Setting Up for Selling Your Business
By JoAnn Lombardi, VR Business Brokers/Mergers & Acquisitions, President
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How to Develop a Successful Exit Strategy
Recently, many entrepreneurs fulfilled their life-long dreams of buying a business. Others have seen their businesses grow gradually over the years. They are pursuits these business owners have enjoyed and cherished. However as a business owner, you have to remember there will be a time you will have to pass your dream along to somebody else.
Whether you’re selling the business because of burnout, retirement or the desire to move on, when the time arrives to do so, do it right and receive the optimal sales price.
Often when you contemplate, plan or pursue the opportunity to sell your business, you discover the selling process doesn’t give you the flexibility needed to make the best deal. But you don’t need to fear, feel manipulated by or go through the resale process alone.
You will be at an advantage as an owner if you start thinking about selling the business before you actually proceed. You will easily be able to identify the important elements of the resale process, and have some control over them in the future. Preparing to sell before you move forward will help you better understand the business transaction, your needs as an owner and be in a better position to develop a strategy to make it through the sale efficiently and profitably.
There are five obstacles in the sale process you will have to examine as you proceed. With each one, there are some helpful tips every VR business intermediary will recommend to you. This will assist you in understanding the process better and successfully sell your business.
1. Position Your Business for Sale.
2. Determine a Fair Listing Price.
3. Running Your Business during the Marketing Period.
4. Finding the Qualified Buyer.
5. When to Consider Selling Your Business.
Position Your Business for Sale
The day you purchase the business is the day you start positioning your business for sale. You might not think so, but thinking about building long-term value for your business is just as important as making money in the short term. You want to maintain detailed records of finances, permits, licenses, equipment and inventory through your ownership. This will be critical when you are trying to sell your business, so don’t neglect this part!
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Determining Risk When Buying a Business
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Risk can be influenced by the stage of the venture, the competitive advantage, proprietary technology, the expertise and experience of management and many other factors that can determine whether a venture succeeds or fails.
It is possible for a venture to fail and lenders to get their money back. This is the strategy used by asset-based lenders. Banks want businesses to have sufficient cash flow to be able to repay their loan and interest. They also insist on a secondary source of repayment, whether in the form of collateral that they can liquidate or guarantees from sources who could repay.
Asset-based lenders may lend money to a business even when it does not have cash flow. They rely on their security in the form of collateral, and closely monitor the loan.
Below is a list of some financial instruments that are sorted by ascending order of risk:
Senior Loans Across All Assets
Good for banks because they prefer the least risk.
Senior Loans with Specifically-Named Assets
Good for vendors of equipment or asset-based lenders who have very specific needs.
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6 Clauses to Negotiate in the Investment Banking Engagement Letter
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The investment banking engagement letter is the official representation of your company’s relationship with your M&A advisor or investment bank, and as such should be carefully considered. The process of negotiating the letter can also provide helpful insight into a prospective bank’s priorities and operations, and reveal how well your interests are aligned. Even if your company’s legal counsel is handling negotiations, it’s important to understand the key points of the agreement and how they do (or do not) represent the interests of your business.
Here are six of the most important aspects of the investment banking engagement letter to keep in mind as you begin negotiations.
1. Scope of Services
What role is the investment banker serving, and what’s the end goal of the engagement? A financing transaction? A purchase? Both? Stating this in the engagement letter ensures that each sides’ goals are aligned both with one another and with the proposed fee structure.
The investment bank will typically detail a list of included services in this section of the engagement letter. Some of these might be obvious and apply across almost every engagement (e.g., reviewing financials, soliciting financial partners and/or acquirers), while others will vary depending on the bank and the company’s needs (e.g., developing marketing materials, providing valuation services).
2. Exclusivity
It’s not uncommon for owners to balk at the exclusivity clauses in the investment banking engagement letter. Even if you do all the research in the world, it’s hard to commit to entrusting one advisory firm with your business. However, the truth is that it can be very hard to find a high-quality M&A advisor or investment banker without agreeing to exclusivity. From the advisor’s perspective, a retainer isn’t enough to justify the many hours of work they’ll spend preparing your business for a sale or financing. Consider, too, that managing multiple investment banks would be an onerous undertaking for you as the business owner, and could result in a lot of confusion and uncertainty.
When negotiating engagement letters, then, the question is often not whether to grant exclusivity to a bank, but rather for how long. Typically, the bank will advocate for longer exclusivity periods and the seller will want shorter periods. Six months to a year is fairly standard in most cases, but the period can vary depending on the complexity of the transaction, how much preparation the business needs before going to market, and other factors.
3. Tail Period
The tail period is one very important aspect of the exclusivity period to keep in mind during negotiations. Even if a transaction is not completed during the terms of the engagement, the investment bank will still be entitled to its fees if the transaction happens during this tail period. Twenty-four months is a fairly standard tail period, though in general clients will look to establish a shorter tail period while investment banks advocate for a longer one.
The purpose of the tail period is to protect an investment bank from losing out on fees if they begin a transaction process during the engagement period, but the transaction is closed after the end date. Deal processes rarely run without delays and factors outside of the banker’s control can frequently impact the timing.
It is important to keep in mind, however, that there are also a number of potential circumstances in which a deal might close during this tail period not as a result of an investment bank’s efforts. When negotiating the investment banking engagement letter, it’s important to add safeguards to the tail provision to make sure you don’t owe the bank fees for transactions that did not originate from their efforts. One common safeguard is that the tail will only apply to deals with buyers or investors whom the investment banker contacted during the exclusivity period. Another is that no fees will be due if the client terminates the agreement for cause prior to the transaction.
4. Fees
In most investment banking engagements, there are two main types of fees: a retainer and a success fee. The retainer fee is a flat amount, often paid out monthly during the term of the engagement (though the structure varies — some clients may pay it out in full at the beginning). Retainers “typically start at $50,000 and go up depending on the size of a potential transaction,” notes Brent Beshore in his book, The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers.
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Always Work on Your Pipeline
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Continual Generation of Leads Ensures New Business
The constant turnover of customers means that generating new leads are essential to continue growth in your business. There are many ways to do this based on the product and customer demographics involved. Remember that new leads provide critical data on potential customers to follow up with and make a sale.
Lead Generation Means Building Your Business
Lead generation is vital to the development of new and continued success of established businesses. Current customers can stop buying, or move on to a competitor. Therefore, you have to continually bring in new customers to increase your sales. To do this, you must have a constant lead flow.
Quantity of Leads Doesn’t Always Mean Quality
The source to draw your leads from has to be one that not only gives you a solid number of leads but are also high quality and qualified. The worst kinds of lead sources are those that produce large numbers of leads but are all poor. Direct mail programs or an event specifically targeting a demographic will give you the most effective results for good leads.
Make Direct Response a Priority
To generate leads from your marketing campaigns, include a response mechanism in every communication that makes it easy for prospects to reply.
Make It Easy for Prospects to Respond
To improve response rates, prospective customers have to be able to easily respond. The most popular mechanism for print media advertisements are:
• Web Site Address
• E-Mail Address
• Toll-Free Number
Use Direct Mail to Target Prospects
Direct mail can be used at a number of stages in a lead generation program. For those contact lists that have not been qualified, make sure that you have a response mechanism to follow up effectively on the mailings that you send out.
Encourage Customers to Register on the Web Site
Web site registration provides high levels of information. When customers visit your web site, ask them to register their details. The registration form is completed online and submitted by e-mail. In return, you e-mail them regularly with details of products and services that are of interest to them. Incentives such as free products or services can encourage higher levels of registration.
Record Exhibition Visitors
If you have a booth at a trade show or exhibition for your business, visitor registration needs to be an integral part. Set up a process for capturing data on all stand visitors. Set up a database of exhibition contacts, and use it to plan and monitor a contact program after the exhibition.
Monitor the Business Press
Many business publications feature news about recent appointments or interviews with leading executives. This type of information can give you names of potentially valuable contacts. The appointments pages can also alert you to changes in personnel at one of your customers or prospect companies.
Using Telemarketing
Telemarketing can be used to generate new leads and qualify existing leads. The telemarketing team can call target companies and ask for the names of decision-makers for follow-up. The team can also call people who have made an initial inquiry, in order to qualify their interest and find out how good the prospects are.
Keep Updating Your Contact Lists
Many of the contact lists that you have developed from internal or external sources may not match your requirements exactly. To improve coverage, or to make them more precise, you must make a continuous effort to refine them.
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This is a great B2B service company located in a very high-profile shopping center in the heart of Frisco, TX – 15 year history of serving the local business community.
This local quick printer provides printing products to businesses of all sizes. Additional services include mailbox rentals, and pack and ship services. The clientele provides excellent repeat business. A variety of digital equipment is in house, and the company has established great relationships with vendors for outsourced needs as well.
Mature and tenured staff should help make for an easy transition to new ownership. This business would make a great add-on or acquisition for an existing print related business.
For more information:
Larry Lane
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Congratulations VR Mergers & Acquisitions in Charlotte, NC for the Sale of Land Clearing Company.
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Gupton Land Clearing is a regional leader in land clearing services for energy right of way, Department of Transportation right of way and site preparation projects. The business has been run successfully operated and managed by Rennie Gupton since 1985. Her son Barry Gupton had recently rejoined the company to help assist in the complicated business and helped assist in the sale process. Rennie has successfully built an organization built on a high level of service with her experienced and well-trained team. When Rennie was considering selling her business, she hired VR Business Brokers to help facilitate the sale.
Rennie said, “We are very pleased to have successfully completed this transaction. I am absolutely thrilled that Caroline and Mitch are going to continue our tradition of excellent service for our clients. I am excited to see them grow this business as I focus on my family, my farm and some travel ahead. Thanks to Adam Petricoff at VR Business Brokers for all his hard work on getting this deal completed. I had never sold a business before but Adam helped me navigate this process.”
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Thinking of selling your business or looking for an established
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Have You Ever Considered Selling Businesses?
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