M&A Transaction Related Questions

Frequently Asked Questions

We also invite you to contact us with any M&A related questions

Answers to Common Seller Questions

Q:  Why is confidentiality important?

Simply put, confidentiality protects the business. If employees learn that their employer is for sale, they may seek other employment to protect their income. Customers can begin to favor other sources for your products or services. Key suppliers may seek alternative channel partners. These events can erode financial performance and destabilize your business, which translates to increased risk and lower value. It is important that your constituents stay committed at this time when your business needs to look its best.

Q:  How does Exit Strategies maintain confidentiality? 

Through a combination of best practices and vigilance. We incorporate these practices in our sale process:

  1. We serve as the gatekeeper for all buyer inquiries and all sensitive company information
  2. Executive summaries supplied to buyer prospects and any blind ads are carefully written and approved by our client
  3. Buyer prospects sign non-disclosure agreements and answer qualifying questions. Only screened buyers receive confidential information.
  4. Our clients pre-approve contact with industry buyers who are generally of greatest concern
  5. Our clients review and approve Confidential Information Memorandum (CIM) contents
  6. Control the format and timing of releasing ultra-sensitive details (e.g. identification of customers)
  7. Buyers release certain contingencies or place a deposit before gaining access to key stakeholders or ultra-sensitive information
  8. Optimize timing for internal and public announcements
  9. Reinforce the need for confidentiality with deal participants throughout the process
  10. Keep the sale process moving forward, which minimizes the opportunity for information leaks

As a result, our clients’ employees, customers, suppliers and competitors nearly always learn of the sale when it is announced by our client at the appropriate time.

Q:  Why should I use an M&A advisor or broker to sell my business?

Successful business sales take hard work, close attention and experience. Owners who try to sell on their own often make mistakes or get side tracked with the sale process and neglect their business. As a result, business performance declines which concerns buyers and lenders. Also, owners who sell on their own often sell for less because they don’t have multiple buyers at the negotiating table. On the other hand, M&A advisors bring multiple qualified financial and strategic buyers. Protect your interests by having a professional advisor run the sale process while you focus on your business.

Q:  When should we tell our employees?

We assist you in deciding the best way to notify employees and other constituents. It is usually best to notify them just before transaction closing. Of course, if there are key employees whose employment is required by the buyer, they may need to be involved earlier in the process.

Q:  Is there one best strategy for exiting a business?

No. The right strategy depends on your goals and circumstances. Your best option may be to transfer to family,  management, or an industry consolidator. Or it may be better to sell to a high net worth individual or a private equity group not involved in your industry. See Exit Options.

Q:  When should I create an exit plan?

If you own a successful business, you can’t start too soon. Usually, the earlier you develop an exit plan the more options you’ll have and the better the outcome will be.  Whether your succession plan involves an internal transfer or third party sale, a good rule of thumb is to start 3 or more years in advance. However, any preparation is better than none! More on why you should prepare now.

Q:  Is there an optimum time to maximize value?

From a business valuation perspective, the best timing is when the business is solidly profitable and trending upward, and future growth is expected. This places you in the strongest negotiating position. If your industry is consolidating, it is usually better to sell earlier in that process. Selling during a time of cheap debt and easy credit allows buyers to borrow and pay more.

Q: How will I know when the time is right to sell my company?

First you have to be emotionally prepared. If your goal is retirement, timing is usually driven by personal finances and lifestyle. Work with your wealth advisor to assess your total net worth, your asset portfolio, and your lifestyle and annual spending needs in retirement. Have an experienced M&A advisor assess the market value and state of affairs of your company from an outside investor perspective.  Will a sale of the company allow you to retire comfortably? Or do you have a valuation gap that you need to close first? Understand the benefits of exit planning.

Q:  When should I begin the business sale process?

Most owners should start 2-3 years before they want to be completely out. It can take a month to a year or more to properly prepare a business for sale. On average, after going to market, it takes 7-9 months to complete the sale process and close a sale transaction. And you may be required to stay on for a transition period.

Q:  We want the highest price, right?

Not always. Selling price is only a part of the picture. There are many elements of value and it is important to understand the total financial package when evaluating a deal. Components of transaction value include cash; principal and interest on notes; liabilities assumed by the buyer; the sale or lease of the premises or other assets; employment contracts; consulting fees; non-competition agreements; retained current assets; an earn-out; royalties and licensing agreements; partial retained ownership; and other perq’s. This combined package represents the total economic value of a transaction. Then are non-financial considerations, such as, is this the right buyer?

Q: Why would we consider an installment sale; isn’t that risky?

With seller financing and other forms of consideration that are received after a sale, there is always some risk of not being paid. Among the benefits of an installment sale to a seller are:

  1. Attracts more buyers (in fact, some buyers refuse to purchase any business that a seller won’t finance partially )
  2. Demonstrates your confidence in business performance under new ownership
  3. Receive interest income on the amount financed
  4. Lower your tax liability by spreading the consideration over multiple tax years
  5. On average, deals with some installment component have higher prices than all-cash deals
  6. Strengthens your negotiating stance on other terms
  7. Close faster if third-party financing is eliminated

Yes there is risk associated with seller financing, but proper due diligence and deal structuring can reduce that risk substantially.

Q:  How long does it take to sell a business?

On average, California businesses sell in 9 months from initial marketing to deal closing. We advise clients to be prepared for 6 to 18 months.

This assumes your price is supported by the market. If you price a business at $5 million and the market is paying $3-4 million for similar businesses, the business probably won’t sell. Money goes where it will generate appropriate returns for the risk involved. Some sellers overprice their business, on the premise that they can always come down. This strategy often backfires, since most serious and capable buyers don’t look at overpriced businesses for sale.

Q:  What are my chances of selling?

You will sell your business only once, so you need to get it right. Yet it is well known that 75-80% of businesses for sale by California business brokers don’t sell. Fortunately, Exit Strategies turns that percentage completely around. We help business owners sell 2-3 times more often, for more money, with less stress and aggravation. Our success rate is the result of doing many things right in the business sale process.

Q:  How long should I expect to stay on board after the sale?

The length of time sellers stay involved with the new owner varies greatly, from a few weeks to a few years. Factors include the nature of the business and your role, management depth, the buyer’s needs, your needs and abilities, etc. Ask your Exit Strategies advisor what to expect in your circumstances.

Q:  How can I help sell my business?

Here are three ideas:

  1. Buyers want businesses that are stable and well run. The #1 way you can help is to stay committed to running the business while we lead the sale process. Keep normal hours, build order backlog, maintain key relationships, and meet or beat your financial projections.
  2. Be honest with buyers — to buy from you they have to trust you. Represent your company enthusiastically, but don’t overreach. Resolve issues uncovered during the assessment phase. If the company has deficiencies, disclose them early on, with solutions in hand.
  3. Buyers need sensible, current financial statements and information. Involve your CPA before and during the selling process, and respond to our information requests in a timely manner.

Q: What is the difference between an asset sale and a stock sale?

In an asset sale, the company transfers the assets of the business to the buyer. These assets may include inventory, equipment, real estate, goodwill, copyrights, patents, leases, customer lists, etc. In a stock sale, shares of company stock are transferred to the buyer. Asset sales are more common; however in some cases it is advantageous to consummate a stock sale for tax reasons, transfer of key contracts or licenses, and other reasons.

Q:  Does Exit Strategies specialize in one industry?

Yes and no. We are experts in the process of selling companies; and our seasoned advisors and effective M&A brokerage practices regularly produce successful transactions in a wide range of industries. Each of our advisors has industries in which they concentrate, and we have completed many deals in manufacturing, services, wholesale distribution, automation, tech, e-commerce and construction sectors. We also have green-business, renewable energy, retail and food industry specialists on staff.

Q:  I understand what M&A advisors do, but what don’t they do?

First, M&A advisors (business intermediaries, M&A brokers, business brokers, investment bankers, etc.) are not magicians! Most businesses are sell-able if they are prepared, priced and marketed appropriately; however intermediaries can’t create demand for overpriced businesses. A business broker who says they can sell your business for an extraordinary sum will likely waste your time and risk overexposing your business.

Also, brokers are not qualified to give legal or tax advice. While we are well-versed in the tax and legal implications related to our work, clients must have experienced tax and legal counsel. When necessary, we can refer you to outstanding transaction attorneys and CPA’s.

Part of an M&A advisor’s job is to coordinate the work of accountants, attorneys, financial advisors, estate planners, lenders, landlords, insurance brokers, appraisers, escrow officers, and others who are involved in your transaction. We can provide our perspective on the optimal timing to engage outside counsel to maximize benefit and manage costs.

Q:  What is buyer due diligence and when does it occur?

Due diligence occurs after a letter of intent is executed by both parties, to assure the seller that they are dealing with a qualified party. A due diligence contingency allows the buyer to validate facts and assumptions. If the buyer is satisfied with the information provided in due diligence, they proceed with the purchase. If not, the deal may be renegotiated or cancelled. Buyer requests vary by transaction, but often include:

  1. Financial statements
  2. Bank statements
  3. Corporate documents (if selling company Stock)
  4. Customer base
  5. Fixed assets
  6. Human resources
  7. Industry conditions
  8. Insurance
  9. Intangible assets & IP
  10. Inventory
  11. Leases and other operating agreements
  12. Legal Proceedings
  13. Licenses, permits, regulatory
  14. Marketing
  15. Sales history
  16. Business disclosures
  17. Real estate disclosures (if sale includes Real Property)
  18. Suppliers
  19. IT Systems
  20. Tax returns

Unlike real estate, businesses often sell without 100 percent cash at closing. Therefore, seller due diligence on the buyer can be just as important. The due diligence period is also usually the time to secure third-party financing and approvals and formulate strategies to transfer operations.

Due diligence is a lot of work, but Exit Strategies can help make it less complicated and less stressful.

Q:  What is an ESOP?

An Employee Stock Ownership Plan (ESOP) is a defined contribution employee benefit plan, technically a stock bonus plan that can borrow money to acquire company stock.  ESOPs can give employees as a group 30% to 100% ownership of a company. Certain government rules are intended to protect the interests of the plan participants. In return, an ESOP is granted certain tax benefits. Owners can use an ESOP to exit their company at fair market value, assure on-going management and reward employees – all without paying capital gains tax. To establish an ESOP, a company establishes a trust, into which it contributes new shares of its own stock or cash to buy existing shares. The ESOP trust is governed by trustee(s), selected by the company’s Board of Directors. ESOPs take considerable time and money to set up and maintain, and are not the answer for every business or business owner.

Q:  What information is needed to evaluate our company before selling?

Many factors affect the value and sale readiness of businesses and every business is unique, but the following list is a good start:

  1. Financial statements and tax returns going back 5 years
  2. Current year financial statements, plus AR and AP aging
  3. Business plans and projections if available
  4. Schedule of expenses relating to owner benefits
  5. List of intangible assets and any off balance sheet liabilities
  6. Fixed asset register or depreciation schedule
  7. Information on company services/products, clientele, suppliers, management, end markets, and strategy
  8. Copies of leases and important operating agreements
  9. Debt schedule
  10. Sample management dashboards and reports

Q: We need to sell NOW. There is time for exit planning. Can you help us?

Yes. When an immediate sale is required for financial or other reasons, Exit Strategies runs an accelerated strategic sale process that maximizes selling price and cash to the shareholders in a compressed time-frame. We move quickly to assess the business, compile essential information, identify and contact strategic buyers, and run an auction to obtain the best price and terms available in the market. We follow that up with an efficient due diligence and closing process. An accelerated business sale process typically takes 90-120 days.

Please contact us with any questions or to schedule a confidential initial consultation.

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