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Your Biggest Sale ...
Part Two
See also:
Your Biggest Sale ... Ever! -- Part One
Your Biggest Sale ... Ever! -- Part Three
Your Biggest Sale ... Ever! -- Part Four

efined techniques can be employed for the valuation of the smaller business, but the fundamentals are essentially identical for all businesses, large and small: (1) earnings expectations, and (2) asset values. The established practice of minimizing taxable earnings as well as minimizing the assets employed in the business can later jeopardize the valuation of the business when its divestment is being considered. Of course, earnings and net worth are commonly "re-stated" to show what they "would have been" had the business been operated by the prospective purchasers. Unfortunately, re-stated earnings and net worth are frequently discounted substantially by prospective purchasers because of their questioned credibility.

          This can also be a risky exercise when the business has utilized "aggressive accounting practices." There are numerous cases in which a prospective purchaser is later revealed to have been a confidential informant working with the Internal Revenue Service; in their eagerness to sell the business by showing what the earnings "would have been," the owner/managers unveil "aggressive accounting practices" that may be determined to have crossed the borderline into tax fraud — either knowingly or simply unwittingly. "Re-stating" earnings and net worth is rarely a totally satisfactory way to overcome a practice established for years of minimizing taxable earnings as well as minimizing the assets employed in the business.

          Our primary lesson is that the smaller business must begin to work with knowledgeable advisors very early to be properly prepared for your biggest sale ... ever! The CEOs of most large public corporations recognize that the strategic and tactical skills required to direct a flourishing ongoing operation are almost-always quite different than the skills required to accomplish a merger or acquisition (M&A). Therefore, many years before the anticipated sale of a business, astute owner/managers begin careful preparations for this singular event.

          The first and most critical step is finding knowledgeable advisors. Of course, Fortune 500 ® corporations routinely retain blue ribbon investment banks and prestigious Wall Street law firms specializing in M&A work — and even they are not always pleased with their advisors' performances. For the smaller business, the identification and selection of truly competent advisors is usually considerably more challenging. One is continually besieged by lawyers, accountants, management consultants, bankers, stock brokers, insurance agents, financial planners and business brokers as well as well-meaning friends, relatives and business colleagues all of whom profess to have special skills and experience.

          Ultimately, the selection of the right advisory team should be made only after the most exhaustive investigation of each professional under consideration. All questions of qualifications, resources, methods of practice, and relationships should be explored candidly and fully. Hopefully, these decisions should never be made hurriedly; this is one reason it is essential to start early. While fees and costs are never inconsequential, they are truly secondary to the importance of assembling the most competent team and a team with which one feels the chemistry is right.

          The next step is to envision the most likely and preferred kind of sale. There are two general categories: the restricted sale and the open sale. The restricted sale is preferred for the many businesses where the most interested purchasers are persons already involved in the business, e.g., family members, key managers, or employees. The open sale is preferred where the acquisition of the business may be particularly attractive to a larger public (or private) corporation, a buyout group, or even as a public offering of equity, i.e., an Initial Public Offering (IPO). Totally different strategies and even valuations are to be encountered with these two types of sale.

          When a restricted sale is anticipated, the principals in the venture commonly establish stock-purchase agreements or partnership purchase plans. These agreements seek to establish a fair and mutually-agreeable basis for the transfer of ownership upon the retirement or death of one of the principals; they frequently also establish the basis by which equity in the enterprise can be made available to new owners. A key component of the restricted sale agreement is the method of equity valuation to be employed. There are several popular and respected methods, not simply one right method, e.g.,

          Complementing equity valuation is the method of equity purchase and buy-back. Striving to anticipate all eventualities, these agreements may be fairly complex inasmuch as there are many variants of ownership transfer. The primary question is whether settlement of a purchase or repurchase is to be made (1) in cash at the time of the transaction or is to be made (2) over a period of time, possibly related to the ongoing performance of the business.

          The continued examination of the eventual sale of the business itself will be the focus of subsequent columns.

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Thomas A. Faulhaber, Editor

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