27 Jan Buyer’s Expectation of an Intermediary (Part 2 of 2)
This posting continues Part 1 of our first Intermediary’s Corner article which detailed the first and second roles of an intermediary below: Assessing the owner’s goal and Learning about the company. Part 2 details the final three roles an intermediary plays in preparing an owner and business for market.
Role of an intermediary
The following is how many potential buyers like to work with intermediaries.
1. Assess owner’s goal
2. Learn about the company
3. Explain owners’ options
This includes a determination of whether the company should be sold now or later and whether the owner should consider a management buyout.
The intermediary should spend time up front with the client to weigh the client’s options in order to clearly reflect the benefits and drawbacks of each alternative. Some of the owner’s options might include the following:
- minority investor who could provide growth capital;
- recapitalization which would provide partial liquidity;
- management buyout which would show allegiance to the employees;
- sale to strategic buyer which would probably receive the highest price;
- roll-up or consolidation which could keep the owner involved; and
- initial public offering which requires the owner to stay in for the ride.
4. Educate owner on process
An aborted deal is often the result of poor communication, misunderstandings, high expectations and… the failure of the intermediary to educate the owners about the selling process. Here are some examples:
- Failing to communicate (or miscommunicating) the expected length of the transaction process.
The average length of time to complete a transaction is usually 9 to 12 months from beginning to end. Often an intermediary will tell prospective sellers that the process takes six months, but that assumes there are no poorly drafted letters of intent, no environmental problems, etc. Selling a business can be very stressful and emotional for owners, so the intermediary should educate and support his client accordingly. - Failing to emphasize business as usual.
Disruption to daily business can cause the owner to let his business deteriorate unknowingly, thus giving the buyer second thoughts about proceeding with the acquisition. The more weight and responsibility the intermediary can handle successfully, the better chance the business will perform well. - Unprepared for due diligence.
Due diligence by the buyer is often so thorough and minute that it becomes an irritant and a distraction. The intermediary, along with the seller’s attorney, should set up a war room in advance with all the necessary documents. - Unprepared for buyer requirements.
Representation and warranties and indemnities will be required of the seller. The intermediary should educate the seller as to what these provisions entail including possible escrow accounts and “baskets” required by the buyer. - Unaware of the need for advisors and unprepared for the cost of advisors.
Advisors can be numerous and expensive but are part of the cost for owners when selling their business. Aside from engaging an intermediary, there will be other advisors such as a transaction attorney and tax advisors from the owner’s accounting firm, plus others. - Unprepared for additional costs involved.
Expected costs should be explained to the owner including the anticipated, stay agreements for key employees, closing costs, etc.
5. Discuss value range
Let’s assume that a basic business has an EBIT of $2 million. Depending on a huge amount of factors, the value range might be $8 to $14 million… or more. The intermediary should be able to identify the company’s value drivers both quantitatively and qualitatively; e.g., margin analysis, working capital analysis, calculation of the “real” free cash flow, depth of management, proprietary products, patents, brand identification. All of these issues and more affect the value of a business.
Finally, value is a relative term and, on the surface, cannot be analyzed by just the cash component at closing. If the owner is willing to sell 70% of the company in a recapitalization, for example, and stay in for the ride, the imputed EBIT multiple is actually higher based on the success of second sale (30% ownership) in the future.
