"Maximizing the amount of cash you receive upon the sale of your company is the business owner's equivalent of hitting the game-winning home run. To hit one out of the park, you must know what to do before you approach the batter's box. The same applies when selling a company to an outside third party, and the two options to consider are negotiated sales or controlled auctions.
Let's consider the case of our hypothetical "Mr. Kentucky."
Mr. Kentucky, the owner of the equally hypothetical Kentucky Diamond Importers, had been approached by a national competitor. Preliminary negotiations led to an offer of $7 million for the company. Before he accepted this offer, he called me with the good news. I urged him to contact an investment banker to orchestrate a controlled auction, a strategy Mr. Kentucky thought would scare off his suitor. The strategy scared the suitor alright — they offered another million dollars to avoid the auction. Mr. Kentucky subsequently hired the investment banker and sold his company (to another suitor) for $13 million cash. How?
First, Mr. Kentucky was clear about his objectives. He told his investment banker exactly what he needed financially, when he wanted to exit, how long he was willing to stay and in what capacity, and which companies he absolutely would not sell to. Using those criteria, Mr. Kentucky's investment banker developed a buyer profile and began to market the company.
Next, the investment banker developed a Deal Book, which told the story of Kentucky Diamond Importers. Qualified suitors signed confidentiality agreements and were sent the Deal Books. After studying the Books, three suitors entered the controlled auction in which they bid against each other for Mr. Kentucky's company. The auction concluded when Mr. Kentucky selected the suitor that met his financial objectives and the other exit objectives and signed a non-binding Letter of Intent outlining the terms of the purchase.
The buyer's attorneys completed the due diligence process (learning everything about Kentucky Diamond Importers as they drafted) and negotiated the definitive purchase agreement. The closing was held, and Mr. Kentucky left the table with $13 million in cash.
If, as in Mr. Kentucky's case, a sale is properly organized and orchestrated, the process can help increase the amount of cash an owner receives.
Contrast the sale method used to sell Mr. Kentucky's business (a controlled auction) with the negotiated sale. In a negotiated sale, a buyer has identified your company for acquisition, and you have decided to sell to that buyer. The buyer controls the timing, the cash, and generally has more leverage in negotiations.
A controlled auction introduces your company to a pre-selected list of qualified buyers. The key to a controlled auction is to have multiple buyers, bidding for your company at the same time, each having identical information and each being financially qualified to acquire your company. As a seller, you can get top dollar when these buyers compete against each other for the opportunity to purchase your company.
Controlled auctions are not a one size fits all proposition. They work the best when:
The value of the company is at least several million dollars and large enough to attract the interest of multiple buyers.
An owner's transaction advisors are skilled and experienced in conducting controlled auctions. (This advisor is usually an investment banker or, for smaller deals, a business broker.)
Getting top dollar for your business requires more than having the best possible business to sell. It also requires selling your business using the method best suited to extract top dollar from the buyer's checkbook.
Disclaimer: The information contained in this article is general in nature and is not legal advice. For information regarding your particular situation, contact an attorney or tax advisor. This article is believed to provide accurate and authoritative information related to the subject matter. The accuracy of the information is not guaranteed and is provided with the understanding that none of the providers of this article, including Business Enterprise Institute, Inc. is rendering legal, accounting or tax advice. In specific cases, clients should consult their legal accounting or tax advisors.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS under circular 230, we inform you that any U. S. Federal tax advice contained in this communication, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.
The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.
Larry E. Botts is a member of BEI's Network Of Exit Planning Advisors ©. Send questions to lbotts@thenautilusgroup.com or visit www.wealthcoachofkentucky.com ® 2007 Business Enterprise Institute, Inc.
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