Peter G. Sutherland & Associates, LLC
Call us: 805-218-7859
FREQUENTLY ASKED QUESTIONS - FAQs
What does a merger and acquisition specialist do? How can PGSA help?
Please see "What Does A Mergers And Acquisition Specialist Do?” to gain an understanding of how PGSA can help with the Business Sale or Recapitalization process. In brief, we help you:
- Expertly market your business in a highly confidential manner
- Attract the best possible price for your company because of our ability to locate more than one qualified buyer and because of our years of experience negotiating and structuring successful transactions.
- Structure a deal that allows you to receive the maximum after-tax benefit.
- Coordinate your team of tax advisors including accountants and attorneys to ensure that the transaction is done in your best interest
- Negotiate and close a successful transaction while letting you stay focused on business operations
Can't I sell my business on my own?
An experienced acquisition team can easily outmaneuver a business owner. The best thing a business owner can do to maximize the take home during a business sale or recapitalization process is to focus on running the operations of the business at peak performance. You will put yourself at a severe disadvantage if you attempt to negotiate on your own against experienced acquirers and/or experienced M & A professionals representing acquirers. Without a capable M&A advisor, the deal making process can be strenuous and take much of your attention from the business. It is best to have an experienced professional help you negotiate.
One anther important factor that most sellers do not realize is the grueling nature and length of the business sale process even after the price and terms are established. Most deals take months to close even after a buyer is found and a LOI is agreed upon. If your business suffers due to the reduced attention during this lengthy business sale process, the acquirers will seize the opportunity to renegotiate the deal. Any drop in the business performance will adversely effect the valuation of your business and many times kill the deal. Unless you believe you can effectively do the duties of an M&A advisor without losing the focus on business, attempting to market the business by yourself would not be a wise choice.
What are the top 3 mistakes that business sellers make?
The most expensive mistake that sellers make is not taking the time to plan a sale. If you have to sell in a hurry, the chances are pretty slim that you will get what you deserve.
The second most expensive mistake that sellers make is that they get themselves into a single buyer auction. This typically happens when the seller got an unsolicited bid from an industry player. The other common situation is when a seller tells his banker or CPA or attorney that he is planning on selling and the well meaning counsel introduces the seller to someone who is looking to buy a business. Regardless of the reason, if there is just a single player determining the value of your business, you are very likely to get an offer that is well below the market price.
The third most expensive mistake that sellers make is taking the eye off the ball during the business sale process. This tends to be not only expensive but traumatic as the buyer renegotiates price and terms of a deal that you think is done.
If you have a reason to believe your business is worth over a million dollars, engage an M&A consultant, plan the process and get the most out of your business by getting multiple buyer to the table and negotiating the best deal.
How do I find out what my company is worth?
In any business sale or recapitalization transaction, the value of a business is determined by the acquirer. While we may communicate with you on what we perceive is the likely range of values for your business, we rarely take the first step in giving out an asking price to acquirers. Depending on the company, the strategic value of the business can be far in excess of what the cash flow may indicate.
See "What Is My Business Worth?" and "The Myth Of Fair Business Valuation" for more information on how businesses are valued in real life transactions. Getting the right acquirer to the table and finding out what a business is worth to them and getting them to pay a premium is one of the most challenging aspects of an M&A advisors job.
What are the three most important factors that improve the value of a business deal?
Strategic fit, growth rates and recurring revenues are the three most important value drivers for most businesses. See "How To Maximize The Value Of Your Business" for tips on how you can improve your business valuation.
What are the three most important factors that reduce the value of a business deal?
Unanticipated or undisclosed downside during the deal process is very likely the single largest value killer in a business sale. Customer concentration and risk of business transferability are two other important facts that drive down the value of a business. See "Avoiding Value Killers In A Business Sale" for tips on steps to take to improve business sale.
What can an M&A advisor do to improve the business valuation?
Preparing a business for sale and improving Business Valuation, refer to "Valuations-Know What Your Business is Worth" section is one of the areas in which a competent M&A advisor can make a huge difference. Businesses typically spend an inordinate amount of time setting up and using accounting practices that reduce the owner’s tax liabilities. CPAs use various business ownership structures and techniques to defer/reduce the revenues or accelerate/inflate the expenses to help business reduce its tax burden. The unforeseen side effect of this exercise is that, to a potential acquirer, the profitability of the business may appear much smaller than what it really is. There may also be other after-sale tax consequences attributable to corporate structure and to depreciation. Business intermediaries “add-back” non-business, non-cash expenses and “recast” the financial statements to get a better picture of the finances, but in most cases this is more of a band-aid than a real solution. Please see our article on "What Every Business Owner Needs To Know About Taxes & Valuation" for a more detailed answer to this question.
What is the difference between Net Income, SDCF, EBIT, and EBITDA?
Net Income (NI), Seller Discretionary Cash Flow (SDCF), Earnings Before Interest & Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) are different ways of measuring a company's profitability. Please see our article "Net Income, EBIT, EBITDA, SDCF" for an explanation of the differences between these metrics.
What are the liquidity or financing options for mid market business owners?
Mid market owners typical gain liquidity throw debt or equity capital or by doing an outright sale of the business. See "Financing Options For Mid Market Businesses" on more detailed explanation of the options and trade-offs.
Who are PEGs? Does it make sense to sell my business to a PEG?
PEG stands for Private Equity Group. PEGs are one of the important sources of liquidity for mid market business owners but not the only source. Elite targets PEGs along with other possible acquirers for your company to make sure your deal attracts the most qualified buyers and get a competitive bidding process going. See "Is Private Equity The Right Option For Your Company?" and "Beware Of The Private Equity Buyer" (refer to articles) for an understanding of PEGs and the complexities involved in dealing with PEGs.
What is a typical sales process?
We typically customize the sales process for each company depending on the needs of the business owner. For smaller companies, the business sale process (refer to "The Merger and Acquisition Process section") can be fairly straight forward and the sale may be consummated in a few months.
How long will it take to sell my business?
The time needed to sell your business depends on a great many factors, including your expectation of value for your business, the type of business, your willingness to finance all or part of the purchase price, and market conditions. The business sale process for a small business, in most instances, can be completed in less than six months. The sale process for mid-market company can be a year long process or more. Depending on the business owners goals, geographic location, market conditions and the negotiating process, we have had deals close in as little as three months and we have had deals take as much as two years. PGSA can explain how your business fits into these general guidelines.
When is it a good time to sell my business?
The right time to sell a company is during a period of good financial performance. For most sellers, timing is largely driven by your personal motivations more than any other factors. Keep in mind that acquirers typically like to buy businesses when sales and profits are holding steady or increasing. A big mistake many sellers make is to continue running their business well after they are capable of running it efficiently. Elite highly recommends that business owners invest time in exit planning (refer to article on Exit Planning) to do the deal on their terms and to maximize their take home.
What is the difference between an M&A advisory firm and an investment bank?
Investment banks typically focus on stock placement and underwriting securities. In addition to providing M&A advisory services, investment banks may maintain broker/dealer operations and maintain markets for previously issued securities. Investment Bankers specialize on large business with revenues over $100 million. Investment Bankers typically do not do transaction where the fee is less than a million dollars. See "Differences Between Business Brokers, M&A Advisors & Investment Bankers" (refer to article) for a more detailed comparison of these intermediaries.
How are mid-market M&A specialists different from business brokers?
Business brokers concentrate on businesses under $1 million and cater to the local retail market. Business brokers are also typically dual agents (i.e. represent both buyers and sellers in the same transaction). While many business brokers are ethical, Dual agency creates an inherent conflict of interest. When it comes to the midmarket transactions, business brokers are typically unaware of the M&A process and work by pricing business at an industry standard multiple of cash flow. The cash flow multiple method ignores the strategic aspects of the business and typically undervalues larger businesses by substantial margin. M&A specialists have substantially different and sophisticated methods to value and market businesses.
Very few business owners are aware that most Business brokers are only licensed to do asset sales. M&A intermediaries are typically licensed to do stock and asset sales. If you use an advisor who does not have the proper license in place, your deal could be rescinded for up to three years from the date of the closing. Since no one knows for sure what type of transaction your deal will be, make sure your advisor has a proper securities license. For mid-market business owners looking to do a stock sale, an M&A advisor is a safer choice.
What is wrong with Dual Agency?
There are significant issues with dual agency when it comes to conflict of interest, client advocacy and dealing with sensitive information. Business sellers and buyers need to carefully pick their agent in a business sale transaction. For a dual agent, providing equal service to both clients is practically impossible in most deals. In the best case scenario, neither the seller nor the buyer is getting an advocate. In the worst case scenario, one or both of the parties are being sacrificed. For these and other reasons some states do not permit dual agency. Much can be lost by employing agents who put themselves in the position of being dual agents and thus not living up to the fiduciary standards.
Can I use a Name Brand Investment Banker like UBS, CIBC or Goldman Sachs?
If your business has revenues higher than $50 million and profits higher than $10 million, large Investment Bankers such as Goldman Sachs, UBS and CIBC are an option. If you are a mid sized company below that range, PGSA, LLC, as a M&A Specialist is a substantially superior option. PGSA is focused on the smaller mid-market deals between $5M and $50M and can provide a service far better than the larger Investment Banks. And, you will always deal with the senior principles of PGSA and not a junior associate in a large investment banking firm.
How does PGSA find buyers?
Our buyer search is tailored to each company. First, we develop a customized marketing strategy and campaign for your business. Next, we utilize several custom databases to identify strategic, financial and high net worth acquirers who are well suited to acquire a business such as yours. The pool of acquirers includes buyers who have approached us in the past and are now part of our qualified buyers database. We also network with other intermediaries and professionals through various organizations. Strategic acquirers are typically targeted and approached by direct mail or telephone. Other marketing methods may include newspaper advertising, trade publication advertising, and ads placed on high traffic M&A websites. All of the marketing is done discretely to protect your business interests.
A company/individual has approached me and wants to buy my business?
Do I still need a M&A Representative?
Yes! Our experience indicates that going with a single buyer can adversely affect the value you can get for your company dramatically. An M&A representative can help maximize the value of your company as well as your take home. Please see our article "The Experience Factor" (refer to article) for some reasons on why retaining an M&A representative is beneficial to your financial health.
What types of offers should I expect to receive?
Astute acquirers are going to structure the initial offer to leave sufficient room for negotiations. Therefore, you should expect to receive low initial offers. All offers will contain some important contingencies, including review of the financial books and records of the business, obtaining a satisfactory lease, agreement on training, and transition periods. Other contingencies specific to your business may also be included. Contingencies are normal and provide the buyer with the opportunity to verify the information presented in the marketing materials.
Do I need to provide any financing for the buyer?
Given a chance, most business owners would like to cash out 100% at the close of escrow. Usually a buyer requires a “holdback of 10%-15% of the total transaction price to be placed in an escrow account for a period of 12 -24 months to offset unknown financial liabilities or representations and warranties liabilities. Also, a significant amount of transactional data indicates that sellers willing to carry a part of the purchase price as a note receive substantially higher valuations than sellers that do not. Acquirers and their lenders see seller-financing as the seller's vote of confidence in this business, and in your ability to successfully transition it to your chosen buyer. Seller's willingness to provide financing will enhance the prospects of selling your company in a timely manner. If PGSA is given the flexibility in terms of seller carry, we are confident that we will put together a deal that has the best combination of price and terms that meet your needs.
How will I be protected on any personal financing I provide to the buyer?
The closing escrow agent can prepare a promissory note, a security agreement and will file a UCC-1 financing statement with the appropriate state and local agencies. It is much like financing a car - the lien can be recorded in the public records and the assets listed on the UCC-1 cannot be legally sold or refinanced without your permission.
I want to keep the sale of my business confidential. I don't want my employees, customers and vendors to know that my business is for sale. What steps do you take to ensure confidentiality?
Most sellers share your concern. Our discrete process and procedures are designed to protect confidentiality. Some examples:
- All interested acquirers must sign confidentiality agreements and must be qualified before any detailed information is disclosed about your company, including its identity.
- All external advertisements for your business are written in a discrete format and do not contain enough information to allow someone to determine that it is your company that is for sale.
- All materials, descriptions, financial statements, and marketing materials are pre-approved by you.
Do I need a lawyer and/or an accountant?
PGSA, LLC specialists do not take the place of a lawyer or accountant. You are encouraged to seek legal and tax advisory services prior to closing any business transaction. We highly recommend that the attorneys and CPAs you use for the sale or purchase of a business be well experienced in M&A transactions. Over the years, we have worked with many qualified professionals in this area - we can refer you to them if needed.
How long is the training period for the buyer?
Generally, you will be expected to provide two weeks to two months of training in the business with equal time of telephone consultation. If you are financing any portion of the purchase price, as is common in a lot of deals, you still have an investment in the business, so properly training the acquirer is in your best interest.
Will I have to sign a non-compete agreement?
Typically, yes. The type of non-compete agreement depends on the type of business you are in.
When should I tell my employees about the sale?
Our considerable experience has proven that it is best to tell your employees about the sale immediately before or immediately after the sale is complete. Of course, if there is an employee whose expertise will be needed after the sale or whose expertise or knowledge will be required to close the deal, you should introduce the buyer to this employee at the appropriate time during the sale process and require his confidentiality in disclosing anything to other employees, customers, vendors, sales representatives or persons who do not have a need-to-know. PGSA can assist you in determining the timing for notifying employees.
What is expected from a seller in order for PGSA to conduct a valuation and to start marketing a business?
The information disclosure requirements for companies vary depend on the type of business. However, most businesses are expected to provide:
- 3 years financial reports with income tax returns, and current income statements, and balance sheets. Forecast revenue and gross margin for next 2-3 years.
- Current list of equipment, fixtures, and inventory.
- A copy of real estate leases or property owned with leaseback details.
- Information about products, customers, markets, programs or applications, marketing and sales distribution channels.
- Breakdown of employees by department with titles, salaries and a short biography for each member of the key management team. Organization chart.
- Photographs of facilities, equipment, and products, etc.
- Summary documentation for any patents, intellectual property, etc.
- Marketing materials such as copies of advertisements, technical articles, tradeshow participation, etc. Quality Standards the company is certified to.
- Other documentation specific to your business that you believe may have an impact on value.
PGSA will provide you with a list of required documents and materials. PGSA may also require that you participate in a thorough interview allowing us to learn about your business to effectively represent you and your company.
How does PGSA get paid?
We are paid for mainly on a success basis and therefore receive a transaction fee at the close of the transaction. Depending on the transaction, we also work with customers on a retainer basis with modest upfront fee and lowered success fee (see Double Lehman Explained for an understanding of M&A advisors' typical fees). If you have been considering the sale of your business or looking for acquisitions that meet your investment criteria, please contact us to arrange a confidential consultation.
What can I do to help sell my business?
Some examples of things you can do to help PGSA after we begin the process of selling your business are:
- Provide us with required information in a timely manner.
- Be as accommodating as possible in setting appointments to meet with buyers.
- Conduct business as usual - Keep normal working hours and continue with business as you normally would
- Make sure your financial records are an accurate reflection of revenues, expenses and assets/liability levels. Annual Audited financial statements are best but at least have them reviewed by a competent CPA.
- Do not let inventory levels dip below normal or delay asset purchases beyond what is reasonable.
- Keep all aspects of the business clean and in good repair.
- Remove equipment or furniture that is not part of the sale.
I want to buy a business. How do I proceed?
First, contact us to introduce yourself. PGSA will work with you to understand your needs and explore the possibilities. We then provide you the necessary forms such as a Confidentiality Agreement and a PGSA Buyer’s Authorization and Fee Agreement or an Engagement Agreement and you provide your financial statements with the ability to finance the targeted transaction. Once we identify opportunities that fit your needs we will contact you to explore the opportunities and zero in on the opportunity that best fits your needs.
Why must I sign confidentiality agreement and provide resume and financial statement?
We are dedicated to servicing the confidentiality needs of our clients. Signing the confidentiality agreement is a painless process in which you promise not to disclose any information that we give you about a business, including the business name, owner information, employee names, etc. Breaches or leaks of confidential information can cause customers to move on, employees to quit, and vendors and lenders to get nervous. This can be detrimental to both the seller and potential acquirer.
It is important for acquirers to understand the role of the M&A Advisor and the nature of the merger and acquisition business. Unlike real estate transactions where the “for sale” sign is posted on the property, the business intermediary must act to preserve confidentiality. Breach of confidentiality may cause serious damage to the client. Transaction size and strategic objectives often set the bar for the determining which types of acquirers the seller is willing to consider. To ensure confidentiality and meet strategic goals, a business must be shown only to “qualified” potential acquirers. Non-disclosure, Experience, and Financial statements are all important factors in determining the proper fit for a given transaction.
Contact Us (refer to our contact info)
Note: We provide you with a free preliminary valuation of your company (refer to article on "Valuation – Know What Your Business is Worth" ) at the beginning of the process. Our years of experience, valuation methods, and review of comparable sales of privately held companies will provide you with a valuation range indicating what your company could sell for in today's market. However, keep in mind that initial valuation is only an estimate and the final value of your transaction will depend on the marketing methods, negotiating skills, business environment, deal structure and numerous other factors.
