Around the Web: A Week in Summary
A recent article posted on Divestopedia entitled “Preconceived Notions Can Be Deal Killers” explores the many misconceptions people have about the exit process which can turn out to be deal killers when selling a business. Here are 10 common misconceptions debunked:
- “Selling to Private Equity means most of the staff will be let go” – Private equity buyers need your employees to run the business and grow the company.
- “Foreign buyers won’t be interested in my firm because it’s too small” – Foreign buyers are pursuing more mid-market Canadian targets than they were a year ago, and Canada is a stable entry point into North America.
- “PE Firms don’t pay as much as corporate buyers”- Although this has been true in the past, more recently as PE firms faced more competition, they have paid nearly as much as strategic buyers.
- “My investment bankers must be experts in my sector”– Bankers do not need to be selected based on the sector but more importantly on the use of deal technology for distribution, number of recent deal closings, and creativity in deal-making.
- “My confidential information will end up in the hands of my competitors.” – Although making a deal does involve disclosing confidential information, bankers and legal counsel will make sure the information is released at the right time and only to vetted buyers.
- “Most investment bankers blast deals to every buyer they know and see ‘if something sticks.’”-Bankers will strategically have a broader distribution list to avoid missing a buyer but they will still be using a curated and filtered list of buyers.
- “I got offers on my own; I’m basically done, and I can handle the process from here.” – Deals tend to fall apart more often without the help of a banker who has the experience and skills to get the highest valuation and the most relevant buyers for the deal.
- “I don’t need to be proactive about an exit. Buyers will find my company.” – Bankers will help maximize value by reaching a large number of the right buyers and creating competitive tension.
- “My banker must know the buyer beforehand to close a deal with them.” – What matters more is that the banker can bring the deal to the right buyers.
- “My lawyer or accountant can run the deal process for me.” – A good lawyer or accountant will know that a banker should also be involved in the deal process to fulfill the role that they cannot.
A recent article from Mybusiness.com entitled “Sell your business and retain the business premises – pros and cons” gives an overview of the arguments for and against selling your business premises when you sell your business.
The pros of selling the premises involve:
- Improved investment portfolio liquidity
- Opportunities for investment diversification by freeing the money you invested in property and making a profit on the sale of the business and the premises
- Less property management responsibilities
- Capital gains tax may not be payable on the sale of the property
The cons of selling the business property are:
- Losing potential buyers for your business premises
- Losing continued revenue from leasing the property or additional profits in the future if the right developer came along
- Missing out on financial opportunities in the future, for example if a developer wanted to purchase the property in the future, they may offer a higher price
- Missing out on tax concessions or tax-free capital gains and rental if the property is held in SMSF’s
A recent article written by Live Oak Bank entitled “6 Business Acquisition Tips from SBA Loan Experts” outlines six factors that lenders review for loans financing mergers and acquisitions.
- Stable or Positive Trend – Not only a positive trend but stability in these trends are what lenders look at to make sure that any recent growth or improvement is sustainable. A decrease in revenue is a red flag and a negative trend should be stabilized or reversed.
- Business Plan – Buyers need to have a business and transition plan for the business they are acquiring so lenders can see they have a good understanding of the business and plans for improvement.
- Key Employees – Lenders like to see that key employees will stay on with the new owner, which helps lower the risk and make the transition easier.
- Seller Transition Period – Make sure you have a transition plan in place where the seller is able to help train and assist the new owner.
- Seller Financing – The seller financing a portion of the deal shows the lender that they are confident in the new owner and lowers the risk factors.
- Working Capital – M&A lenders will review the financials of the business to see what working capital is needed. The buyer should demonstrate a clear understanding of how much and what type of working capital is needed for the business transition.