Part 3: Transitions, transactions and trust in business

We are considering an important hypothetical scenario. Two partners set out to sell their company. Most of their net worth is invested in their business and one of them happens to have a health issue – so they want to diversify their wealth holdings. After taking their business to market and receiving an excess of six offers, they ultimately select the offer that allows them to take some money off the table based on a high valuation. However the terms and conditions of the deal are such that the cost of capital is higher than they could have attained from a traditional lender. Instead of selling 100% of the company to the highest bidder, they end up selling a minority position with fewer oversight obligations.

Why does this matter?

There are many ways to take your money off the table when selling a business. The concept of “taking money off the table” in this case, is in reference to entrepreneurs who have built a business, but their net worth is tied up in the company – it’s not cash and therefore is not readily available, like a public stock, which you can sell in the market. The sources available to them to access capital range from banks, to private equity and everything in between.

In this series, we will explain that not all deals are made equal, how to assess offers, important questions to ask during the sales process and how to best access capital.

In Part 1 and Part 2 of this series we explored how to determine whether you’d like to make a deal and what factors you should consider when seeking buyers for your company.

Now what? When offers have been made to buy your business there are many questions to ask.

It’s one thing to appreciate the high-level points of the offer, but important to also assess the fine points in an offer document. Ask yourself, what are the small details that require more attention in this deal? The devil is in the details…and there will almost always be other things you need to assess, which collectively must be considered before deciding on the offer.

In the scenario we discussed in the first two parts of this series, a pair of partners who had done pretty well for themselves wanted to take some money off the table and were open to selling up to 100% of the business. They didn’t want to keep all their eggs in one basket.

So they cast a net out, with the support of professional advisors, to see what sort of buyers would be interested in their business.

What they got were very different offers, from players inside and outside of the country. After narrowing down their options, here are a few initial questions that would be important for them as sellers to consider:

  1. How much can each of the buyers help the firm grow? Do they have the capability, and have they helped to grow a firm in this sector before?
  2. Are these private equity groups just “financial guys and gals” or do they have real operating experience and expertise? Have they ever gotten their hands dirty metaphorically? Or even calloused?
  3. Who can they trust while going through this deal? And after the deal? Who has shown them their true face, looked them in the eye and answered their questions? Did the buyer send juniors to negotiate, or did they send decision makers?
  4. Will the seller’s company become just another trophy on the shelf, or will the buyers help with operations and growth?
  5. What does the payout look like after accounting for tax?
  6. What does the payout look like in five years, 10 years, thereafter?
  7. How do they feel about these prospects?
  8. How much is the equity worth from the public company and what are their terms?

 

Stay tuned for Part 4 of this series!

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