June 2012

Since one often hears the term “fair value” or “fair market value,” it would be easy to assume that “fairness opinion” means the same thing.  A fairness opinion may be based to some degree on fair market value, but there the similarities end.  Assume that you are president of a family business and the other members are not active in the business, but are stockholders; or you are president of a privately held company that has several investors/stockholders.  The decision is made to sell the company; and you as president are charged with that responsibility.  A buyer is found; the deal is set; it is ready to close — and, then, one of the minority stockholders comes out of the woodwork and claims the price is too low.  Or, worse, the deal closes, then the minority stockholder decides to sue the president, which is you, claiming the selling price was too low.  A fairness opinion may avoid this or protect you, the president, from any litigation.

A fairness opinion is a letter, usually only two to four pages, containing the factors or items considered, and a conclusion on the fairness of the selling price along with the usual caveats or limitations. These limitations usually cite that all the information on which the letter is based has been provided by others, the actual assets of the business have not been valued, and that the expert relied on information furnished by management.

This letter can be prepared by an expert in business valuation such, as a business appraiser or business intermediary.  The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert.  It does not provide any comment or opinion on the deal itself or how it is structured; nor does it contain any recommendations on whether the deal should be accepted or rejected.

Fairness opinions are often used in the sale of public companies by the board of directors.  It helps support the fact that the board is protecting the interests of the stockholders, at least as far as the selling price is concerned. In privately held companies, the fairness opinion will serve the same purpose if there are minority shareholders or family members who may elect to challenge the price the company is being sold for.

Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.”  Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.

Neglecting the  Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business.  At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball.  Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits.  A potential buyer could become concerned if the business flattens out or falls off.

Solution:  For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history.  This is no time to be overly cost conscious.  The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.

Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family.  The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.

Solution:  By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.

Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached.  It happens, perhaps more frequently than not.  The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.

Solution:  Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach.  Involving senior management can also prevent information leaks.

Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively.  According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs.  With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.

Solution:  Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some.   Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important.  If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.

Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction.  Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets.  If the owner is selling real estate, an environmental study is necessary.  If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction.  These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.

Solution:  The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.
Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run.  However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.

Solution:  If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.

Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time.  The potential buyer probably will have a similar set of expectations.

Solution:  Decide ahead of the negotiation which are the very important items and which ones are not critical.  In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.

Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end.  For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time.  It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties.  What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months.  If it does, this means that the deal is dragging and is unlikely to close.  The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.

Solution:  Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost.  The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.

The deal is done and you have completed the closing.  Now what do you do?  You help the new owner because chances are that you have some vested interest in the new entity, and it is in your best interest that the new owner is successful.

For example:
– there may be an escrow account due you.
– the buyer may have given you a note.
– you may be the landlord, and the buyer the tenant.
– your name remains on the company letterhead, and your personal reputation continues to be associated with the business.
– your former employees depend on you to have made the right decision in selling to the particular buyer, thus preserving their jobs.

If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary.  You probably have wondered what you could expect from him or her.  It works both ways.  To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you.  By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:

• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second.  It takes this kind of partnering to get the job done.  You have to return all of his or her telephone calls promptly and be available to handle any other requests.  You, other key executives, and primary advisors have to be readily available to your intermediary.

• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary.  Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale.  Only they can provide the necessary information.

• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer.  An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc.  The lines of communication must be kept open.

• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers.  They will need to know just what is required, and expected, from such visits.

• You will rightfully expect the intermediary to develop a list of possible acquirers.  You can help in several ways.  First, you could offer the names of possible candidates who might be interested in acquiring your business.  Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.

• Keep your intermediary in the loop.  Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents.  Now is not the time to assume that the intermediary’s job is done.  It may just be beginning as the details of financing are completed and final deal points are resolved.  The intermediary knows the buyer, the seller, and what they really agreed on.  You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.

• Be open to all suggestions.  You may feel that you only want one type of buyer to look at your business.  For example, you may think that only a foreign company will pay you what you want for the company.  Your intermediary may have some other prospects.  Sometimes you have to be willing to change directions.

The time to call a business intermediary professional is when you are considering the sale of your company.  He or she is a major member of your team.  Selling a company can be a long-term proposition.  Make sure you are willing to be involved in the process until the job is done.  Maintain open communications with the intermediary.  And, most of all – listen. He or she is the expert.

One of the most frequently-asked questions by those looking at the independent business scene is: “How many are for sale?” Right on the heels of that question comes another: “How many actually sell?”

To determine how many of these businesses are for sale at any one time, and what percentage of these get sold, it is necessary first to define terms by business category. The industry groups that account for the majority of small to mid-sized business sales are: manufacturing, wholesale trade, retail trade, business and personal services, and household/miscellaneous services. Using these categories as components, the total number of businesses that apply to our “survey” is approximately 6.3 million.

Of this total, businesses that are for sale at any one time account for roughly 20 percent. There is naturally going to be a higher percentage of businesses for sale that employ four or less workers, but some independent business experts feel that fewer of these businesses–at least percentage-wise–sell than do the larger ones. Of those businesses with four or less employees, one expert’s estimate is that one out of six actually sells; with five to nine employees, about one out of five sells; and the trend continues.

Why is the actual-sale percentage lower for very small businesses? Many factors operate to affect this tendency. For example, the much smaller business may suffer more from unsubstantiated income or inaccurate financial information. Some owners may not be realistic in their pricing or simply aren’t serious about selling (problems that can threaten the sale of a business at any level). Still others may simply pay the bills and close the doors.

However, no matter what the percentages show, a business owner considering putting a company on the market should remember this: most businesses are salable if the seller is realistic in assessing value and is aware that the marketplace is the final arbiter of the selling price.