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Tips for selling your business to the so-called vultures
Published By: National Post
Date: Thursday, November 16, 2006
By: Carrie Tait
Email: catait@nationalpost.com
For private business owners, the idea of a
private-equity outfit knocking on your door can be an
unsettling experience. After all, private-equity types are
often labeled as vultures and depicted as hard-nosed,
money-hungry investors wearing mean-looking black suits. Yes,
private-equity investors are savvy, sophisticated investors
who know their way around a balance sheet. To make the process
of selling a private business as pleasant -- and safe -- as
possible, private business owners need to know what to expect
and how to navigate through a deal process. The Financial Post
surveyed a slate of experts, asking them about how private
business owners should prep themselves when the so-called
vultures come knocking.
Get ready
Being ready to show off your business to
potential buyers doesn't mean sweeping the shop floor hours
before potential buyers arrive. It means getting ready three
to five years in advance, says Jason Sparaga, president of
Spara Capital Partners Inc.
"Prepare, prepare, prepare for the transaction and the
process," he says.
This means looking at the tax ramifications, upgrading your
financial reporting in preparation for proper due diligence
and perhaps even going through a proper audit. When potential
buyers dig into the books, they must be in order or the buyer
will walk away.
"A lot of deals fall apart after the letter of intent
because due diligence doesn't hold up," he says.
The process
With the books in order and the timing right,
the actual process can begin. Be patient: "These things
can take months, even years," Mr. Sparaga said.
First, enlist help. Many private business owners enlist
specialists for guidance through the process. In some cases,
this could be a broker -- someone who helps find an
appropriate buyer.
"You may not have the contacts necessary to tap into
private-equity buyers," said Randall Pratt, a partner at
Osler, Hoskin & Harcourt LLP.
Some advisors do more than serve as brokers. Intermediaries
or mergers-and-acquisition advisors, for example, tend to be
more involved in the process and are able to provide more
advice.
Vendors also need to have price expectations in line with
what the market is willing to pay. Again, advisors can help.
After finding an advisor, vendors need to find a buyer.
"In terms of pitching yourself, you need to pitch to
the funds that will be interested in a transaction of your
size," Mr. Pratt said.
There are hundreds of private-equity funds and there's no
point in calling Henry Kravis of Kohlberg Kravis Roberts &
Co. fame if your business is nowhere near his stratosphere of
interest.
As part of the pitch, you'll need a narrative description
of your business, including the future opportunities that your
business holds. A "teaser" of your financial
information is also necessary, Mr. Pratt said.
The financial teaser will help potential buyers decide if
they want to do further due diligence -- the point where
things start to get serious.
Potential buyers who present serious interest and terms
that suit you now need to see inside a data room where they
can comb through the books. Interviews with management will
also be in order.
Brokers and intermediaries Beware.
While you may need an advisor, there are pitfalls here, too.
There have been cases where brokers have taken advantage of
unsophisticated business owners, charging expensive fees.
This can make getting a transaction done difficult because
too much of the value is going to the broker and the
private-equity player is not prepared to pay the price for the
business and then pay the broker on top of it.
While experts still say brokers and intermediaries should
be involved, there are other ways to gain knowledge about how
to do a deal. For example, vendors might be able to pick up
tips and make contacts at groups such as the Young Presidents'
Organization and the Association for Corporate Growth, Mr.
Pratt said.
Management and succession
If you aren't planning on
sticking around after you sell your business, make sure
there's someone around who knows how to run your shop. Because
private-equity firms rarely run the businesses they own
themselves, they will want to know that they are leaving it in
good hands.
"The financial buyer puts a lot of weight into people
they are investing in," said Howard Johnson, president of
Veracap Corporate Finance Ltd., which works as an advisor on
behalf of sellers.
If the owner of the business is the one who has been the
primary force behind the company, the buyers will want to see
if there are any members of the management team who can grow
into the chief executive role.
According to Mr. Pratt, private-equity firms have one
question here: "Do we have the confidence these people
can do the job?"
Auctions
On the surface, having different private-equity
buyers battle over your company sounds like a great idea.
Auctions can indeed generate a higher price for your company,
but there are dangers lurking here, too.
"Depending on how big the business is and the size of
the prize, being involved in an auction process is expensive
for a private-equity buyer," Mr. Pratt said. "If it
doesn't look like a good enough opportunity and indications
show there are already a bunch of participants in the auction,
they may just decide to take a pass and not become
involved."
As a result, you might be shutting out a firm that would be
a good buyer for your company.
That's why sellers need to be cautious when an auction
situation emerges.
"It's a bit of a double-edged sword," Mr. Pratt
said.
Pick your buyer carefully
It seems obvious: Pick the buyer
who offers the best price. But again, this can be troublesome.
Don't be too quick to shun lower preliminary offers early
in the process.
"Some buyers have a better reputation for actually
closing deals," Mr. Pratt said. Your advisor should help
differentiate between private-equity firms that are better at
sticking around to the end of the buying process.
Sellers may also have moral and sentimental concerns that
need to be addressed. Which buyer will be best for the
community you live in and the people you employ?
Again, different buyers have different reputations -- and
intentions -- for what happens after the business is in their
hands.
"Finding the right partner is key -- and the right
buyer is not always the one with the biggest cheque," Mr.
Johnson said.
If you retain an interest in your company, picking the
right buyer becomes even more important. Private-equity firms
are always looking at how they will make money in the future,
and that often means pushing companies in their portfolio out
on to the public markets. Mr. Johnson notes that a private
business owner can make just as much money on the second
transaction as on the first, even when left owning a sliver of
the company.
Timing
It's always hard for entrepreneurs to know when to
sell their businesses. The prospects might be better tomorrow.
Five more years of growth might fetch an even higher price.
But liquidity in the market is key. Right now,
private-equity firms around the world are awash in cash and
raising even more money by the minute.
Now might be an ideal time.
"It's a sellers' market now," Mr. Sparaga said.
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