Strength in Numbers
Preparation is probably the hardest part of this process from an operational, financial, and emotional perspective. Concerns about family, employees, lifestyle, and most importantly, long-term finances can be overwhelming. Most sellers have one chance to get this right, and the implications of making a bad decision can be irreparable and devastating, but very few really prepare themselves properly. Let’s talk about operational and organizational concerns. No one wants to buy a company that doesn’t have a talented and motivated management team in place. Owner-operators that are overly involved in daily management, who control the largest portion of the sales, and who don’t possess the ability to delegate or share decision-making with others can be extremely problematic for a buyer. Once a decision has been made to prepare a company for sale, diversification of all of the key management functions takes on greater urgency. It is often difficult for an entrepreneur to deal with the emotions that go along with this aspect of preparing for a sale, but it can be the most important aspect of attracting the right buyer and securing the best possible deal. Many closely held businesses blur the line between necessary business expenses and personal expenses. Family members are often on the books with no-show jobs or higher compensation levels than are appropriate. Personal-type expenses for cars, entertainment, and other items are run through the business. All of this necessitates significant normalization adjustments or add-backs to the company’s cash flow that is presented to a potential buyer. Similarly, the quality of the financial statements is often low. If you are serious about preparing for sale, then you should obtain audited or reviewed financial statements from reputable CPAs and try to minimize the number and magnitude of normalization adjustments that will be required to cast your business in the best possible light.
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Capital considerations must be made as early as possible, for a buyer will reduce the price for perceived capital investments that it must make to bring the operation up to standard. It is also important to note that every dollar of debt will reduce the net consideration that the sellers receive. When deals are announced by large publicly traded companies, they generally report to the shareholders that the deal is based upon a fairly low multiple of economic value, something in the four to six range. Yet when the seller looks at the deal, he or she believes that a significantly higher multiple would be gained. How is this possible? The answer lies in the synergies and integration benefits that the deal creates for the buyer. If the buyer can shut down the seller’s plant and move the business to one or more of his existing facilities, millions of dollars of additional cash flow is created for the buyer. The same condition exists if the buyer can shut down one of his own facilities and move the business into the seller’s facility. Industry analysts have reported that paper mill EBITDA, when the paper is consumed domestically, can be in the $250- to $350-per-ton range, so the amount of paper consumed by the seller is often a significant component of the deal. In addition, profits to a corrugated sheet feeder on incremental business can be in the $5- to $10-per-MSF range. If a deal possesses the ability to give a buyer expense reductions, additional mill tonnage, and incremental sheet volume, then the buyer can afford to pay more. Most importantly, when you are valuing your company, you must take into account what the seller’s potential cash flows are from the deal and not just apply a high multiple to your existing cash flow. Understanding the economics of the deal to the seller is crucial to the buyer’s decision-making process. For most closely held businesses, there is a certain finality to selling their
business, and they must be prepared emotionally and have a sound financial plan going forward. The closely held business “piggy bank” will no longer be available, and all expenses must be paid for with after-tax dollars. The net proceeds received for the business must be invested wisely for the long term, and lifestyle choices must be made so that the funds will be preserved. In addition, no longer having a business to run and all that comes with it can leave a former business owner with too much unproductive time on his or her hands. It is critical to plan for these life-altering changes well in advance of the decision to prepare for sale. Targeting the right buyer requires a good knowledge of the industry in which you operate and the players within it. Putting a book together and sending it to every prospective buyer can be extremely destructive to your business. Key employees and local competitors will soon find out about your plans and could cause a lot of trouble. The best approach is usually to target the buyers who have a real strategic need to buy you and who will have the largest potential for synergies and integration benefits. Confining access to your company’s information to a limited group of responsible, strategic buyers at a very high level of management is usually the best approach to maximizing value and minimizing potential problems associated with marketing your company. My best advice for any of you who are considering a sale scenario is to start the process years in advance. Prepare your business operationally and financially, prepare yourself financially and emotionally, and make sure to target the right buyers in order to secure the best possible deal for you and your company. Mitch Klingher is a partner at Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@ klinghernadler.com.
