Surviving the ‘operation' of selling your company

If you are considering selling your company, your situation is like a person facing major surgery. The most important decision will be the surgeon to perform the operation.

That decision will likely determine if, and how quickly, the individual returns to health. Your critical decision before proceeding with the sale process is "What investment-banking firm or advisers should I retain to handle the transaction?"

This decision will likely determine whether you achieve a fair price with minimal risks after closing. If you are the owner or chief executive officer of a middle-market company - those with a transaction price between $2 million and $250 million - the importance of this selection is probably even greater, as many advisers serving the middle market are less than adequate.

Here are the top adviser characteristics that will produce the best deal.

1. An open, verifiable record.

Your advisers should be willing to discuss any nonproprietary information related to a prior deal, except the transaction price and terms. The advisers should provide you with a thorough list of completed deals, including sellers and buyers. This record should be made available for unrestricted investigation. These deals should be supported by references that you could directly contact to substantiate advisers' claims. Talk to former clients and decide if the record warrants hiring the company to handle the largest transaction of your career.

As a rule, advisers should consummate two deals per person, per year to be considered "reasonably good." An "outstanding" firm should have a longtime record of three to four deals per person, per year.

2. Guidance from beginning to end.

Advisers must be able to help you plan and time the sale. In addition, advisers must control all aspects of the deal. Their job should not end with a letter of intent.

Advisers should be your lead negotiator until the execution of the definitive purchase agreement. This requires possessing highly specialized knowledge in warranties and indemnifications. These are critical issues, whose financial consequences can potentially be as significant as the purchase price.

Your advisers must have intimate familiarity with these issues and have the capability to control the deal process.

3. Tough, aggressive and determined.

This is necessary to convince strong-willed, sophisticated buyers that things are going to be done in a way acceptable to you. The advisers must understand the leverage points that will pressure buyers to provide your desired price and deal terms.

It is often beneficial for middle-market sellers to retain an adviser that is a self-made man or woman. This type of adviser will probably be an entrepreneur, just like you.

He or she will better understand your makeup and the things important to you. This should help negotiate a deal that will fully satisfy your needs. In addition, the person should be more capable of helping you deal with the myriad post-closing emotions that sellers often have.

4. A business-oriented approach.

Most advisers believe the sale process is only a financial exercise. Nothing could be further from the truth. Ask yourself the question, "Do all publicly traded companies in a specific industry trade at the same multiple of earnings?"

Obviously, the answer is no. The reason is because of the differences in the companies' business foundations and what this means for future growth or threats to earnings. The only way a seller's business foundation can be evaluated is by your advisers, through pre-sale investigation of your business' foundation. This includes a detailed investigation of the capabilities of your company's operations and production, marketing, personnel, facilities, purchasing and operational cost efficiencies, and demographic considerations related to your industry.

By the time the process is concluded, the advisers must thoroughly understand your business niche, and how it correlates to future growth and profitability. This will enable an accurate forecast of future profitability and earnings.

Many advisers either do not possess those capabilities or are unwilling to spend the time to perform them. Using only a financial approach will likely have a serious negative impact on your transaction price.

5. A history of all-cash deals.

This type of deal minimizes your post-closing exposure. Except for certain highly unusual situations, there is no good reason for a seller not to do an all-cash deal. Advisers who recommend their clients accept other than all-cash deals are being overly accommodative to buyers' needs at the expense of their clients.

6. Strong guidance.

You need advisers who clearly articulate their ideas in a manner that provides strong guidance to clients. Although ceding a minimal amount of control is often difficult for successful entrepreneurs, it is necessary if the seller is to maximize their transaction price.

They should allow qualified and proven advisers to guide and direct the process, since most sellers do not have the market expertise or experience to make independent judgments on how to professionally handle the process.

Although advisers should direct the process, sellers should always retain the unqualified right to make all decisions regarding the acceptance or rejection of prices and terms.

Any sellers who are foolhardy enough to want advisers they can totally control are making a critical mistake. They should realize that any advisers who can be dominated by clients could also be dominated by buyers. What sellers really need are advisers with the record of being able to control large, sophisticated buyers and obtain premium prices for their clients.

7. Patience.

Your advisers must be patient. You don't want them committed to a quick sale, regardless of price.

Although the normal time to transact a deal is usually six to 12 months, in unusual situations it might take two to five years to consummate a deal. In these cases, probably about 5 percent or 10 percent of total deals, a much longer time is required if the sellers' objectives are to be fully satisfied.

Discuss their overall record with potential advisers. If they have not taken an extremely long time to successfully complete a few sales, it probably is indicative they are more interested in "churning deals" at less-than-premium prices than getting maximum value for their clients.

8. Getting along.

If a company has multiple shareholders who have significantly different financial and personal objectives or problems with each other, it becomes even more imperative to find strong-willed advisers.

Advisers must have the expertise to develop a solution to reasonably satisfy all shareholders, and the ability to explain why the compromises inherent in their solutions will fairly benefit all shareholders.

This mandates not only strong and forceful advisers, but also those who have compassion and understanding.

When you are selecting your advisers, don't look for those with the most pleasing personality or whom you have known the longest. This will probably be the largest transaction in your life, and the right adviser should add at least 10 percent to 20 percent to your transaction price.

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