When Kathy Knight decided to call it quits after nearly 30 years doing market research for large corporations, she had no idea how agonizing the process would be. As owner of BAIGlobal in Tarrytown, N.Y., Knight, 57, couldn't just pack up her office and start collecting pension checks. She had to sell her business first. After six months of bad counsel from ill-informed advisers, she finally hired a mergers-and-acquisitions specialist. He engineered the sale of BAIGlobal last July to a large, publicly held market research firm, Market Facts, for $11 million.
Knight is one of thousands whose business changed hands last year. J.P. Morgan Securities estimates that a record $110 billion in U.S. private company sales were announced in 1997, up 42% from $80 billion in 1996. A booming stock market has pumped up company valuations and prompted owners to sell. Also contributing are the strong economy, low financing costs, a cut in the capital gains tax to 20%, and consolidation pressures. Fortunately for all those aging entrepreneurs ready to retire, many professionals are searching for new business opportunities.
RIGHT ADVISER. But you don't just stand in front of your office or factory with a "for sale" sign to get a deal done. As Knight quickly learned, the first thing you need to do is to pick the right adviser. A good one, for example, can help you decide whether your company should remain independent, be merged, or liquidated. That, in turn, will dictate to whom you sell--insiders, another company, investors, or the public.
In addition to guiding you, a professional adviser can help negotiate the deal--a task most entrepreneurs aren't trained to do. "People think they can negotiate alone, but it's hard, and often a mistake," says Bob Weisman, vice-president for operations at Hillside (N.J.)-based May Tag & Label, a maker of adhesive computer labels. Because of growing competition, he sold out in October to Fortune Brands with the aid of DAK Corp., a Rochelle Park (N.J.) firm that helps sell businesses.
The type of adviser you hire depends on the size and nature of your enterprise. Smaller deals--say, under $5 million--can be handled by business brokers. They act as listing services, broadly advertising your company for sale. They forward bids, but typically don't do any hand-holding. A business broker would be the best choice if you owned a deli or a dry cleaning store. Brokers generally charge 3% of the sale price, but the fee can go as high as 10%.
Deals involving closely held, midsize companies get trickier. Transactions ranging from $5 million to $200 million are often handled by regional investment or commercial banks, attorneys, or accounting firms. Independent M&A specialists may also play a role, serving as consultants and even investing in the company for sale.
Middle-market sellers can even go to a big investment bank. But since experienced bankers tend to focus on transactions above $200 million, you'll likely deal with a less-seasoned associate. "Make sure the adviser you hire has done transactions in your field and your size," says Robert Paglia, a partner with Coopers & Lybrand.
As a rule, middle-market advisers charge about 2.5% of the sale proceeds, payable at the deal's close. Usually, the seller must pay an upfront fee of up to $50,000 that gets credited against closing costs. You must also face a monthly retainer fee of $5,000 to $10,000, which goes toward closing costs as well.
Ask your most trusted business confidant for referrals to advisers. Once you have prospects, ask for names and numbers of their last three clients. Call them and discuss how satisfied they were. When you've made your choice, be prepared for a thorough going-over.
Most advisers go through a similar process. First they help assess what the company is worth. Most often, a middle-market company will sell for a multiple of operating cash flow, as measured by earnings before interest, taxes, depreciation, and amortization. John Jellinek, owner of Jelco Ventures, a Chicago-based private equity investor, estimates that middle-market private companies with niche businesses sell for five to seven times operating cash flow. Larger companies command higher multiples because they have stronger market positions and greater management depth.
After the valuation comes an intensive marketing period. Your adviser should create a glossy book to be distributed to potential buyers, describing your company in detail. It should feature management details, at least three years of financial statements, and other confidential information such as customer and supplier lists. If the book lures prospects, a due diligence process ensues. Not only will a potential buyer want to know more about your company, you will have to start gathering data on the buyer's financial standing.
If you don't want it widely known in your industry that your business is for sale, it's best to do a "quiet deal." This "is a very targeted in-depth search using databases and personally telephoning a select number of potential buyers to pitch the company," says Jeffrey Schneiders, a managing director at Mesirow Financial, a Chicago-based investment bank.
If you're not so concerned with keeping your plans quiet, you may want to consider a campaign targeting thousands of potential buyers via direct mail. Wellesley (Mass.)-based New England Business Exchange, the M&A specialist that sold Knight's business, sends out up to 10,000 letters to investors and CFOs in related industries, among others, describing the company for sale in generic terms. A mailing typically gets 50 to 250 responses. After interested parties sign a confidentiality agreement and send a preliminary letter, marketing books get sent out. Ultimately, five or so prospects end up bidding against one another. "This auction process will get you a higher price than a quiet deal," says Stephen Madden, president of the New England Business Exchange. Since it will also likely turn up rivals as buyers, it may not be best for companies with patents, trade secrets, and other confidential information to protect.
TAX-FREE SALE. In deciding to sell out, you must also consider what your role will be after the transfer. Do you want to retire or stay on as a manager? If you stay on, who will be in control? And don't forget estate and tax planning considerations. For example, you should transfer stock to your heirs before you sell, says Dick May, president of VM Equity Partners, a New York-based regional investment bank. Instead of selling out for cash, a move that could trigger a 20% capital gains tax, you might want to arrange a tax-free sale by merging your business with a public company in exchange for stock or by doing a management leveraged buyout. Whichever way you go, however, be sure to start with someone who can give you the best counsel all along the way.