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If you think it’s been a challenge to build your company, grow your customer base, hire and retain the right talent and eke out a profit over the years…now you are about to be put through a daunting set of hurdles to prove it to a skeptical buyer.  Every stone will be unturned and achieving your forecast during the process may be one of the toughest tests of all.

I cannot emphasize enough that it’s your job to keep the company on track and to leverage your principal Advisory team to execute the sale process on your behalf.  Let them play the role of adversary with the lead buyer candidate and keep you abreast of progress and control your time in front of the buyer for critical discussions.

Buyers have a fiduciary responsibility to their Limited Partners to thoroughly evaluate all aspects of your business.  Key areas of focus will include:

• Financial Statements
  • 3-5 year historical financial statements
  • Audits or reviews
  • Projections for current year and 1-2 years in the future
  • Analysis of key asset and liability accounts
    • Normalized working capital
    • A/R aging
    • Inventory 
    • Fixed Assets
    • Loans and obligations
  • Taxes – due and payable, including state sales taxes
  • CAPEX spending 
  • Revenue recognition policy
  • Quality of Earnings report
  • Adjustments to EBITDA (one-time items and owner-related)
  • Unrecorded liabilities (to be uncovered)
• Customers and Sales Analyses
  • Customer concentration
  • Retention and history by account 
  • Customer backlog and pipeline
  • Sales team compensation and incentives
  • Seasonality of the business
  • Product and services pricing
  • Discussions with key customers (to be done last)
• Business records and major legal documents
  • Material contracts review
  • Guaranties, loans, credit agreements
  • Customer and supplier contracts
  • Legal structure
  • RE and equipment leases
  • Any important restrictions imposed by 3^rd parties
  • Indemnification
  • Employment agreements
  • Exclusivity arrangements
• Litigation history and potential litigation
• Condition of facilities and equipment
  • Future expansion plans and CAPEX requirements
• Management, Employee and Independent Contractors
  • Contracts and proper classifications/withholdings
  • Organization chart and bios/resumes
  • Compensation
  • Discussions with various individuals
• Technology/IP
  • Patents 
  • Open source code, if any
  • Product and services licenses
  • Code escrow
  • Liens
• Environmental Review

In a due diligence process there will be discrepancies or items requiring further investigation.  The cleaner the review the smoother the overall process and likelihood of closure and initial offer maintained.

Generally senior management team members are actively engaged in the due diligence preparation and discussions.  Customer reference checks are generally held off until the end of the process to ensure minimal leakage of a transaction and concern among customers as to resolution.

Concurrent with the due diligences process will be the preparation of a Purchase and Sale Agreement and Exhibits.  Buyers Representations and Warranties will be a part of this Agreement. A closing timeline will be coordinated and there will be some post-closing adjustments generally to true-up the working capital to be retained in the business.

Upon closing, key customers and employees should hear it first from management and a general press release is generally issued to broadcast the news and create positive energy around the transaction.  

If the business is run smoothly during the process, the next phase of ownership can take on a well run business and maintain positive momentum for the company employees and its valued customers.

Written by Virginia Turezyn

If you have spent much of your career building a business, I am sure you anticipate that others will want to buy it from you one day and all your hard work will turn into your retirement nest egg.  If so, read on.  

What Will a Buyer Look For?

1. A very organized and well-run business, including automated processes
2. A stable and repeat customer base
3. Future sales pipeline and explanation of your sales cycle
4. A team that is not solely reliant on 1 or 2 individuals
5. Clear competitive advantages and understanding of your competition
6. A website which is current and visually appealing
7. Preferably a website with continuously updated content and optimized to attract the right type of customers organically
8. Clean financials – all family/personal related pass-throughs disclosed
9. Audited or reviewed financial statements (last year or more)
10. Year over year growth in the business 
11. A forecast for the current year and 1-2 years beyond
12. Scalability – how the business can grow even more if XXXX were to be done 
13. Legal documents and major contracts ready for review
14. Detailed list of open items, legal disputes, issues, late receivables, open payables
15. All taxes current – Fed, State, Sales taxes in states you do business in
16. All business and professional licenses current
17. Valid reason for selling now
18. Realistic expectations

Offense vs Defense?

Play offense and be in control of your future exit transaction with the same care and attention you give to winning new business.  Prepare now with an objective look at all the key disciplines in your business: Sales, Cost of Sales, Gross Profit, Sales, Marketing, Operations, Overhead.  Pretend you did not own your company and wanted to buy it – what would you think of it today? After this assessment, done by you or a trusted advisor, start to improve it now.

Take an unbiased perspective on your business and be open with respect to all issues and challenges.  A smart buyer will do extensive due diligence and will be looking to find all the warts and problems to reduce the price just as you would.  If you have not disclosed issues and problems first, and the buyer finds them, you will be on a slippery slope in terms of price, terms, and even closing at all.

Independent Advice Along the Way

You should work with a small cadre of independent advisors to help guide you.  These include a savvy business attorney, tax advisor and personal wealth advisor.  Forethought and planning as relates to your legal entity structure and estate/trust plans can make a significant difference in how any transaction will be treated for tax purposes.  The latter, assuming a constant sale price, can make a meaningful difference in the ultimate proceeds which you get to keep vs donating to the IRS.

Written by Virgina Turezyn

Over the years we’ve seen what works well and what doesn’t in selling a company. You’ve read in our other articles about the potential “Pitfalls” and what a well-managed “Sale Process” entails.

Summarized below are the Keys to a Successful Deal!

1. Planning & Preparation—everything lined up well in advance.

2. Positioning – sale documents to showcase your business, tailored for each type of buyer.

3. Presentation – to the right set of buyers, US and globally.

4. Professional Process – don’t go it alone; hire the best experienced professional team!

More often than not, the buyer for your business will come from your industry or an adjacent sector. We refer to these as “Strategic Buyers” who typically can afford to pay the most for your business, due to potential synergies (e.g. cost savings & revenue growth) in combining your business with theirs. The other important category of buyers is Private Equity, increasingly a factor in M&A deals, often backing the less well-capitalized Strategic Buyers. A subset of Private Equity is Family Offices, usually smaller acquirers focused on particular niche areas.

Private Equity Fund (PE) vs Strategic Acquirer vs Family Office

Outlined below are some of the key attributes of each type of buyer for your consideration. There is no right or wrong choice, and each has positives and negatives to be aware of.

Strategic Acquirer

A strategic buyer is generally a larger corporate entity in your line of business, an adjacent sector, or one who covets your area of expertise and views you as a critical tactical purchase. They may know a fair amount about your business in advance, if they are a competitor or customer. Depending on how mission-critical they think buying/owning your business is to the growth and success of theirs, the higher the value they will place on owning your business. But they will likely only pay that full value in a well-run and broad-canvas sale process (aka “auction”).

If you are introduced to a large multi-division Strategic acquirer for the first time by your M&A Advisor, it will be  important for your Advisor to position your business with the right divisional executive/sponsor within the buyer’s organization who will understand the fit within their division, and make the compelling case internally (e.g. CEO, Board of Directors, etc.) to ensure priority focus. Navigating the internal decision-making process in these large companies takes skill, finesse and experience. Be sure your M&A Advisor has these attributes.

In today’s global M&A markets, strategic buyers who will bid most aggressively often come from outside the US, so it’s paramount that your M&A Advisor have the capability, persistence and willingness to conduct an international buyer canvas for your business.

Private Equity (PE)

Private Equity firms seek to secure majority control or have significant minority ownership, in attractive businesses which they can either use as a base to expand from (a platform investment) or as an add-on augmenting an existing investment in their portfolio. This would typically be a portfolio company for which your Company is in the same line of business or a related field, and which combined, would strengthen the overall business proposition.

PE firms offer many positive elements:

• Additional capital to help the business grow
• Improved infrastructure
• Broader sales and marketing capabilities
• An expanded network of relationships
• Deeper focus on analytics and key metrics
• Retention and more expansive career paths for key employees
• Financial incentives, such as earn-outs for owners and equity for employees
• Upside potential in a future sale

All PE firms are different. Some have deep industry expertise; some are looking for exciting new opportunities in fragmented (i.e. many smaller players) industries which are ripe for consolidation. Some focus on retention of team, while others have deep benches with talent, they want to bring in.

Family Office

A family office is more akin to a PE firm, and usually focus on one or two niche areas, often around a core mission. While a PE firm typically holds investments for 3-7 years before selling the business again, most family offices have much longer horizons and are looking for growing cash flow quite often to support their core mission and vision. They are generally less hands-on in terms of management and if the business is run well and growing will be less intense in their interactions than PE owners.

While many positive attributes exist within each possible entity, the negatives are more a function of your desires going forward. You need to be honest with yourself as to whether you want a meaningful role in the future, for how long, and whether you can live within certain new boundary lines which will be drawn for you. Think these points through carefully upfront to ensure a smooth process and fewer surprises later.

How to Find the Right Buyer?

A sophisticated Advisory firm will guide you based on your specific criteria and negotiate on your behalf to secure the most favorable terms. It is in your best interest to showcase your business across a broad spectrum of firms to find the right fit and relationship you feel comfortable with as the optimal owner for yourself, your employees and your valued customers. Compare and contrast the attributes of the different parties with your trusted Advisor to achieve a successful outcome.

There are many mistakes we’ve seen business owners – and sometimes their advisors – make in selling their business. Here are 5 common ones:

1. Trying to go it alone – someone has reached out to you on an unsolicited basis – perhaps a competitor, business associate or other source – DANGER lurks ahead.  No one will offer you top dollar in a non-competitive process. In addition, selling a business is a full-time task which takes months to complete and it is not necessarily your area of expertise.  Moreover, it’s critical you focus on running your business, keeping customers happy and profits solid.
2. Hype and Hyperbole – beware the M&A Banker who “hypes” you with unrealistic valuation expectations and timeline or tells you they know the right buyer. Inevitably these promises fall short. 
3. Not running a Broad Process – you live, eat and breathe your business every day and know your customers and competitors.  Potential buyers can be companies who are competitors, in adjacent markets, considering an entry into your niche, domestic or international players looking for a market leader, private equity firms aiming to buy a player in your space or add you to one of their companies, family offices with a longer term time horizon…The list of potentially interested buyers can be large.
4. Thinking Bigger is Better – Boutique firms offer deep expertise – the individuals who will actually do the work need to be senior, experienced, have a wealth of transaction experience and commit to you that during your process your transaction is their main priority.
5. Taking your eye off the ball and LOSING MOMENTUM in your business during the process – the outcome, if there is still a buyer, will suffer. Focusing on keeping your business running smoothly throughout the sale process is key.

5 November 2019 – SiVal Advisors, LLC acted as exclusive financial advisor to Citilabs, Inc., on its acquisition by Bentley Systems, Inc., the leading global provider of comprehensive software and digital twin cloud services for advancing the design, construction, and operations of infrastructure. Citilabs’ CUBE simulation software provides world-leading predictive transportation technology, helping engineers and planners to design and optimize safe, efficient, effective, and environmentally sustainable mobility systems. Citilabs’ Streetlytics delivers mobility data and analytics on the moving population within the U.S. and Canada for planners, engineers, and infrastructure asset managers to make data-informed decisions about transportation trends. SiVal guided the acquisition process that included working with companies around the world to obtain a successful outcome for Citilabs.

Arif Janjua, Chairman of Citilabs, said: “ We are very happy with the outcome of this transaction as this will allow Citilabs to continue building a world-class traffic simulation and analytics solution for customers across the globe. Throughout the process, we have been truly impressed by the skillful execution from the SiVal team. Their knowledge and experience have played an instrumental part in closing this successful transaction.”

Jan Robertson, Managing Partner at SiVal Advisors, commented: “We are delighted to have worked with the Citilabs team on this journey. The inclusion of Citilabs in the Bentley Systems portfolio will deliver stronger solutions to enable organizations to address the transportation challenges facing everyone today.

For further information, contact Geoff Roach, Partner, at SiVal Advisors, groach@sivaladvisors.com.

About SiVal Advisors

SiVal Advisors, founded in 2002, advises its clients on a wide variety of merger & acquisition and financial advisory engagements, with particular emphasis on technology and emerging growth companies. The partners at SiVal, with their diverse backgrounds as business enterprise founders, CEO’s, technology executives, and investment bankers, combine this unique blend of operating and transaction experience for the benefit of each client engagement. SiVal has successfully served clients in a variety of technology industries including: Software, Business Services, e-Commerce, Semiconductors, Electronic OEMs, Semiconductor Capital Equipment and Materials, Electronic Design Automation, Medical Devices and Services, Communications and Technology-based Consumer Products.