Business owners of the Baby Boom generation are considering what to do with their privately held companies as they enter retirement. Many will choose to sell their businesses rather than pass them on. Fortunately, this is an opportune time as investors are sitting on a lot of capital and logistics and transportation businesses are looking to expand through acquisitions. But selling a family-owned or closely-held logistics and transportation company can be a fulltime job in itself. That’s why you need help. Michael D. Golden, co-leader of Arnall Golden Gregory’s Closely-Held and Family Business Practice and the Logistics and Transportation Practice, organized a panel at the recent Georgia Logistics Summit that addressed critical issues to consider when selling a company. Joining Michael on the panel were Rob Adams, managing director, EVE Partners, LLC; Vince Eget, partner, Bennett Thrasher, LLP; and Heidi Green, managing partner, Perdue Partners, LLC. Below are key issues they discussed that should be top of mind for business owners.
"40 percent of owners of privately held businesses are going to retire between now and 2017, and many are going to sell their businesses rather than pass them on"
Hire an investment banker. Preparing a company for sale is a job in itself that entails setting up a data room, engaging in conference calls, trying to keep the effort confidential, etc. An investment banker will compile market comps, quietly shop the company to select targets, and serve as an intermediary between the buyer and seller. “The deals that have the highest likelihood of closing with the least difficulty involve an investment banker,” Mr. Golden said.
Identify your buyer. A private equity fund, a family office private company (high net-worth family) and a corporate (strategic) buyer will make different demands. Private equity and family office buyers often require that the seller stay invested in the company and that leadership remain in place for a year or two until transition difficulties are ironed out. A private equity buyer is more likely to hold the company for a shorter period, until it’s ready for sale again. In that scenario, a seller would want to think about whether the investor’s plans align with how the seller views his or her legacy. A corporate buyer is more likely to bring in new leadership rather quickly and merge operations. Does that mean relatives and friends will lose their jobs? Some investor buyers also might replace leadership right away.
Conduct a legal audit. An experienced corporate attorney should examine contracts, organizational structure, intellectual property protection, etc. “You want to find a problem before the buyer does,” Mr. Golden said. He relayed the story of a young software developer who was working with someone in India without an agreement. When it came time to sell the business, the owner learned he didn’t own 100 percent of his product. That would have been avoided by crafting an inexpensive agreement with the offshore contractor at the outset. The seller ended up paying the contractor $20,000 to acquire all rights to the technology before selling the business.
Make sure the financials are in order. Usually, companies are started by visionaries or someone with a sales background – not CPAs. Many privately held companies often do not have audited financial statements or keep proper track of their purchase orders. Additionally, many privately held companies maintain their financial books on a cash basis rather than on an accrual basis. The above will be seen as deficiencies by buyers and will significantly impair the ability of the company to be sold. A review by an accountant is essential if a company is going to look its best to a buyer.
Other preparatory considerations. If your business does not have a board of independent, outside directors, think about creating one. “The oversight provides a back stop for the family,” Mr. Golden said. Also, invest in the best technology. Not only will it help you run your business better, but it will have a value when it comes time to sell – unlike free downloads from the Internet.
Should the No. 1 priority be getting the most money at the close? That might be the goal at first, but as the process evolves other priorities are likely to push maximum cash out down the list. In the family business often it’s more important to make sure relatives and friends keep their jobs, to close the deal relatively quickly, and to sell to a buyer with similar values or who is not a competitor. “I can’t think of a deal in recent times where the high bidder got the company,” Mr Golden said. “One of the reasons someone is the high bidder is to overcome aspects of the offer that are less attractive.”
Stock sale or asset sale? There are many different legal structures for selling a business (e.g. a sale of stock, a sale of assets, a merger, or recapitalization, etc.) If your company has a choice, which route is best? The answer depends on the requirements of the buyer and the seller. Is the goal to minimize taxes (generally, a seller’s goal) or is it to receive a step-up in basis in the target company’s assets (generally, a buyer’s goals)?
The owners’s prominence. A business where the owner is A level and surrounding personnel are C level is unattractive to buyers. Important business relationships should be with several key employees, not just with the owner. When a dominant owner’s tenure ends, the company’s business relationships might end, too, leaving the new owner with nothing. Building a diversified customer base is critical if the strength of the company is going to be more than just the owner’s relationships.
Responding to the unsolicited offer. Do you want to sell to the first offer or test the market? This is where the investment banker plays a critical role. Closing a sale can take 6-9 months. During that time “you need to keep doing what you were doing, which is to run your business,” Mr. Golden pointed out. And that’s possible only if someone else – the investment banker – is carrying the ball during the selling process. The No. 1 reason deals fall through is that the company has missed earnings during the vetting period.
The emotion factor. When the seller and buyer are communicating directly emotions can run high. It’s critical to have an intermediary who will process the information to help the client better understand the transaction and make the right decision.