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Bidding War

How to Trigger an M&A Bidding War When Selling Your Business

How To Trigger A Bidding War For Your Business

Cody Weaver , CONTRIBUTOR

I write about improving the value of your business. Opinions expressed by Forbes Contributors are their own.

One of the toughest things about selling your business is attracting an acquisition offer and creating a bidding war without putting a metaphorical “FOR SALE” sign on your company’s front lawn. My day job is running a company called Business Acqusition Experts, where we help companies build corporate value through exit planning. With the end goal of taking the businesses to market and monetizing their equity aka “their life’s hard work” through a sale to a stratetegic or financial buyer. One of the key tenets of our methodology is the idea that, to get a premium valuation, you need buyers coming to you, not the other way around.

John Dorsey

How do you get buyers keen to make an offer and lure them into A Bidding War without telling them you’re for sale? If you sound too keen to sell, a buyer will assume there is something wrong with your company. At the same time, if you appear standoffish, an acquirer may assume approaching you would be a waste of their time.

 

 

The Magic Letter

In 2001, John Dorsey started an safety consulting firm called Safety One Advisors, Inc in Newark, New Jersey. Dorsey grew Safety One to be a successful, consulting practice. He was an active marketer and sponsored local sports teams and events, making him a well-known figure in the area.

In 2016, Dorsey received an unsolicited offer to buy his firm from a competitor he respected. As Dorsey told me when I spoke to him in our initial conversation, he was not planning to sell, but warmed to the idea as he imagined moving on to a new chapter in his life. When the deal fell through because of a financing glitch on the buyer’s side, Dorsey was disappointed. He had become emotionally committed to selling, but no longer had a buyer. What’s more, he operated in an area and a niche industry where they were only a handful of competitors, so getting the word out he was interested in selling without spooking his clients and employees would be tricky.

Dorsey eventually hired us and together we surveyed the landscape of competitors and strategic buyer’s operating within his market vertical. And identified a couple of firms that he respected and we sent the owner’s a letter. The note simply stated that Dorsey had received an unsolicited offer to buy his firm which he had been seriously considering; before making any final decisions, we wanted to know if the other owner’s would also be interested in making a bid.

The letter sets the right tone for a few reasons:

  1. It’s truthful. He had been seriously considering an offer
  2. It doesn’t sound desperate. Dorsey had been sought out
  3. It’s non-committal. It doesn’t say he is for sale, or that he is going to sell for certain, merely that he was seriously considering an offer

In the end, several of the  recipient’s  of Dorsey’s letter were interested in expanding and simultaneously made offers which put us in a prime position for a bidding war. One buyer eventually won the bidding war and acquired Safety One for 1.25 gross revenue—most of which was paid at closing with a few smaller payments due over time. Professional services firms like Safety One usually sell with a significant portion of the consideration in an earn-out, a bonus scheme that puts a portion of the sale price at risk and it only becomes available if the seller stays on and helps the buyer achieve their goals in the future. With our guidance, Dorsey was also able to avoid an earn-out in part because the buyer knew—thanks to the letter —his firm was in demand, giving Dorsey a little more leverage to get the terms he wanted.

If you’re keen to sell, consider a variation of Dorsey’s letter, which strikes the right tone between confidence and openness.

For more information about How to get more $$$ for your business, Please read this article as well: http://acquisitionspro.com/high-business-sale-price/

 

 

 

If you’re considering selling your business in the future, please feel free to reach out to us for a free no-obligation consulation. www.acquisitionspro.com

 

 

unexpected events when selling a company

The Top 3 Unexpected Events CEO’s May Encounter During the Selling Process

When it comes time to sell a business, not everything goes as planned. Having Unexpected events when selling a company is not uncommon for  CEO’s and Business Owner’s. However, you may be one of the lucky ones. And find that selling your business is a streamlined process. But most CEO’s looking to sell a business find they can expect the unexpected. Let’s take a closer look. Here are some of the top surprises CEO’s experience.

Unexpected events when selling a company #1-

 Surprisingly Low Bids 

 

Selling a Business or Company is full of pitfall’s. Avoid mistakes and work with experienced advisers.

CEO’s looking to sell their businesses need to be ready for almost anything. One of the larger surprises that CEO’s face are surprisingly low bids. Don’t let low bids shock you. Read more here about how to increase value in your business. And get much higher bids. Click the link!

Unexpected events when selling a company #2 – 

A Huge Time Commitment

CEO’s have to a substantial amount of work to do before their company goes to market. Responsibilities like the confidential information memorandum and management presentations are highly important. They should be well thought out. Creating a list of potential acquirers also requires a lot of research. The confidential information memorandum is considered the cornerstone of the selling process. A CIM is typically at least 30 to 50 pages in length.

Most business intermediaries expect the potential acquirers to submit their initial price based on the information contained in the memorandum. Management presentations are also time consuming, but it is common to have these presentations ready before the final bids are submitted. Ideally it is best for the CEO to show the benefits involved in combining the acquirer and the seller as well as the future upside for selling the company.

Unexpected events when selling a company #3 –

The Need for Agreement from Other Stakeholders

CEO’s are able to negotiate the transaction, but the sale isn’t authorized until certain shareholders have agreed and done so in writing. Until the Board of Directors, shareholders and financial institutions who may hold liens on key assets, have agreed to the deal, the deal simply isn’t finalized. Often this legal necessity turns out to be an issue that gets in the way of a successful deal.

Sellers can take their “eye off the ball” during the time-consuming process of selling a company, however, this can be a serious mistake. CEO’s must understand that potential acquirers will be examining monthly sales reports with great interest. If potential acquirers notice downward trends they may want to negotiate a lower price. No matter how time consuming the sales process may be, CEO’s have to maintain or even accelerate sales.

Selling a business can have a wide array of surprises. Avoiding these kinds of issues is paramount. The good news is a CEO can drastically reduce them. Proper prior planning prevents poor performance. It is vital to keep in mind that the best practice for selling a business is preparation and diligence. There can still be many surprises when selling a business. When selling a company. It is always a prudent move to hire or consult with a business broker or M&A specialist. Many offer free consulting and will help you prepare. Their goal is just to build a relationship. In hopes one day getting a sell side engagement.

Cody Weaver President at Business Acquisition Experts- “It is our goal to ensure the successful exit of as many fellow entrepreneurs as possible

Copyright: Business Acquisition Experts

Business Brokerage Press

 

goodwill

How to Drastically Reduce Taxes by Allocating Goodwill

You may hear the word “Goodwill”  thrown around a lot, especially during business valuation and/or buying and selling a business, but what does it really mean?  When it comes to selling your business, the term refers to all the “sweat equity” that the seller put into a business during his/her ownership tenure. Goodwill can be thought of as the difference between the various tangible assets that a business has and the overall purchase price.

The M&A Dictionary defines goodwill in the following way, “An intangible fixed asset that is carried as an asset on the balance sheet, such as a recognizable brand, product name, or strong reputation. When one company pays more than the net book value for another, the former is typically paying for goodwill. Goodwill is often viewed as an approximation of the value of a company’s brand names, reputation, or long-term relationships that cannot otherwise be represented financially.”

Goodwill vs. Going-Concern

Now, it is important not to confuse goodwill value with “going-concern value,” as the two are definitely not the same. Going-concern value is typically defined by experts, as the fact that the business will continue to operate in a manner that is consistent with its intended purpose as opposed to failing or being liquidated. For most business owners, goodwill is seen as good service, products and reputation, all of which, of course, matters greatly.

Below is a list of some of the items that can be listed under the term “goodwill.” As you will notice, the list is surprisingly diverse.

42 Examples of Goodwill Items that Drive Core Value

  • Phantom Assets
  • Local Economy
  • Industry Ratios
  • Custom-Built Factory
  • Management
  • Loyal Customer Base
  • Supplier List
  • Reputation
  • Delivery Systems
  • Location
  • Experienced Design Staff
  • Growing Industry
  • Recession Resistant Industry
  • Low Employee Turnover
  • Skilled Employees
  • Trade Secrets
  • Licenses
  • Mailing List
  • Royalty Agreements
  • Tooling
  • Technologically Advanced Equipment
  • Advertising Campaigns
  • Advertising Materials
  • Backlog
  • Computer Databases
  • Computer Designs
  • Contracts
  • Copyrights
  • Credit Files
  • Distributorships
  • Engineering Drawings
  • Favorable Financing
  • Franchises
  • Government Programs
  • Know-How
  • Training Procedures
  • Proprietary Designs
  • Systems and Procedures
  • Trademarks
  • Employee Manual
  • Location
  • Name Recognition

As you can tell, goodwill, as it pertains to a business, is not an easily defined term. It is also very important to keep in mind that what goodwill is and how it is represented on a company’s financial statements are two different things.

Here is an example: a company sells for $2 million dollars but has only $1 million in tangible assets. The balance of $1 million dollars was considered goodwill and goodwill can be amortized by the acquirer over a 15-year period. All of this was especially impactful on public companies as an acquisition could negatively impact earnings which, in turn, negatively impacted stock price, so public companies were often reluctant to acquire firms in which goodwill was a large part of the purchase price. On the flip side of the coin, purchasers of non-public firms received a tax break due to amortization.

The Federal Accounting Standards Board (FASB) created new rules and standards pertaining to goodwill and those rules and standards were implemented on July 1, 2001. Upon the implementation of these rules and standards, goodwill may not have to be written off, unless the goodwill is carried at a value that is in excess of its real value. Now, the standards require companies to have intangible assets, which include goodwill, valued by an outside expert on an annual basis. These new rules work to define the difference between goodwill and other intangible assets as well as how they are to be treated in terms of accounting and tax reporting.

Before you buy a business or put a business up for sale, it is a good idea to talk to the professionals. The bottom line is that goodwill can still represent all the hard work a seller put into a business; however, that hard work must be accounted for differently than in years past and with more detail.

Generally speaking when you purchase another business, you are only buying the assets of that business. In other words, you are not buying the entity. Why not? Well, the entity could have a lot of skeletons in the closet. If the previous owner had made a mistake on a tax return and that mistake led to $100,000 in damages for the client, as the new owner do you want that responsibility or exposure? Nope.

There are circumstances where an asset sale is NOT ideal. At times the entity holds a license that is non-transferrable such as a liquor license or the entity has a contract with the government that took 7 years to bid and be awarded, and is also non-transferrable. But for most transactions, you will be executing an asset sale.

Within that asset sale is allocation of assets. Buyers and sellers have competing interests on price of course, but they also have competing interests on tax consequences. And to add to the complication, based on each party’s unique circumstances, a buyer and seller’s interests might be in concert with each other. In other words, an asset allocation might provide a favorable tax position for the buyer because of his or her own tax world, while still providing a favorable or at least neutral tax position for the seller. And these issues can affect the purchase price as well.

As business consultants, the Business Acquisition Experts is very aware of these competing interests and how they interplay with price negotiations. Let us help!

Let’s review some basics.

Asset Priority Buyer Seller
Cash Class I NA NA
Investments Class II NA NA
Accounts Receivable* Class III NA Ordinary Income
Inventory, Book Value Class IV NA None
Fixed Assets Class V Amortized, Varies Recapture / Gain
Intangibles Class VI Amortized, 15 Years Capital Gain
Goodwill Class VII Amortized, 15 Years Capital Gain
Non-Compete NA Amortized, 15 Years Ordinary Income
Consulting Agreements NA Expensed Income + SE Tax

* Sellers using an accrual method of accounting would not recognize income for the sale of their Accounts Receivable

The IRS breaks assets into classes, and essentially once you’ve allocated everything to Class I thru Class VI, whatever is left over is then considered Goodwill. So if the price is $200,000 and all your assets add up to $150,000, then you are also purchasing $50,000 in Goodwill.

 

For more on selling your business and how to negotiate the many parameters of a deal contact Business Acquisition Experts today!

 

Copyright: Business Acquisition Experts, Inc.