I sell mid-market businesses.
A mid-market business has turnover from $2 million to $50+ million.
The sales process is essentially collecting and summarising business information, valuing the business, identifying or advertising buyers, and negotiating the sale. There are differences in selling a small vs mid-market business and I note those differences below.
We understand the business.
When selling a business we first work with the owners to understand the strengths and weaknesses of the business by asking about the company, the customers, and the competitors. We are looking to highlight the strengths when we sell the company but also have a ready explanation for any weaknesses.
We also analyse the business earnings and adjust them to reflect total owners benefits rather than simply Net Profit, this earnings figure is called Earnings Before Proprietors wages Interest Tax Depreciation and Amortisation (EBPITDA).
This information is used to prepare an Information Memorandum that is given to prospective buyers, and prepare a summary of the business that does not identify the name.
In the case of a mid-market company, a summary is insufficient for such a large investment. Instead, we build a financial model of the business over the next 3-5 years including a forecast P&L, Balance Sheet and Cash Flow Statement. We don’t use EBPITDA but EBITDA as the earnings figure. We also collect much more information about senior management capability and systems, and the industry.
We value the business.
We prepare a business appraisal that uses this information to estimate future maintainable earnings and the risk of those earnings.
In the case of a small business we use three methods: 1) the market method using the small business sales database BizStats to look at what similar businesses sold for, 2) the income method where we use small business capitalisation rates (or multiplies), and 3) the asset method where we use the sum of the market value of assets. Together these provide a theoretical value of the company and assist with setting the price.
In the case of a mid-market company, we research mid-market comparable transactions in NZ and Australia using specialist databases specifically EV/EBITDA multiples. In a mid-market transaction the multiple is the key figure. We check the resulting value using Discounted Cash Flow.
We advise on the best method of sale.
The usual process is set a price, list the business on websites but keep the company name confidential, and not have any deadline for when the business sells.
This ensures a steady sales process that maximises the number of buyers who see the business over time. Not providing a price can discourage buyers from bothering to enquire.
We also do not name the business unless a confidentiality agreement has been signed. If it becomes known a business is for sale then competitors can start targeting customers, employees start to leave, and customers start to look for other options.
If there is urgency in selling the business, then we may choose to publically name the business. In essence, this is trading off boosting the awareness of the sale with the drop in profit and business price due to the issues noted above.
We approach buyers.
Small business buyers will either be identifiable because they work in the same industry e.g competitors, customers and suppliers, or they will not be identifiable because they are working elsewhere e.g. perhaps as an employee in the industry or a non-related corporate.
We work with the owners to create a buyers list from their industry knowledge and our business database. We also advertise the business for sale on various websites in order to target those non-identifiable prospective customers.
In the case of mid-market companies, we work off a buyers list and tend not to do any advertising.
We provide information.
Once prospective buyers have signed a confidentiality agreement, they are given the information memorandum. We follow up with them to establish interest. If they are interested then they will have numerous questions which we’ll answer, they’ll want to meet the owners to discuss directly, and they’ll want to do a site visit.
At some stage, they’ll ask for client lists or employee details or such like highly confidential information, at which time I’ll say they need to make an offer and access that information during due diligence.
Mid-market companies follow a similar process, albeit often with advisors.
We assist with contractual negotiations.
We help the buyer prepare a sale and purchase agreement using the standard Auckland District Law Society contract. The parties will negotiate price and other terms and we facilitate that negotiation and make changes to the agreement. The agreement is usually conditional on due diligence, lease and license assignment or authority, handover, restraint of trade, employee contracts and other such issues. Lawyers are a key part of this process in that they approve the agreement before their client signs it.
If an agreement is reached we facilitate execution of that agreement such that the parties meet their obligations within the agreed time frame.
Mid-market businesses may follow the same process especially if the transaction is less than $10million. Or they may use a “term sheet” rather than a full agreement as the negotiation document. Once the terms have been agreed, then due diligence may be undertaken by the buyer and their accountants, and then a full agreement prepared by commercial lawyers. In effect, there are two negotiations, the term sheet and the full sales and purchase agreement details.
Our role is to facilitate the negotiations by communicating the owner’s terms to the buyer and their advisors including recalculating equity value based on those new terms. We also suggest ideas to keep negotiations on track or maximise business value.
We keep in touch.
On the settlement (or “completion”) date of the legal agreement, money and ownership changes hands. Then a handover process usually begins with the new owners running the business with the assistance of the old owners. Although strictly speaking our job is done, we keep in touch to make sure things are going smoothly.