For What Its Worth - Spring/Summer 2006
Spring/Summer 2006 PDF
As we discussed in a previous issue of For What Its Worth, there are several ways to transfer an ownership interest. For those business owners who desire to transfer ownership through a negotiated sale, it is important to address several issues as a first step in the sale process. By anticipating a potential buyer’s questions and concerns surrounding these critical issues, the seller is more likely to achieve a successful sale on favorable terms. Below, we briefly discuss a few of the major issues that sellers should carefully consider before putting their business on the market.
Sellers should be prepared to explain in depth the key drivers of historical and projected growth. Pertinent details to address in any model of projected growth include source (internal vs. acquisition; unit volume vs. price increases), type (recurring vs. nonrecurring revenue), and segmentation (by product line, division, customers).
Sellers should be prepared to address any significant customer concentration issues by providing insight into the company’s relationships with key customers. Pertinent information includes details of customer contracts and any significant changes in the customer base.
Financial Performance/Profitability Margins
Sellers should be prepared to explain the company’s financial performance, including recent profitability trends, key drivers of profitability, and plans to improve profitability. Other items to be explained include margin fluctuations and variations across product lines, customers, and divisions. Sellers should also be able to explain drivers of cost of sales and selling, general and administrative expenses. It may be especially important to explain the company’s performance during economic or industry downturns. Finally, as buyers will need to see reliable financial information, sellers must have audited or reviewed financial statements, possibly for a several-year period prior to sale.
Sellers should also be prepared to address any significant supplier concentration issues by providing insight into the company’s relationships with key suppliers, including any supplier contracts. Pertinent information includes length of relationships with key suppliers and the financial strength of key suppliers.
Sellers should be able to present detailed plans for projected capital expenditures. Sellers should also understand the expected return on investment for each project and how these capital expenditures are expected to improve the company’s profitability. In addition, capital expenditures for routine maintenance should be distinguished from expenditures which support expected growth.
Sellers should be able to explain how the company’s products are differentiated in the market and unique among competitors’ products. Sellers should also be prepared to clearly explain plans for new product development.
If the owner is selling only a partial interest in the business, then he or she should be prepared to explain that the right individuals are in place to lead a growing business. If the owner is selling the entire business, then he or she should address the prospect of retaining any key employees, for example, through employment contracts.
There are of course a number of other issues in addition to those discussed above that sellers must carefully consider as a first step in the sale process. It has been our experience that anticipating potential questions and concerns is essential to achieving a successful result when selling a business.
FWIW - Spring/Summer 2006
FWIW is intended to inform readers of developments in the field of valuation. The articles written may, or may not, reflect the opinion of the authors. Please note, any advice contained in this publication was not intended, or written, to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is distributed with the understanding that the publisher and distributor are not providing legal, accounting or other professional advice and assume no liability whatsoever in conjunction with the information contained within this publication.