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Inside, Outside or Upside Down

10 frequently asked questions about ownership transfer
By P. Andrew Limes

FAQ_street_signThere are four transactions most often associated with investment banking. Those include selling, recapitalizing, acquiring, and raising debt or equity. For many business owners considering a transaction, one of the most difficult questions to answer is the first one that arises:

“What are the best alternatives for my business?” Knowing where to start isn’t always easy. A transition does not always mean a sale, and most business owners can choose from a number of options. In order to think about the alternatives for your business, start by looking at the options in three broad categories: inside, outside, or upside down.

Inside
The best alternatives for your business may be found internally. Before jumping to the conclusion that you need outside solutions, consider in-house options. Take into account current management, including family. Other options may be an employee stock ownership plan, or an equity sponsor with management.

Outside
In other cases, the best route for your company might come from an outside source. These options include a sale to strategic or financial buyers. A merger might be another consideration. And for some organizations, a recapitalization or outside private equity can provide the right solutions.

Upside Down
Finally, an upside-down solution might be the best alternative for your business, with multiple combinations of inside and outside options. Special circumstances and complex situations may call for a unique combination of any of the options already listed above.

So, what’s the next best move for you and the company? When looking at the alternatives, there are 10 common questions we typically hear. Let’s take a look at these frequently asked questions on ownership transfer of a business.

1. What do buyers want?
In general, buyers are looking for a handful of factors that include a controlling interest in a growing company, a big market with no customer concentration, and a profitable business with management in place. And, of course, buyers also will be looking for a sale price that is three to five times EBITDA. How does this compare with what the seller wants?

2. What do sellers want?
When selling their business, all sellers are looking for a huge valuation. Their starting line is usually five times EBITDA. In many cases, their “ask” is often an unrealistic value. Additionally, sellers obviously prefer 100% cash at closing.

3. Why engage an investment bank intermediary?
As an SDR client once said, “I wouldn’t sell my house by myself, why would I sell my business by myself?” The use of an investment banker comes with several key advantages. First is the focus of a professional who knows the market. As the business owner, you have a fulltime job, and distractions can be very time-consuming and costly. Additionally, an investment banker is there to facilitate negotiations, and in some cases, say the things that you as the business owner cannot say.

The right investment bankers will pay for themselves. If and when there is any complexity in the deal process, an investment banker will multiply your time, solve problems and may add value to the transaction.

4. What should I look for in an advisor?
A great advisor will be registered with a broker-dealer and licensed by the Financial Industry Regulatory Authority (FINRA), have a significant depth of experience, and the skill and abilities to add value to the sale process. Finally, an advisor should be a good fit for you personally. By the time the deal is complete, you will have seen a great deal of your advisor.

5. What do I need to know about the sale process?
The sales cycle typically includes five overlapping processes over the course of six-to-nine months. These processes include analysis, research, marketing, due diligence and closing. In addition to cash at close, there are 100 other moving parts including agreements covering carry, earn-out, a seller note, employment contracts, and non-competes.

6. What should I expect in a buy-side engagement?
For business owners considering the option of a buy-side transaction, there are a few key pieces to consider. First, carefully study the geographic niche, vertical niche and horizontal niche of your business to help define the targets and goals. You should also expect to carry out two overlapping processes, neither of which has a defined end. The first process includes planning, searching and screening potential acquisitions. The second process includes negotiations, due diligence and closing.

7. What should I expect in a recapitalization?
When considering recapitalization as an option for your business, you should expect to receive liquidity for ownership and a new source of capital. The owner should also have a clear plan for growth and well-defined return expectations. But along with this new source of capital will also come a great deal of help, direction, and advice whether solicited or not.

8. What is a wise vetting process for transactions?
As a business owner, any time you consider a transaction, make certain that you understand the valuation metrics. You must also ensure that the buyer, investor or team is qualified. Finally, set specific goals and alternative strategies as a part of the process.

9. What are the common traps to avoid?
One of the most common hang-ups that we see in this business is an owner that isn’t fully prepared to carry out the transaction. When entering into a transaction process of any kind, make sure that you understand the possible outcomes and consequences and are prepared for the deal to close.

Next, be sure that you aren’t simply fishing for a solution, and check that your expectations of the process are realistic. Finally, it’s important that owners make a commitment to the process. A lack of commitment is one of the most common pitfalls.

10. What does an agreement look like?
An agreement will be exclusive and may carry a monthly or one-time fee. You should also expect a success fee and tail. Transactions will be subject to the scrutiny of FlNRA, the SEC, and your state securities commission and do not come with any guarantees.

When planning and executing the ownership transfer of your company, start by considering all of the options: inside, outside and upside down. If your only tool is a hammer, you will tend to see only nail s. Only when you understand the options and the implications of each can you begin to plan the most effective route for your business.

P. Andrew Limes is a Principal at SDR Ventures, Inc. and Registered Representative of Colorado Financial Service Corporal ion. To learn more, contact Andy at alimes@sdrventures.com.