Making An Acquisition The Smart Way

According to Bank of America Business Capital’s2008 CFO Outlook, among those companies expecting merger and acquisition activity, 86 percent report that they will be making the acquisition, while only 7 percent plan to be acquired by another firm. In other words, many buyers will be chasing few sellers. That means if you are a would-be buyer, you need to develop a well thought-out process that generates proprietary deal flow, minimizes your risk and maximizes your return on investment (ROI). The right approach will also enable management to continue focusing on its existing business; increase your probability of acquiring the right company at the right price, terms and conditions; compress the time frame to complete a transaction; and ensure successful post-merger integration.

How To Get Started:

Should you wait for investment bankers or business brokers to call you with deals? That might result in missed opportunities, competitive bidding situations such as auctions, or a stream of companies that do not fit your criteria. The acquisition process includes a number of steps and requires considerable preparation and careful execution. It also calls for experience and specialized skills in accounting, due diligence, finance, law, strategy and valuation. So let’s start at the beginning.

Step 1: Acquisition strategy and criteria.

Your first step is to clearly define your acquisition strategy and set of criteria. Some common strategies are to:

  • Overcome barriers to organic growth.
  • Bolster a company’s competitive advantage by acquiring key resources like strong management, skilled labor, complementary or proprietary products or services, production capacity or new technology.
  • Expand geographically or manage business risk through market or customer diversification.

Once the strategy has been vetted, set specific criteria for the business you want to buy. Type of business (or industry), size of business (in terms of sales or cash flows), location, size of transaction and equity investment and other qualitative factors are commonly used criteria. If your strategy is off-target or your criteria are too loose, you’ll waste time and other resources or, worse, fail at attaining your goal

Step 2: Valuation methods and assumptions.

It is also important to use valuation methods and assumptions that fit your requirements as well as those of a reasonable seller (for example, market-based). Most financial advisors use the discounted cash flow (DCF) method to estimate the value of companies with positive, predictable cash flows. Purchase price multiples should be used carefully as a rule of thumb to check a DCF valuation or to provide a quick estimate. As part of the valuation process, you must make assumptions about variables like future sales growth, capital expenditures, cash flows, financing and return on equity. Using generally accepted, reasonable valuation methods and assumptions greatly increases your probability of completing acquisitions of companies that satisfy your strategy and criteria.

Step 3: Acquisition funding.

Before reaching out to acquisition targets, as a buyer you should identify sources of debt and equity and determine how much capital you can invest. Some buyers need to look no further than their own balance sheet, since excess cash and existing revolving lines of credit are common funding sources. Other sources include private placements, sale-leasebacks, bridge or term loans, and mezzanine or subordinated debt. Another alternative is to raise equity from a professional investor such as a private equity group (PEG). PEGs are not only a source of capital, but also provide board-level advice, management and deal-making expertise, and industry experience and contacts. Clearly, the source and amount of capital will influence the size of transaction you can consider as well as the valuation and structure of any proposed transaction.

Step 4: Preparing for a broad search.

When you target a large group of companies such as an industry rather than one or a few specific targets, you need to prepare a few more items:

  • Have a list of prospective targets based on your acquisition criteria, such as type of business (or industry), size of business (in terms of employees or sales) and location
  • Write a brief description of your business and acquisition criteria. Prospective sellers want to know who is courting them and why. This can be presented to prospective sellers verbally, but many will ask for something in writing.
  • Prepare a Confidentiality or Non-Disclosure Agreement. Confidentiality is critical to sellers especially privately held middle-market businesses. A few prospective sellers will want buyers to sign their own, but many will not be prepared to sell their company and, therefore, will not be ready with an agreement.
  • Complete a standard information request. Again, since many prospective sellers will not be marketing their companies for sale, you need to be ready to request pertinent information. An initial screen of about five items is a good place to start.

Step 5: Finding the right fit.

Once you have completed the necessary preparations, contacted several prospective sellers and identified an interested party who may be a good fit, the heavy lifting begins. You will need to analyze detailed target company information to understand the target company and determine whether or not it fits your strategy, culture and ROI parameters. Valuation models and transaction structure alternatives need to be developed. If you decide to pursue a transaction, a letter of intent or term sheet needs to be presented, negotiated and finalized. Funding needs to be arranged. Due diligence needs to be conducted, the transaction needs to be closed and post-merger integration needs to be completed. The right approach will increase your likelihood of finding the right acquisition. It requires considerable preparation, careful execution, experience and specialized skills. While this process may seem time consuming and a bit intimidating, you can get help. The right team of professional advisors includes your investment banker, attorney, CPA and other experts who will show you the way.

Managing A Business In Preparation Of A Sale

You might be thinking about retiring or pursuing other interests, or you might be young with lots of gas left in the tank. Regardless, it can take years to prepare a business for sale. So, if you are a business owner and want the process to be smooth and the fruits to be sweet, it’s time to start thinking like a buyer and managing your business for a sale.

Review Your Strategic Alternatives

You can start by talking with an investment banker about strategic alternatives. This will require an understanding of the shareholders’ goals and priorities, concentrating on both qualitative and quantitative factors. Do the shareholders want to protect the employees, community and other stakeholders and not sell to a buyer likely to relocate the business? If the shareholders own the real estate, is it important to sell it with the business? A thorough review will include some or all of the following:

  • A valuation, including estimates of enterprise and equity value. This requires complete financial statements; projections for sales, cash flows and capital expenditures, and other information.
  • An analysis of the business and its prospects, focusing on its strengths, weaknesses, opportunities and threats. This includes consideration of corporate structure and resources, industry structure, legal and technological factors.
  • A presentation of alternatives. Some of the most common include a recapitalization, sale and management buyout.

Think Like A Buyer

Buyers can be grouped into two main camps: financial and strategic. Simply put, financial buyers bring capital and expertise to target companies; help them grow sales, profits and barriers; and realize returns when they are sold a few years later. Strategic buyers acquire related companies for a variety of reasons, including gaining access to new markets, customers or products; filling existing capacity; and cutting costs. Financial or strategic, buyers look for many of the same qualities in an acquisition target: management, growth, earnings and sustainable competitive advantage.

  • Management. Some owners of privately held companies find it hard to hand over the reins to their managers. Others might find it easy, but lack a team with the experience and skills to step up. Either way, it takes time to groom or recruit the right people. A strong management team will help buyers get more comfortable if the owner plans to leave. It will also increase the owners’ alternatives, as financial buyers are investing first and foremost in management.
  • Growth. There is no hard, fast rule, but companies should at least grow at a rate equal to the rate of inflation or their primary industry’s growth. Robust growth signals that your business is strong in terms of products and services, competition or competitive advantage, pricing power, sales and marketing, and customer loyalty or satisfaction. Moreover, growth is a key input in any valuation.
  • Earnings. Again, no hard, fast rule, but 10-percent earnings before interest, taxes, depreciation and amortization is a popular hurdle, especially for financial buyers. Like growth, healthy earnings are a sign of strength and a key input in any valuation.
  • Sustainable Competitive Advantage. According to Michael Porter, Harvard Business School’s authority on competitive strategy and international competitiveness, the three methods for creating a sustainable, competitive advantage are through-cost leadership, differentiation or focus.

Managing For A Sale

In many cases, the initial valuation or alternatives don’t meet the shareholders’ expectations. This gap can be caused by the difference between perception and reality, or simply the space separating the company’s current state and its future potential. Over time, management can address weaknesses and threats and lead the company to a place that fits the composite buyer’s criteria. At the same time, managers should be ready to provide detailed information when the time comes. Buyers like to examine audited or reviewed financial statements; projections; and sales and profits by market, customer and product.

Out of the Blue. M&A Firm Sees Market Slow but Opportunities for Buyers (MiBiz)


Preparing for Tomorrow’s Graceful Exit Today

What a dilemma. After years of low numbers and much debating, the owner of Sturm and Drang Consultants finally decided to sell the business — and once N. A. Stupor finally decides something, he expects it to happen yesterday. Why should the sale of his business be any different? So he called a quick meeting of his management team and gave them a two-week timeline.

Fortunately for Sturm and Drang, owners don’t work in a vacuum. Stupor’s management team explained that transition experts must be brought in, to maximize not only the company’s potential, but his as well.

Know the Ways Out

Specifically, an exit is a sale to a strategic or financial buyer. A strategic buyer purchases another firm because it can, for instance, save money on purchases, consolidate operations or enter new geographic markets. A financial buyer believes it can run a targeted business successfully, perhaps even better than the seller can. Financial buyers also use leverage to maximize their returns.

And occasionally an exit involves a recapitalization with management participation, which is the case with fictional Sturm and Drang. Whatever motivates you toward the door, five steps can help you and your company avoid obstacles along the way.

Step I : Clarify Owners’ Vision

This isn’t the time to address specifics. First you must look at the current big picture and produce a plan or strategic report that:

  • Analyzes the business and its prospects, focusing on the business’ strengths, weaknesses, opportunities and threats,
  • Projects future performance (an “over-the-horizon” analysis),
  • Identifies shareholders’ priorities and goals, concentrating on both qualitative and quantitative factors,
  • Evaluates the potential exit options (for instance, sale or management buyout) and their tax implications,
  • Identifies obstacles that stand between you and the exit options,
  • Selects the preferred exit, and
  • Specifies key value drivers that will affect the selected exit.

Avoid extreme time pressure as exit day approaches by considering these issues early — at least two years before actually initiating the exit process.

Step II : Prepare an Action Plan

Now that you’ve clarified where you want to go, you can design how best to get there. Analyze characteristics that potential purchasers will value. Then make necessary adjustments accordingly. If a strategic buyer seems likely, concentrate on making the business more valuable. If a financial buyer seems likely, perhaps beef up management and reduce debt.

Given cash and time limitations, some changes will spur quicker or more direct value increases than others. At all times, owners and shareholders should stay laser-focused on changes likely to reap the greatest value returns.

Step III : Hammer Out the Details

Notwithstanding tax implications, well-seasoned advisors learn a business’ structure and keep its profitability and attractiveness clear to potential acquirers. Experienced tax or estate advisors know the objective is to make the deal happen, but keep in mind that overly creative tax and estate planning can create serious obstacles, such as a delay in closing the deal.

As we alluded to earlier, timing is also important. For instance, it’s usually inappropriate for a company to make major changes (such as in legal structure, IT and large capital expenditures) if it’s close to being sold.

Step IV : Share Knowledge

Many owners of private companies wrestle with making the business less dependent on themselves. After all, spreading knowledge across the management team can only strengthen it, and the stronger the management team, the stronger the company. If a company’s foundation is solid, the buyer will be more comfortable with the owner’s exit. A strong management team also increases an owner’s exit options.

One caveat: Transferring responsibilities to key management must be real, not window dressing. If management isn’t on board, the chance of exiting gracefully grows more remote.

Step V — Work Every Day To Build Value

Not caring for a business is like owning a prize racehorse and feeding and brushing it only once a week because it’s more convenient for the owner. The horse will probably die from such neglect, and even if it lives, it certainly won’t finish any races. Thus, grooming is not a one-time fix, but should be a continual improvement effort.

The Curtain Call

The time and resources each step demands can differ according to the business’ size, sophistication and ownership team. So find a process appropriate for your company and its unique circumstances.

Even if your exit seems a long time hence, it’s never too early to start grooming the business. Although there’s no one-size-fits-all way to do it, a well-structured process reaps the highest reward.

The sale of a business in the current economy takes six to nine months from inception to completion, so the time to consider a plan may be now. Certainly, it can never be too soon to prepare, but it can definitely be too late. Don’t wait until the last minute; please call us for help today.

Uncertainty And Expectation: The Joys Of Life

No one likes uncertainty. Most of the time, we feel relatively confident about the future. Over time, economies grow, asset values appreciate and our stan­dard of living improves. We might worry about the failure of one of our customers or the success of a new product, but the world keeps turning.

However, today the world is awash in uncertainty. Several major financial institutions have failed while others fight for their lives. Almost every economy and industry is in recession. Real estate and stock prices were down by a third at the end of October. And in the U.S., a new administration is set to take office in January.

The breadth and depth of uncertainty raises myriad questions and provides few clear answers. How will the new administration address the unprecedented economic and financial crisis we face? Will it raise taxes, and if so, by how much? When will the credit markets thaw? Amid the chaos, you might be question­ing all these things, as well as your strategic business alternatives and capital needs.

Are buyers making acquisitions given the current environment?

According to the Bureau of Eco­nomic Analysis, non-financial business cash balances as a percentage of total liabilities were about 10 percent at the end of the second quarter of 2008—an 18-year high. This historic amount of cash provides buyers much of the capital they need to make acqui­sitions. That being said, middle market deal activity slowed slightly in the third quarter of 2008, accord­ing to GF Data Resources. Although the full impact of the economic and credit market turmoil has yet to be seen, high performers in attractive industries will likely stand out more now than they did during the 2006-2007 boom. The result? Buyers are spending more time looking for acquisitions and performing due diligence. Leverage multiples are lower. Financ­ing terms are tighter, but deals are getting done.

Is it too late to sell my company before capital gains tax rates increase?

U.S. President-elect Obama has promised to tax capital gains at 20 percent, an increase compared with the current rate of 15 percent. However, most of his tax ideas were floated before the credit mar­kets froze and the economy faltered. Pundits say this could force the president-elect to shelve his tax plans while he focuses on the economy. According to Roberton Williams, principal research associate with the nonpartisan Tax Policy Center, “Most of his tax proposals will be deferred because they don’t have a stimulus effect, and some of them will make the economy worse.” Regardless, the 15-percent rate on capital gains will revert to 20 percent after December 31, 2010, if no action is taken. Tax rates are only one of many factors to consider. If you are ready to explore a sale, 2009 and 2010 will likely be good years to sell from a tax perspective.

My balance sheet is strong, but sales are flat. Is this a good time to consider growth through acquisition?

Data compiled by the Administrative Office of the U.S. Courts reveal bankruptcy filings rose 28.9 percent to 967,831 during the 12 months ended June 30, 2008. It seems likely this trend will continue into 2009 and perhaps beyond. As sales and profits plummet and the ratio of assets to liabilities constricts, it becomes increasingly difficult to fund a business as a going concern. Alternatives become limited. At some point, a dis­tressed sale, reorganization or liquidation are the only options. Although they may not necessarily be in or headed for bankruptcy, some of your competitors are weak and present acquisition opportunities. Even if your markets are shrinking, the right acquisition can help you grow by grabbing more market share. If you have access to capital, one or more carefully structured acquisitions may be one of the best ways to restart growth.

If most of my sales are to the auto industry, how do I grow or survive?

CSM Worldwide predicts North American auto production will contract more than 11 percent to 11.3 million units in 2009 from 12.8 million units in 2008. By 2010, production is expected to bounce back more than 8 percent to 12.3 million units, reaching 16.0 million units in 2014. With auto production stuck in reverse for the next few years, acquiring one or more of your competitors can help. However, you need to diversify. So, an acquisition outside the automotive industry would be best. The experience gained and skills developed while serving auto customers should be transferable to other, attractive industries. It is hard to imagine a more demanding customer base than the auto OEMs or their suppliers. If you lack access to the capital required to make an acquisition, but your business model is sound, you might need to find a financial or strategic partner to help.

My bank has asked some of my business friends to find another bank even though they have never missed a payment. What can I do to avoid this situation?

To banks, loan agreement covenants are more important than payments. That means you need to understand all financial and non-financial covenants, how to satisfy them and when to communicate with your bank. Consider a covenant checklist and fore­casting model to monitor compliance. Make them part of your annual budget process and review them at least quarterly. And communicate potential prob­lems with your lender(s) as they arise. Don’t wait. Banks are expecting record levels of covenant viola­tions during the next few quarters, so it is a good time to reread your covenants and start being proactive. If your bank is one of the many looking to raise capital, one of its best sources is its customers who do not comply with their loan agreements.

Given the level of uncertainty, many business owners and managers are reconsidering their strategic alterna­tives and capital needs. The mergers and acquisitions window remains (cracked) open, especially for buyers with cash and sellers with exceptional businesses who want to sell at the 15-percent capital gains rate. Banks are lending, but only to outstanding companies that know and satisfy their covenants.

Taxing Considerations for Business Sellers

When selling your business, tax considerations play an important role in maximizing the cash return to you and the rest of the shareholders. Because Uncle Sam will penalize you if he doesn’t receive a share of the proceeds, it’s in your best interests to ensure he gets his due – but not one penny more.

To minimize the tax bite, sellers must understand the legal implications of the terms and conditions at the start of the sale process. When you consider divesting your business, consult with your advisors to get appropriate advice. In the interim, let’s discuss some basics so you better understand how tax laws can affect you when you sell your business.

What’s Your Type?

When you established or bought your firm, you either chose a business type or acquired an already formed business. Common business structures include C corporations, S corporations, limited liability companies (LLCs), general and limited partnerships, and sole proprietorships. Note that S corporations, LLCs and partnerships generally are more tax friendly to sellers than C corporations.

Sellers of C corporations prefer to sell stock rather than assets for two primary reasons: All liabilities go with it, and, more important, only the stockholders recognize – and thus pay tax – on gains from the sale. In other words, there’s no gain at the corporate level.

Buyers, on the other hand, prefer to pay for depreciable assets and assume only the liabilities that they want. When C corporation assets are sold at a profit (that is, marked up from book value), Uncle Sam takes two bites from the apple – one at the corporate level and one at the shareholder level after the company pays out what’s left of the gain to its shareholders. Fortunately, in many cases the second bite will probably be smaller because of the new 15% tax rate on dividends under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Conversely, when an S corporation, LLC or partnership is sold, the gain or loss from selling the assets is passed directly through – with no tax at the corporate or company level – to selling stockholders, LLC members or partners. The buyer and seller must agree to the assets’ value because the IRS requires the value of each asset class to appear in the sales agreement (or in one of the exhibits).

So, when establishing or buying a business, remember that there are significant tax benefits from using the S corporation, LLC or partnership form of business. Also, negotiate the transaction’s structure; it may significantly affect what you as the seller can keep after taxes are paid.

If you’re buying a C corporation, you can establish an S corporation or LLC to buy it. Then you can merge the C Corporation into the buying organization. When it comes time to sell, you’ll be able to reap the tax benefits we’ve discussed. Note that if you’ve converted a C corporation to an S corporation, 10 years must pass before a seller can receive the conversion’s full tax benefits. So make sure (whether you’re buying or selling) to consult with your tax advisor along the way or a nasty surprise may await you.

Often C corporation sellers will try to get a higher price from the buyer to offset a part of the larger tax bite. When that occurs, the buyer will want to make part of the consideration a consulting agreement, employment agreement or earn out. Why? These payment types are tax deductible to the buyer when paid to the seller, whereas funds spent on stock, inventory, fixed assets, goodwill and the like are not.

But, while these agreements are tax friendly to the buyer, they are tax unfriendly to the seller because any money received from these types of agreements is taxed at the “ordinary” income tax rate rather than the lower long-term capital gain tax rate.

Another consideration regarding taxes has to do with the timing of payments received. If you are selling your privately held company (either stock or assets) through an installment sale, you may report the gain on the installment method to time tax payments to coincide with cash received because of the sale.

Why Go It Alone?

Tax laws and IRS rules and regulations are extremely complex. A savvy seller will seek sound tax advice throughout the divestiture process to minimize taxes and maximize take-home cash. Please call us to help ensure that Uncle Sam gets only what’s coming to him.

Take Note of New Financial Reporting Standards

Combining two businesses is never simple. Myriad factors – many beyond anyone’s control – can affect each step along the way. The best-case scenario is an honest accounting of assets and fair third-party mediation throughout the merger process. Toward that end, the Financial Accounting Standards Board (FASB) rigorously deliberated accounting treatment of business unions. The results? Statements of Financial Accounting Standards 141 and 142.

Goodwill Hunting

Statement 141 addresses business combinations, while Statement 142 focuses on goodwill and other intangible assets.

Statement 141.Intangible assets are now recorded separately from goodwill at their fair values and amortized over their remaining lives. Previously, many companies recorded as goodwill any purchase price not allocated to an acquired company’s current assets’ fair market values and real and personal property.

Statement 142.This prescribes a new method of testing goodwill for impairment by establishing a separate test using fair value, which is based on market evidence or standard valuation techniques. If the goodwill’s fair value is less than its book value, goodwill is impaired. Impairment loss is measured by the amount that goodwill’s carrying value exceeds its implied fair value.

It’s now important to have an expert perform a business enterprise valuation of the reporting unit to estimate its value as an operating business and then value identifiable assets, such as working capital and real property.

The valuation’s underlying assumptions must be based on market participants’ transaction price expectations. For asset valuations, this would include assessing the asset’s current use. For reporting unit valuations, your expert should consider whether the acquiring entity would be willing to pay a premium for a controlling interest. If so, a publicly traded reporting unit’s market capitalization may not represent the unit’s fair value as a whole, because such a control premium would cause the unit’s fair value to exceed its market capitalization.

Now, only the purchase method accounts for business combinations. So why should you care? Well, that involves valuing acquired intangible assets as well as valuing current assets and real and personal property. Intangible assets that are separable from goodwill must be recorded at their fair values and amortized over their remaining useful lives. But, goodwill (both existing and future) and intangible assets with indefinite lives won’t be amortized under any circumstances.

Within six months of the closing, existing goodwill must have a benchmark value assessment, which must establish whether the existing goodwill’s book value is impaired.

Assessing Goodwill Impairment

Under the new statements, the goodwill impairment test requires a market-based valuation of the reporting unit (that is, the unit reporting the goodwill). There are several impairment hot spots, including:

The reporting unit’s current-period operating or cash flow losses, combined with a history of losses or a forecast of continuing losses, or

Significant adverse change in one or more of the assumptions or expectations (including competitive factors and loss of key personnel) used to determine fair value.

Other existing goodwill doesn’t require an immediate impairment test; however, such goodwill will need a benchmark assessment.

Finally, FASB itemized 29 intangible assets separable from goodwill. They’re based on the following categories:

  • Marketing
  • Customers
  • Contracts, and
  • Technology.

Fortunately, assessment isn’t as onerous as it might appear, because not all of the enumerated intangible assets exist within every business.

What’s It Worth?

Statement 142 requires measuring goodwill impairment based on market value. This means valuation by independent professionals specially trained in fundamental, discounted cash flow and market pricing analyses. So please call us to facilitate a FASB 142 valuation.

Sidebar: More Than Words

In addition to changing the rules, Statements of Financial Accounting Standards 141 and 142 have altered a few definitions. Here are two frequently encountered expressions:

  1. Reporting unit. Goodwill can often be associated with a specific operating or business unit. Statements 141 and 142 define a reporting unit as the “lowest level of an entity that is a business and that can be distinguished physically and operationally and for internal reporting purposes from the other activities, operations, and assets of the entity.”
  2. Fair value. The new accounting statements define fair value as “the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.” Thus, fair value is not a book value concept. A reporting unit’s fair value is “the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties.” According to Statement 142, quoted prices on active markets measure fair value best. But, if such quotes don’t exist, estimate fair value using standard valuation techniques.

Selling Your Business? Learn To Think Like a Buyer

You’ve built a great business with love and care. The business has grown larger than you’d ever imagined, and it generates a nice profit that has allowed you and your family to live a comfortable life. Now you’ve decided it’s time to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business. By entering the mind of prospective buyers, you can see what you can do to increase your company’s appeal.

What Buyers Look For

There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:

1. Cost and terms. What will it take to acquire the business? (How much cash and how much debt?) What are the deal’s terms and conditions?

Because we’re constrained by space, we’ll focus on one standout issue: the amount of cash required to make the deal. By decreasing the cash requirement and increasing the acceptable debt portion, a seller can make its company more attractive – and perhaps even increase its selling price.

The biggest factor directly affecting a deal’s attractiveness is the asset base. Simply put, the more the buyer can borrow against to do the deal (or for post-transaction capital), the less cash you need upfront. As collateral, banks usually accept land, buildings, equipment, inventory and accounts receivable.

Many entrepreneurs have purchased the land their business resides on and leased it to the company. An often unanticipated side effect is that this structure reduces the company’s asset base, thereby decreasing the amount of debt leverage the seller can obtain.

Another way sellers can reduce the buyer’s initial cash requirement is by accepting part of the purchase price over time. Commonly known as “seller paper,” this can do a great deal to lubricate a sale.

2. Continuity. Will the business continue to operate similarly after the sale? In fact, much of the risk of buying a company relates to continuity. Let’s look at a few examples of potential continuity problems:

  • The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain.
  • The current owner has special expertise that is undocumented and difficult to learn.
  • Key personnel aren’t committed to staying.
  • A major threat of offshore competition looms.

Sellers armed with solid responses to these types of continuity concerns will more frequently get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence can be worth millions to you when you sell.

3. Growth. Don’t hesitate to point out unexploited opportunities. For instance, you may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer who believes he or she can substantially increase revenues will pay more for the business than one who believes the current owners have maximized opportunities.

What Sellers Should Do

It may seem counterintuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast, “My company would run just fine without me,’ or ‘There’s lots of sales opportunities I failed to exploit.” Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.

Rethinking A Sales Strategy

Whether you’re thinking about a divestiture or a sale of your company, or if you’re in the middle of an operational turnaround or managing your business as usual, maintaining and growing sales are critical to your success. That’s why every business needs a disciplined approach to selling.

One such approach is outlined by Robert B. Miller and Stephen E. Heiman in their acclaimed work, “Strategic Selling.” In this book, they share insight gained through years of consulting with top sales people.

Here’s a summary of the book’s key elements to put you in the strategic sales frame of mind:

The Ideal Customer

No single product or service is made for everyone. That’s why companies make money by matching their offerings with the self-interests of their custom­ers. The ideal customer is the standard against which to measure the actual customers.

Start by analyzing the best custom­ers. In your opinion, what qualities make them the best? Do they generate the most revenue for your business? Do they pay their bills quickly? Are they smart, rea­sonable people who stretch your capabilities?

Next, use your answers to define the “perfect” cus­tomer. Consider two categories of customer charac­teristics: demographics and psychographics.

Demographics are the physical characteristics that define a customer. What are their annual revenues? What industries do they serve? Where are they located? What are their distribution channels?

Psychographics are the values and attitudes shared by the individual buyers within a company and held collectively by the company itself. What are their core values? Is their business mission or vision similar to yours?

Buying Influences

Are you involved in a complex sale? That means several people must give their approval before it is finalized. Here’s a scorecard on the roles that people play in influencing a complex sale:

Economic buyer: The economic buyer will give final approval, and can say yes when everyone else has said no, or vice versa.

User buyer: The user buyers make judgments about the potential impact of a product or service on their job performance. The user buyers’ success is tied to the success of the company’s product or service.

Technical buyer: This person screens out potential suppliers and focus on the product or service and how well it meets certain objective specifications. Technical buyers can’t give a final yes, but can give a final no.

Coach: The coach guides sellers to the other buyers and provides the seller with information to help position themselves and their product or service with each one.

Response Modes

When selling a product or service, it is important to know how receptive the buyers are to the change—or sale—that is being proposed.

Growth mode: This buyer knows the difference between the way things are and the way they should be and will be receptive to a proposal if it helps them do more or better.

Trouble mode: A buyer in trouble mode also sees the difference between the current and future states, but is concerned about a problem. This buyer will wel­come change that addresses the cause of the problem.

Even keel/overconfident mode: These buyers think the current situation is as good as or far better than desired. In other words, if it ain’t broke, don’t fix it. They are completely unreceptive to change.


The buyers’ personal needs should be met as well as their business needs. This can be achieved by giving them win-results. A win is a personal gain that satisfies a buyer’s perceived self-interest. A result is the impact a product or service has on the buyer’s business processes. A win-result is a result that gives a buyer a personal win, which is the real reason people buy.

The Sales Funnel

It’s important to actively work the sales funnel so that orders are predictable. To do so, customers and prospects should be sorted into one of three sections of the funnel: above the funnel, in the funnel, and best few.

Above the funnel. You have data, which suggests a fit between your product or service and the prospect’s needs. In this section, it is time to qualify or verify the suggestive data by contacting the buying influences. At least one buying influence should be contacted and a growth or trouble discrepancy that a product or service can address also should be identified.

In the funnel. You’ve verified the possibility of an order: You’ve contacted at least one buying influence and spoken about growth or trouble. In this part of the funnel, the buying influences and the results each buyer needs to win should be identified. Also, the response mode of every buyer should be understood. Time and uncertainty decrease as you move down the funnel.

Best few. You’ve all but eliminated luck and uncer­tainty in the final buying decision. There are a few discrete tasks to be performed. The bases have been covered so well that you’ve moved beyond trial and error or guessing. Finally, there’s at least a 90 percent probability that the order will close in half the time or less of the normal sell­ing cycle.

Robert B. Miller and Stephen E. Heiman published a more recent book called “The New Strategic Selling.” Also, find information about sales performance on their Web site at