This latest issue of the Privately Held Company is compliments of Gary Papay, CBI, M&AMI. Gary is president of CK Business Consultants, Inc. and is an active member of the M&A Source. Gary has been involved in the sale and acquisition of businesses for over 29 years, and is available to handle all of your merger, acquisition or divestiture needs.

P: 570-584-6488
F: 570-584-0199
gpapay@ckbc.net
www.ckbc.net

 
When one sells their house, the best deal is usually the highest price. When one decides to sell their business, there may be other factors to consider. Many buyers are similar to the “overlooked” buyer described below, serious and qualified; and most sales of businesses are win-win transactions. However, there are a few exceptions, and sellers should consider them carefully, balancing their prerequisites to the goals of the buyer.
Selling to a Competitor – Many company owners think this is the best way to go. They read about the mega-mergers such as Bank of America and Fleet Bank, or the pending deals such as Federated and the May Company Department Stores, and U.S. Air and American West. Consolidation may play a major role in large public companies; this is not the case in middle market companies. Many owners of middle market firms look at these mega-deals and think it might work for them. However, upon further consideration, they realize that by disclosing a lot of confidential information to a competitor, their business could suffer irreparable damage if the deal would fall apart – and some do.
Selling to a Strategic Acquirer – This may bring the highest price, but there are several reasons why this may not be in the company’s best interest. Many owners have worked with key employees for years and would not like to see them replaced. The strategic owner might not only replace members of management, but might also move the company to another part of the country.
Selling to a Financial Buyer – This buyer may not be willing to pay the seller’s price and is usually buying a company with intentions of selling it at a profit in three to five years. This leaves the company and its employees in limbo waiting for a new owner to take over.
Other Buyers – The employees may decide to buy the company (ESOP). However, this usually means a long-term payout for the owner. An individual buyer may come along such as a Warren Buffett, but what are the chances? A key member or members of management might decide to purchase the company, but generally they won’t pay the price. If a sale is not consummated, the key management member(s) will most likely leave.
 

The “Overlooked” Buyer – There are many individuals who want to own their own company. They might be former executives of major companies who want to do something on their own. Some buyers have access to large amounts of investment capital. There are many qualified individual buyers in the market place. Russ Robb, the editor of a leading M& A newsletter, M&A Today, has written a book, Buying Your Own Business, for those individuals interested in buying their own company. This book has sold over 20,000 copies, which indicates the large number of people who are interested in buying a company.

There Is No Magic Answer – Selling a company comes with no guarantees. When Badger Meter Company, a public company headquartered in Milwaukee, acquired Data Industrial Corporation based in Mattapoisett, Massachusetts, this appeared to be a marriage made in heaven. Their respective product lines fit like a glove, their corporate cultures seemed compatible, and sales expansion by cross-selling was evident.
Certainly selling to the overlooked type buyer doesn’t guarantee all of the seller’s concerns, but knowing the interests of some of the various buyer types can help insure that the goals of both buyer and seller are met. Sellers should determine their goals prior to attempting to sell their business. A consultation with a professional intermediary is a good start to this process.
 

If Starbucks raised the price of a cappuccino, sales most likely would not be affected. If your attorney raised his or her hourly rate, would you switch law firms? If a company or service firm does not have pricing power, then its value is less than it should be. Here are a few ways to develop or increase pricing power:

  • producing a discernible branded product or service
  • innovating with patent production such as Apple’s i-Pod
  • providing such exceptional service that competitors are not able to replicate it

An interesting question for company management is – how should they set their prices? Sometimes the answer is that management figures out at what price the item can be sold and then works their costs backward. The more traditional way is to add up the cost of labor, material, and overhead plus an acceptable profit. But times have changed, and in many cases, the power of pricing has moved from the producer to the customer. Today, Wal-Mart tells most of their vendors what they will pay for certain items, and Ford tells their suppliers the same. On that basis, many companies are beholden to the Wal-Marts and the Fords of the world and do not have the benefit of pricing power.

     
Experienced intermediaries list several key factors from the buyer’s side, most of which are necessary for a successful closing.
  • Sufficient financial resources to complete the deal
    as specified.
  • Sufficient staff to run the business and to continue working on an acquisition at the same time.
  • Realistic approach to the type, size, and geographic location of target companies.
  • The willingness to pay for acquisitions and, if necessary, to pay all-cash.
  • The willingness to go six to twelve months in the search for acquisition targets and to pay monthly retainers to the intermediary firm.
  • Confirmation in writing by the Board of Directors or the company owner(s) of their commitment to the search for an acquisition.
  • The existence of a company representative, preferably the CEO, CFO or the Director of Development, who is reachable on a daily basis.
  • Complete access to company management who may be helpful in the search process.
  • The willingness to not give up on a deal even if it is necessary to walk away from the table. The buyer or his intermediary should contact the seller every few months – surprisingly sellers can become more reasonable over time.

The real keys to acquisitions are to maximize deal flow of target companies, qualify the seller by discussing price issues early-on, retain professional intermediaries, make sure everyone understands the valuation parameters, and stay in touch with prospective sellers even if at first negotiations fall apart.
 

Health insurance is, by far, the No. 1 benefit college graduates are looking for when considering employment. Here are the rankings from a study by the Employee Research Institute and Matthew Greenwald & Associates.

Health insurance
60%
Retirement savings plan
17%
Paid time off
05%
Retiree health insurance
05%
Pension plan or defined Benefit pension plan
04%
Long-term insurance
03%
Life insurance
03%
Disability insurance
01%
Stock options
<.5%
Something else
0.1%
 

When deals fail to close, everyone involved with the transaction is disappointed. Sometimes the differences between buyer and seller are insurmountable; other times the differences are minor. Here are some reasons why deals fail to close.
Buyers
Who lose patience and give up the acquisition search prematurely, maybe under a year’s time period
Who are not highly focused on their target companies and have not thought through the real reasons for doing a deal
Who are not willing to “pay up” for a near perfect fit, realizing that such circumstances justify a premium price
Who are not well-financed or capable of accessing the necessary equity and debt to do the deal
Who are inexperienced and unwilling to lean heavily on their experienced advisors for proper advice
Sellers
Who have unrealistic expectations for the sales price
Who have second thoughts about selling - commonly known as seller’s remorse, most frequently found in family businesses
Who insist on all-cash at closing and are inflexible with other terms of the deal such as stringent representations and warranties
Who fail to give the investment bankers their undivided attention and cooperation
Who allow their company’s performance in sales and earnings to deteriorate during the selling process