Midmarket business owners consider sales, divestitures and spinoffs for a variety of reasons, both positive and negative. Fortunate triggers for a sale include opportunities to capitalize on strong acquisition markets or an owner’s planned retirement. Unhappier reasons include financial stresses (declining revenues, capital constraints or bankruptcy) or the sudden departure or demise of key leaders.
Regardless of the reasons for a sale, business owners must clearly understand why they are selling and craft a strategy that maximizes the sales price given those specific conditions. Why? Because while the value of M&A deals in the United States has increased to $893.1 billion, up 3.8 percent from 2012 to 2013, many owners walked away from years of hard work without getting the best returns on those investments. The difference between those satisfied with a sale and those who wonder why their deals went wrong depends in large part on how sellers prepared themselves, and their organization, for a transaction.
Preliminary benchmarking will determine the viability of a sale; a more sophisticated review will determine if it’s the right time to sell (will conditions improve in six months to a year?) and whether the transaction is likely to generate the desired sales price. A thorough pricing analysis will assess the organization’s “fair market value,” which accounts for every asset, including capital equipment, real property and current assets such as inventory. And while accounting can differ by type of sale (e.g., assets or stock), gains or losses included in fair market value will generally be recorded based on treatment of the individual assets (e.g., capital assets result in a capital gain or loss, inventory results in ordinary income or loss).
This doesn’t mean, of course, that a seller can’t negotiate for a premium above fair market value. An eager acquirer can allocate a premium purchase price against the fair market value of the company, with the excess purchase price recorded as goodwill. But preparing a fair-market-value analysis offers a realistic starting point for a seller before negotiations begin.
Sound accounting analysis should be accompanied by well-documented business practices and workflows as the company’s management team continues to operate and invest in the business as it always has. Meanwhile, the firm’s owners, along with professional advisors including brokers, accountants and lawyers, will guide the sale process.
It’s important, too, that leaders be upfront with employees if a sale is rumored or confirmed. Prospective buyers may lose interest if top talent leaves due to uncertainty. Clear internal communication of any tentative sale can help facilitate successful post-acquisition integration. A study conducted by the International Association of Business Communicators (IABC) and Mercer Human Resource Consulting asked CEOs post-merger what they would change if they had it to do over again. Their top response was the way they communicated with employees.
Alerting customers to possible transactions may also be appropriate. Apart from applicable “quiet period” restrictions during which a company and related parties cannot disclose information publicly, external communications can actually improve the deal-making process. A strong PR strategy will get the word out about a sale to analysts and others who can influence corporate acquisition decisions, priming the pump for potential buyers.
Check back for additional articles on this topic.