Selling Your Business in a Merger & Acquisition Transaction - Part 1

By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

The following article is one of a series of articles on things you need to know to sell your business in a merger & acquisition transaction.

Selling your business in a merger and acquisition transaction can be a painful process. If you are emotionally attached to your business, you will probably be uncertain about what to do after the sale. As a business owner, you have spent most of your business life looking towards the future. The same holds true if you are going to sell your company. If you have taken time to prepare for the sale including developing clear post sale goals (e.g., personal, financial, retirement, legacy, etc.), you will experience far less anxiety in separating from your company. The mergers & acquisitions sales process will also be much smoother.

As part of the M&A planning process, talk with your spouse and friends to discover what they think you are good at and will enjoy spending your time doing after the sale. Consult with your financial advisor before beginning the merger & acquisition selling process to determine what you need to receive on an after-tax basis (the “bogey”) from selling your company to provide you with the means to sustain the lifestyle you desire after the sale. Doing so will prevent a false start if the sale of your company is not likely to generate the proceeds you require and you find this out at a later date.

While there is an efficient and effective mergers & acquisitions process to selling a business, it doesn’t make sense to start if your business’ value is insufficient to support your bogey. Business valuation is not an exact science. Several valuation methods exist to estimate the market value of a business from different viewpoints. The most common methods used Merger and Acquisitionin mergers and acquisitions are discounted cash flow, multiple of earnings, multiple of cash flow and comparisons to prior sales of similar businesses. Each method will give a different result and all methods are subjective as to applicability because each buyer uses a different method and therefore has a different valuation for the same business.

What we’re trying to say is that in mergers & acquisitions there is no cookbook approach to valuation that is applicable in any sale of a business. Two companies may have similar revenue and profitability and have widely diverse values in the eyes of a buyer. You should also keep in mind that valuations of businesses vary with the timing of a sale, so what your business might have fetched last year will most likely not be applicable today.

However, having a realistic estimate of market value for mergers and acquisitions is important so you can make an informed decision about your asking price. If your asking price is unrealistically high, the  buying community will be turned-off and you will probably find no takers. If your asking price is too low, you will not have the chance to maximize your value upon sale. Your asking price should therefore be able to pass a “Buyer’s Sanity Check,” which means will it make economic sense to a purchaser without being unrealistically high or low.

The next thing you need to know is your M&A strategies regarding what type of buyer you want to sell your company to. Your buyer could be a family member, your management team, employees, an entrepreneur, a professional investor or private equity group, an industry or strategic buyer or the public via a public offering. In mergers & acquisitions no one type of buyer is right for everyone. There are plusses and minuses inherent in the sale to each type of buyer who may be available. Many of the plusses or minuses end up being in the risk associated with the sale price and payment structure each type of buyer is in a position to offer. We’ll get in to that in a continuation of this article next month.

Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at jlyons@lyonssolutions.com.

Copyright 2010 Jack Lyons. All Rights Reserved.