EVOLUTION
OF OWNERSHIP IN A
PRIVATELY HELD COMPANY
At
some point in their corporate lives most good companies eventually approach
two exit doors. One is marked initial public offering (IPO); the other,
selling to another company (or individual) in a private transaction. The two are similar,
but most entrepreneurs tend to think of them as being very different.
Both involve marketing the
company to potential acquirers, and both require picking
the right team of professionals to establish a plan and properly handle the
details in order to maximize the company's value in the marketplace.
For
many companies a public offering either does not solve the company's needs
or the company does not fit the size or profile needed to generate public
interest. Selling to another company or another entrepreneur represents an attractive alternative to going public.
Selling provides instant liquidity for owners looking to cash out or reduce
their business risk.
Additionally,
a sale or merger can bring with it synergistic opportunities lacking in an
IPO. But a sale requires as much planning as an IPO, and in some ways, more
effort. Sellers need to understand the potential pitfalls in the
acquisitions market in order to successfully and confidentially sell their
company. Many decide to pick an experienced professional - often a
business broker/intermediary, a firm that specializes in arranging the sale
of businesses - to handle the transaction.
Here
are some basic guidelines for owners considering a sale of their company.
Timing. By timing the sale to coincide with good corporate performance and a
healthy acquisitions market, the private business owner can greatly
influence both the interest in his or her company and its value. In general,
the more activity in the market, the higher the overall values paid for
acquisitions. High stock market levels and low interest rates normally
coincide with a good acquisitions market for privately held companies. That has been the case for the last several years.
Just
as banks are more eager to lend when business is good and prospects are
bright, the acquisitions market is much more receptive to companies coming
off prosperous years. By deciding to sell when recent performance is good, a
business owner can gain tremendous leverage in negotiating a sale. While
transactions occur all the time with companies in various stages of growth
and decline, most acquirers pay a premium for the consistently growing
company with a bright future. Just
as in the stock market, it is normally best to sell too soon, rather than
too late.
Creating a Market. Too often
private businesses are sold through business contacts or as a result of direct
approaches made by potential buyers. While an unsolicited proposal is
flattering, and selling to someone you know may seem like it will be easy,
limiting your potential buyer to these parties rarely yields the highest value
or produces the best acquirer for the company.
Instead,
owners should create a market. The best way to obtain the highest price and
the right buyer is to consider an array of suitors all concurrently examining
and pursuing the acquisition. This
requires planning for the sale, preparing the necessary documentation, and
then locating potential acquirers.
Using an Intermediary. Just as most
people should not represent themselves in court, most owners should not
represent themselves in an equally complex field of mergers and acquisitions.
Instead, owners should engage a professional intermediary to guide them
through the proper procedures in order to find the best acquirer.
An
intermediary will minimize the risk of information leaks that can have a very
disruptive effect on customers, suppliers, and employees. In addition, an
intermediary can define realistic goals for the owner, use its contacts to
locate and cull through a large universe of potential acquirers to select the
most attractive suitors, and selectively negotiate with the various parties to
achieve the best deal for the company.
Regardless
of the door chosen, IPO or selling to another company - only with the full understanding of
the benefits and pitfalls of each, along with proper planning and selection of
a professional team, can an owner expect to achieve the best results.
|
Written
by Wayne Corney |
|
Published
in The Business Courier |
