Selling Your Business – An Overview of the Process

“I am grieving.  It’s a process – Dr. Ben Sobel (Billy Crystal) dialogue from the movie Analyze That

My previous blogs have addressed a few factors impacting your decision to sell your business.  They have covered points such as assembling the deal team, dealing with due diligence and avoiding seller’s remorse.  However, I am now in the middle of a handful of transactions and I realize the overall process itself is not well understood by owners.  What is the right sequence of events and how do I get started?  So, I thought I would provide a brief overview:

We are going to begin by assuming you have definitely decided to sell but you are unsure about how the process works. While not in perfect order, here is a sequenced overview of key steps:

  1. Start with a self-assessment of your business. What are the strengths and weaknesses and how desirable is this business in the hands (and minds) of others?  For example, if you are Picasso selling your painting business, a new owner may have some transition issues whereas this may not be a factor if you are selling a widget manufacturer.
  1. Understand what is your business worth?  Speak to a couple of investment bankers in your industry and see if their view of the world reconciles with yours and results in a value which you find acceptable.
  1. Assemble your deal team.  You should find an Investment Banker (IB) who understands your industry or is familiar with transactions of your size. You have to be comfortable with the personal chemistry – you will be spending a great deal of time together.  A good transaction lawyer and CPA are also important team members.
  1. Determine how you will make the decision on a transaction.  Have a good understanding of your acceptable price and terms; is an earn – out acceptable?  If there is more than one owner, how will the decision process work?
  1. Work with your IB and team to prepare an Offering Memorandum (OM).  It should clearly convey the positive aspects of your Company in a truthful manner.
  1. What do you want to look like after the deal?  If you want the best price and are less concerned about keeping the “legacy alive” you may want to consider a strategic buyer; a financial buyer is a better choice if you want the team and your business to continue and grow. This feedback will give the IB some direction.
  1. The IB then goes to work to identify buyers and obtain a solid letter(s) of intent (LOI).  A good LOI, which is basically non-binding, lays out all the key terms, provides for confidentiality and exclusivity and then allows the buyer to perform due diligence. Hopefully, there is more than one interested party.
  1. The deal team works to finalize the Purchase Agreement as the buyer completes any due diligence.  Make sure you understand the economics, tax consequences and timing of the closing.

Hopefully, in advance of starting this process, you have spoken to an estate planner, tax advisor and investment advisor to make sure your proceeds will be realized in the most tax efficient manner possible.  With some basic knowledge, you can manage a successful transaction process. And yes; it is a process. Good luck!

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Equity Sharing; Spread the Wealth and Spoil the Child?

Dark Helmet: “. . .  See there’s two sides to every Schwartz.” – Dialogue from Space Balls – a Mel Brooks film

As is the norm in my dealings with startups and emerging growth companies, the recent past has been filled with dozens of discussions about the concept of sharing equity.  This subject never seems to get old and it is increasingly apparent to me that there are really two different philosophies on this topic.  It never was that apparent to me until this past week when I had a discussion with one client on one night and another discussion the next morning with a prospect.  They were 180 degrees different and I realized it might make sense to shed some light on both points of view.

The first philosophy is what I call the “chicken in every pot” approach.  In this scenario, the key owner (or owners”) vision is that the company will reach unbelievable heights and as a result, the value will soar and every employee from administrative staff to key executives will become millionaires. The streets are paved with gold and all go off into the sunset carrying an enormous satchel full of money.  What a great vision and how emotionally rewarding it would be to enrich so many lives.

The second is what I call the “1% solution.”  Following this path, there is a more meaningful share of equity with the key people who drive the company.  In this scenario, challenging goals are set for exceptional leaders, they outperform the expectations and the economic rewards follow their success.  This is pay for performance at its best.  But, is one technique better than the other?  As with most things in life, I believe it depends.

I think the driving force behind a choice of approach is matching it with the culture of the company.  If one has a very inclusive, collaborative working environment where all believe that each person’s contribution is important, then the chicken in every pot approach fits.  While it can be successful, I see two potential downsides; one is that because there are so many participants and the pot is only so big, rewards for the key players may not be as significant and rewards for lesser players may not be perceived as meaningful. A second concern I have is since everybody gets some ownership (like a Holiday bonus) it is not seen as a motivational tool to drive behavior but just part of the standard compensation package.  Again, in a share and share alike environment, this may be a good fit.

On the other hand, if you have an organization where a small group of people are clearly seen as the leaders and drivers of the business, the 1% solution may be the answer.  The fear in this scenario is stirring up either the old “a few people are getting fat off our backs” syndrome or the even more concerning “us vs. them” attitude which can arise because of the disparity in rewards.  Rewarding the key players who get you to the goal line works in this case.

So, as Dark Helmet says, there are two sides to every Schwartz… Just make sure your equity sharing plan takes into account the DNA of your organization. That is the right answer.