By C. Brett Cooper, CPA•ABV, ASA•BV/IA, BVAL, CRFAC
Last month, Rene J. Zarate discussed the starting point for a business owner who receives an unsolicited offer from a third party to buy their business. So, here you are with an unsolicited offer in hand.
You have determined that you are desirous of selling, the amount you require to meet your future financial needs, and you have a good feel for the business’ value. What’s next?
Understand the Business Sale Process
Armed with this knowledge, it helps to understand the business sale process, which usually takes from eight to twelve months.
That time frame includes some time to identify buyers, an exercise which may not be necessary if you have received an unsolicited offer. The total time to close may be reduced by an average of two months when removing the time for identifying buyers.
The front end of the sales process includes the exercise of self-evaluation. By that, I mean the performance of due diligence on your own company. This process, among other things discussed further, will cause you to gather core financial and operational data that you will need to draft a business profile to provide buyers.
Once qualified buyers are identified, and confidentiality agreements executed, the buyer courting process starts.
Meetings with management and tours of facilities soon follow. Initial interest is shown through the receipt of binding bids and letters of intent from potential buyers. A conditional offer is accepted, and the letter of intent is signed. Buyer due diligence gets underway. The attorneys representing both parties draft documents and final negotiations take place. Ultimately, the sale closes.
Above is a whirlwind explanation of the process, but it will hopefully provide you with some feeling for it.
It can be long, arduous, detailed, tiring, exciting, and satisfying. But, it’s important that you prepare properly for it.
The Self-Assessment Due Diligence Exercise
Back to the front end of the process where you, the seller, perform a self-assessment due diligence.
Later in the sale process, the buyer will perform due diligence on your business. When the buyer’s due diligence team begins requesting information, you will need to be prepared.
The purpose of the due diligence exercise is for the buyer to assess the credibility of you and your company, which ultimately provides a basis for them to assess the risk associated with an investment in your company.
Due diligence is performed in the finance area, the IT area, the HR area, the legal area, in your production area, and of management.
For example, being able to provide the answers to questions posed in a manner that proves to be accurate will lend to increased credibility, keeping risk at a minimum, versus the situation where answers to questions are not known, or information is unable to be produced or is proved inaccurate. These issues may increase investment risk to the buyer.
What is Risk?
A quick sidebar on risk. What is it? Well, an entire paper can be written on the subject, but I’ll try to be brief.
Risk may be present in a business in many different areas, such as when a concentration of customers exists, or, when fixed assets are purchased out of state and Florida sales and use tax has not been paid.
Risk may be mitigated when you have a strong management team in place to take the business forward and accomplish its objectives, or when you possess a patent on a particular manufacturing process that is important in the industry.
When you consider the functional areas mentioned earlier, it is easy to understand that there is potential for risk to be present in the business.
Business Value and Risk
When a business value is determined, the risk specific to the business, over and above the risk to all in the market, is assessed.
Company risk is controllable and can change with action from management. It may take considerable time to make the change in some cases and not so much in others.
The risk being assessed is the risk of the realization of the future return on the buyer’s investment. Risk impacts value in an inverse manner. All else being equal, when risk increases, the value of the business decreases.
So, from a seller’s perspective, it is advisable to assess and confront items of risk present in their business over which they have control. Be the risk adverse or mitigating in nature, it is better to have knowledge of it, than not.
Addressing Weaknesses
During the self-assessment process, you are identifying areas of weakness and strength. By addressing the weakness, being prepared to discuss it, and being open about it, you may mitigate the overall impact of the unpleasant item on the assessment of risk by the buyer.
A weakness that is present in the company is just that, and risk will increase when weakness is present. The manner in which you handle the weakness and are prepared to be open about it is important.
Remember, the due diligence process of the buyer, among other things, assesses your credibility and the credibility of your business.
When a weakness of the company is discovered during the self-due diligence, and it is curable, the time to cure the weakness and the overall perceived impact to risk must be determined.
Sometimes the time to cure and the resulting positive impact to value will be such that the sale process should be postponed in order to increase the value of the business.
There are countless scenarios that can occur when you uncover weaknesses in the business. Each needs to be addressed and the time to cure needs to be determined. It is better to understand these issues before the buyer’s due diligence.
Highlighting Strengths
The process does not focus only on the weakness of the business. Positive attributes are also identified, and a plan for the presentation of these attributes to the buyer can be formulated to present them in a manner that is most beneficial to the situation. Positive attributes serve to lessen or mitigate company risk. A plan to highlight the positive attributes of a business should be developed.
The Importance of Self-Assessment
I once had a colleague who likened due diligence to an open kimono; nothing is hidden from view. By performing the self-due diligence exercise, you lessen the chance of unpleasant surprises in the future when the buyer’s due diligence takes place.
By performing the self-assessment, you have time to correct identified weaknesses that are curable and develop a plan of presentation for those that may not be curable. You can identify positive attributes of the business and develop a plan to present those attributes in the most favorable manner.
Need More Help?
Rivero, Gordimer & Company has performed many due diligence engagements, both from the self-assessment viewpoint and from assisting buyers with the exercise. We understand how the risk assessment process works and are happy to talk with you about how it may benefit your business.
Author:
Brett Cooper, CPA•ABV, ASA•BV/IA, BVAL, CR.FA is a Managing Director with Rivero, Gordimer & Company, P.A. Brett has been involved with numerous business sale and purchase transactions and has assisted companies with assessing business value and with due diligence, from both sides of the transaction.
