The Confidentiality Agreement
When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don’t want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.
The following are some of the questions that a seller should expect a confidentiality agreement to cover:
- What type of information can and can not be disclosed?
- Are the negotiations open or secret?
- What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
- What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
- Which state’s laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
- What recourse do you have if the agreement is breached?
Obviously, executing an agreement does not mean a violation can’t occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.
While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.
A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes “common ground” between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.
© Copyright 2015 Business Brokerage Press, Inc.
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The Devil May Be in the Details
When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.
In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.
One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:
- Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
- Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
- Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
- Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
- Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
- Sellers who have unrealistic expectations for the sale price.
- Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
- Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
- Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
- Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.
Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.
© Copyright 2015 Business Brokerage Press, Inc.
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Family Businesses
How to Successfully Sell a Family Business
Introduction
Selling a family business can be a complex and emotional process. Whether you’re planning to retire, pursue other ventures, or simply feel it’s time to move on, understanding the steps involved is crucial for a successful sale. This guide will walk you through the essential aspects of selling a family business, ensuring you get the best value and transition smoothly.
Why Sell a Family Business?
Personal Reasons
- Retirement
- Pursuing new opportunities
- Health issues
Business Reasons
- Market conditions
- Financial struggles
- Lack of succession planning
Preparing Your Family Business for Sale
Financial Preparation
- Audit Financial Statements: Ensure your financial records are accurate and up-to-date.
- Valuation: Obtain a professional business valuation to understand your business’s worth.
Operational Preparation
- Streamline Operations: Make your business as efficient as possible.
- Document Processes: Ensure all business processes are well-documented.
Emotional Preparation
- Family Consensus: Ensure all family members are on the same page.
- Professional Counseling: Consider seeking advice from a business counselor.
Finding the Right Buyer
Types of Buyers
- Strategic Buyers: Companies looking to expand their market share.
- Financial Buyers: Investors looking for profitable businesses.
- Individual Buyers: Entrepreneurs looking for new opportunities.
Marketing Your Business
- Confidentiality Agreements: Protect sensitive information.
- Professional Brokers: Utilize business brokers to find potential buyers.
Negotiating the Sale
Key Considerations
- Price: Ensure the price reflects the business’s true value.
- Terms: Understand the terms of the sale, including payment structure and transition period.
Legal Aspects
- Contracts: Have a lawyer review all contracts.
- Compliance: Ensure the sale complies with all legal requirements.
Closing the Deal
Final Steps
- Due Diligence: Allow the buyer to conduct due diligence.
- Transition Plan: Develop a plan for transitioning the business to the new owner.
Celebrating the Sale
- Family Celebration: Mark the occasion with a family celebration.
- Future Plans: Discuss future plans and opportunities.
Common Mistakes to Avoid
Lack of Preparation
- Financial Discrepancies: Ensure all financial records are accurate.
- Operational Inefficiencies: Streamline operations before the sale.
Emotional Decisions
- Family Disagreements: Resolve any family disputes before the sale.
- Unrealistic Expectations: Have realistic expectations about the sale price and process.
Conclusion
Selling a family business is a significant decision that requires careful planning and execution. By following these steps, you can ensure a smooth and successful sale, securing the best possible outcome for your family and your business.
Call to Action
Ready to sell your family business? Contact our experienced brokers today for a free consultation and take the first step towards a successful sale!
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Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
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What Are Buyers Looking for in a Company?
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.
Quality of the Earnings
Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be:
- meeting some new governmental guidelines,
- paying for a major lawsuit, or
- adding a new roof on the factory.
The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.
Sustainability of Earnings
The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?
Verification of Information
Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables? The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.
© Copyright 2015 Business Brokerage Press, Inc.
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