Very basic, but important issues to consider when a business owner is contemplating an exit event. 

PART 1 - How much is my business worth, and why does the structure of the transaction matter?

Ever wonder to yourself, "Why hire an outsider to sell my business when I have grown it and know it better than anyone else?" Fair question.  Given the often towering obstacles CEOs and owners have overcome in building up a business, and bringing it to the point where it becomes attractive to a strategic or financial acquirer, that confidence is understandable.  Some CEOs and Owners think M&A is a do it yourself type of transaction.  However, the skills and expertise gained from growing a company are not necessarily automatic qualifiers to handling the single largest financial transaction of your life. 

Sometimes we don't know what we don't know.  For instance: What multiples and metrics do you use in valuation comparisons? Do you have a preference for selling stock or assets?  What are the different valuation techniques, and how do you determine which one is most appropriate, or how do you weigh the results?  There are a host of issues, often unanticipated, to deal with when entering any transaction. Let's focus on two issues of a transaction where professional advice is often critical - Terms and Valuation.

1)      Terms.  First off, price is not everything. There are vastly divergent tax implications associated with various transaction structuring options.

For example: Should you sell the assets of your company or the capital stock?  For multiple reasons, buyers usually prefer to structure a transaction as an asset sale rather than a stock sale. An asset sale allows a buyer to purchase the company without fear of unknown or contingent liabilities. Another reason acquirers prefer to purchase assets versus stock is the ability to amortize the goodwill portion of the purchase price by utilizing a stepped-up basis for the assets.  This savings is one reason a buyer can justify a higher purchase price in an asset sale versus a stock sale.

For the seller, the double taxation of an asset sale, at the corporate and personal level, destroys value.  An optimal approach is to compare after-tax effects for both the buyer and seller in order to maximize the best overall outcome.   Another structural issue is the form of payment.  Will you accept cash only or will you accept some consideration in the form of securities?  An advisor can aid you in anticipating and analyzing the differing terms proposed by various suitors.

2)      Valuation   Different methods of valuations vary by degree of relevance based on the purpose of the valuation.  We believe the most credible valuations indicate a valuation range rather than a firm number. 

The most relevant type of valuation to a business owner contemplating an exit strategy is Market Value.  A rational valuation will instill confidence in prospective buyers. As a selling shareholder seeking to maximize your net after-tax proceeds, you must consider the fact that not every potential acquirer will value your business the same.  The opportunity for enhanced profits and/or reduced costs created by combining businesses is not equivalent for all potential acquirers and the differences in valuations may not be due solely to negotiation posturing.

By engaging an outside advisor, you will be able to develop a valid, non-biased, business valuation.  In fact, this is often one of the main reasons owners consider engaging an advisor. 

When coming to this decision, here are some questions you should ask yourself:

Can my team quantify future risks and net cash flows? Can we calculate our weighted average cost of capital?  What normalizing adjustments can we legitimately claim on our financial statements that enhance our value?  Do we know how potential acquirers will value our company? Where will an acquirer's synergies come from?

Professional judgment on a transaction of this scale is needed.  That judgment is gained from experience.