationship to the current financial performance of the vendor is unlikely to involve a business broker as few would have the knowledge and experience even to suggest this as a possible outcome.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.