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MidMarket Corporate Finance Q&A Series: Part 1

First in the Series


“How It Really Works: Sale of Founder-Owned Private Company”

The focus here is on middle market businesses (under $100 million in revenue) owned by the founder, family and management, rather than a sale by a corporate parent or a private equity investor.

What do business owners wish they knew before starting the sale process?

  • No matter what, the deal won’t go the way you think it will.
  • Allowing specifics to be worked out later (after letter of intent/term sheet) is a bad idea.
  • Management distraction leads to missed forecasts and then the buyer drops the price.

How does the sale process start?

  • You are approached by a large strategic buyer which should pay more than equity players.
  • A private equity firm entices you to get cash now and a lot more later.
    If it is your idea to sell, your board or CFO or lawyer begin to suggest how to proceed.

Why are there so many surprises?

  • You probably won’t be realistic about potential problems until it is unavoidable.
  • Only real nitty gritty due diligence by the buyer uncovers the unexpected.
  • Even if you have sold a business before, values, processes and taxes have changed.

Why do some people seem to do so much better than others?

  • They know exactly what they want and clearly lay that out to bidders.
  • They disclose potential deal killers up front to buyers and offer realistic solutions.
  • They understand deal dynamics and then all the stars become aligned for their deal.

What determines price?

  • Your company’s strategic contribution to the buyer’s business.
  • Deal structure and buyer’s profile govern financing limitations for the prospect.
  • The buyer knows that you have another prospect ready to take its place.

How do buyers decide what to offer?

  • They ask what you expect and gauge how much competing buyers will offer.
  • If you don’t tell them what you want, they will rely on conservative analysis.
  • If you allow them to confirm your earnings growth or cost savings, they will stretch.

What should the founder-owner know about the agreement of sale?

  • It will be much more detailed and complex than you think is needed.
  • The term sheet is the roadmap, so make it comprehensive.
  • It is best to thoroughly read the contract and exhibits of a relevant deal before you start.

Why can’t the Founder-Owner get a clean break at closing (or take the money and run)?

  • Because the post-closing price adjustments have serious consequences.
  • Representations and warranties insurance has limitations and exceptions.
  • Private equity buyers nearly always have a roll-over investment requirement.

How does a Founder-Owner know whether a deal is fair?

  • Your deal can be compared to others that are most relevant.
  • A well-orchestrated process produces an accurate reflection of the market.
  • Experienced advisors will have informed opinions that you can rely upon.

What other topics will the MidMarket Q&A Series include?

  • Details and nuances on company valuation and deal structuring.
  • Negotiation of acquisition agreements and debt and equity agreements.