Progressive Distributor - Strategies for buying and selling a business

Strategies for buying and selling a business

Use caution before jumping on the mergers and acquisition bandwagon.

by Richard Vurva

In nearly 80 percent of all cases in which a buyer and a seller of two companies sign a letter of intent to merge their businesses, the deal never closes. The reason, according to Bart Basi of the Center for Financial, Legal & Tax Planning, is because information uncovered during the due diligence process caused either the buyer or the seller to walk away from the deal.

Thats why Basi considers conducting proper due diligence one of seven steps necessary to successfully complete any merger or acquisition.

Basi will explain the seven steps during his presentation, Strategies for Buying & Selling a Business at the ASMMA/I.D.A. spring convention on May 7, 2000 in Dallas. This article looks briefly at a few of the steps Basi will cover in his presentation.

Conducting due diligence
The due diligence process is important to both buyers and sellers.

Buyers use due diligence for two reasons, Basi says. First, to verify the accuracy of the information the seller has told them, and second, in an attempt to adjust the purchase price.

Due diligence is just as important to the seller of a business. Its during this phase where the seller opens his financial records for the buyer to examine, bares all of the details (both good and bad) about his company and provides details concerning the companys future growth strategies.

When sellers are well-prepared and go into the due diligence process with the proper attitude, it can make the process of selling a business go that much more smoothly, Basi says.

The presentation package
Another critical step toward a successful merger is for the seller to prepare a detailed presentation package that explains the company to potential buyers.

Its critical that sellers help the buyers understand what is being bought, Basi says. Theyre buying people, theyre buying products, theyre buying a market territory.

Distributors that are seriously considering selling their business would be wise to develop a comprehensive presentation package, and may want to contract with a broker or other firm that specializes in mergers and acquisitions to develop a package for them.

Basi says presentation packages should include the following five items:

1) A brief history of the company that explains the major aspects of the business, its overall size and ownership interests.

In this section of the presentation package, sellers should offer a precise explanation of how the business arrived at its present market position.

2) An explanation of the companys organizational and operating structure.

Buyers want to know how a company operates, who reports to whom, and what people or departments are responsible for various activities. If the organization is set up in a way that cant easily be explained to a potential buyer, fix the structure before putting the company up for sale.

3) An analysis of the overall market position of the company.

A companys market position is one of the primary reasons why a buyer may be interested in acquiring a business. A strong market position enhances the dollar amount that a potential purchaser will pay for an ongoing business.

4) A breakdown of the companys finances.

The financial aspects of many businesses can hurt as much as help in establishing a selling price. For example, a primary objective of many closely held corporations is to keep profits as low as possible to avoid taxes and enhance cash flow. And, in many closely held private companies, personal expenses and other perks taken by current owners may not be allowed if an outsider owned the company. Knowing this information should cause the present owner to refrain from adding personal expenses to the companys financial explanation provided to a prospective buyer. No purchaser will buy a company that cant return a satisfactory profit.

5) An explanation of the key personnel, background information and specific duties of company employees.

Owners of businesses sometimes forget they have qualified people who perform valuable services for their company. Reviewing key personnel may identify individuals most responsible for the companys success and could reveal any weaknesses that exist. A prospective purchaser also wants to know if key people on staff will stay with the company after it is sold.

Proceed with caution
In a society where mergers and acquisitions are becoming more and more fashionable, it is imperative to stay realistic about the success of a merger, Basi says.

While the urge to merge is strong, company owners should seek the best advice they can find.

Dont go into a merger just for the sake of change or just to give people something to talk about, he says. Have your company valued before the merger, compare the pros and cons of merging and, most important of all, forecast the cash flow of the combined operations.

Bart Basi of the Center for Financial, Legal & Tax Planning can be reached at , or .