Posts made in March 2015

Many owners are shocked at how much it costs to sell their businessess


The Denver Post | BUSINESS

By Gary Miller GEM Strategy Management

Posted:   03/15/2015 12:01:00 AM MDT

Gary Miller

Many owners plan to someday sell their businesses. Often, they think about their retirement and dream about their lifestyles based on the money they will make from the sale.

But more often than not, they have not anticipated the costs involved. This is not surprising because most owners have concentrated on building their businesses rather than selling them.

I strongly recommend that my clients spend the money — and the time — necessary to do a sale correctly. If they don’t, they risk leaving money on the table or, worse, may not sell their businesses at all.

Because most owners do not know the necessary steps needed to successfully close a transaction, they are unaware of the time and costs involved.

Once they grasp the scope of work and associated costs, many try to save money by going it alone or by using their existing business accountants and attorneys, who may have little or no transaction experience. Not using a team of transaction experts is a major mistake, akin to asking your general practitioner to perform surgery.

Research indicates owners who use an experienced transaction deal team often realize higher multiples, better terms and conditions and sell their businesses more quickly than owners who do not. This is a result of preparing better and having your company in pristine condition before going to market.

For example, if an industry’s selling price multiples range from four to eight times EBITDA (earnings before interest, taxes, depreciation and amortization) and the average is 5.2, your company can sell at the higher range of those multiples if it is well-prepared. Companies that are minimally prepared will sell at the lower range of the multiples — if they sell.

Continuing our example, if your company’s adjusted EBITDA is $5 million, and you spend the bare minimum to go to market, your costs still could be as much as $575,000 for legal, investment banking, accounting and consulting fees and expenses, excluding the success fees paid to the investment banking firm at closing. With only minimal prep, the company might sell for 3 to 4.5 times EBITDA or between $15 million and $22.5 million.

It may take an additional $400,000, excluding success fees, to position the company in the top tier with the possibility of selling at 5.5 to 7.5 times EBITDA or $27.5 million to $37.5 million.

Below, are some general guidelines and cost ranges to consider if you are selling your business in the next five years. The guidelines vary significantly depending on the size and complexity of the company.

If you are an established business, there are three stages to go through in selling your business: preparation to go to market; identification of potential qualified buyers leading to a letter of interest, terms sheet and letter of understanding; and due diligence, negotiations, purchase and sale agreement and closing documents.

There will be costs related to each stage.

The most important decision a business owner makes is the selection of a deal team, and transaction experience is the most important criterion. Are they experienced transaction experts (surgeons vs. general practitioners)?

The first member of the deal team is a transaction consultant who specializes in M&A. The consulting firm’s first job is to prepare the firm for market and lead the other deal team firms throughout the transaction process. The cost of the consulting firm can range from $100,000 to $350,000 or more, plus expenses, depending on the size and condition of the company, the time it takes to sell the company and the complexities of the transaction.

The second deal team member is the transaction wealth management firm, who can guide you in wealth preservation and tax avoidance or deferral (not tax evasion).

It is important your estate plans be in place at least three months before you receive either a verbal offer or a letter of interest, because the IRS could disallow your tax saving strategies if they are not in place. Wealth management firms usually are compensated based on management fees derived from the amount of assets under management.

The final three deal team firms are the transaction law firm, the transaction accounting firm and the investment banking firm, all of whom can work together with the wealth management firm to negotiate the best deal structure, price and terms while at the same time minimizing your tax liabilities.

Costs for a strong transaction law firm team can range from $75,000 to $350,000 or higher, plus expenses. Accounting can run from $50,000 to $400,000 or more, plus expenses, if they have to audit your last three years of financial statements.

Costs for an investment banking firm include an upfront retainer fee ranging from $60,000 to $300,000 or more, plus expenses and a “success fee” for completing the transaction. Success fees range from 3.5 percent to 10 percent based on total value of the transaction. Some investment bankers add a “sweetener” to the success fees such as warrants convertible to stock at some future value, at some future date.

While much of the above may sound complex and expensive, business owners who use experienced transaction teams win more than they lose, more often than not. Owners should ponder not the costs involved in the transaction process but the price they will pay for not using transaction specialists. In my opinion, those who do not are “penny-wise and pound-foolish.”

Gary Miller is founder and CEO of GEM Strategy Management Inc., a national firm focusing on strategic business planning, raising growth capital, M&A planning and transactions, exit strategies, preparing companies for sale and post-integration processes for middle-market companies. Reach Gary at 970.390.4441 or gmiller@




Without a “deal team” you will probably leave money on the table


Gary Miller

The Kansas City Star  

Business Columns & Blogs

 03/09/2015 8:26 AM      

Gary Miller: Without a ‘deal team,’ you probably will leave money on the table


Last summer  Paul, called me to ask if I would help him sell his company. He had built a business from scratch and his revenues today are $30 million with an EBITDA (earnings before interest, taxes, depreciation and amortization) approaching $3 million. Paul had been in business more than 30 years, pouring his heart and soul into building a successful enterprise.

During our conversation I explained the need to prepare his company for sale before we take it to market and we will need to put a “deal team” in place to ensure he can realize the most value possible from the sale of his company. He asked me to explain the various roles of the deal team. I told him a strong deal team includes a consultant team leader, an investment banking firm, mergers and acquisitions legal counsel, tax counsel, and a wealth management adviser.

Paul asked whether he really needed all those advisers to sell his company — particularly an investment banker and M&A legal counsel. Here is the advice I gave him.

The value of a strong intermediary consulting firm and investment banker.

About 75-80 percent of all middle market companies for sale never close their transactions. One of the biggest mistakes business owners make is underestimating the value of a seasoned and qualified investment banking firm and what they can bring to a transaction. There is a misconception that investment banking firms charge exorbitant fees for very little work. Nothing could be further from the truth. Though it’s possible owners can sell their businesses on their own, often costly mistakes are made during the transaction process.

The right advisers bring critical skills, expertise and transaction experience:

▪ Most important is understanding your personal goals as there is life after the transaction. They can help you evaluate your transaction goals and timeline and help you select the best process for exiting the business. Advisers can help you think through what a successful exit looks like and help you understand there are more considerations than price when selling your company. For example, do you want to leave or stay with the company after closing? What concerns do you have for the company’s legacy, the management team and employees?

▪ They can help you polish your strategic business plan, help you clean up your operations, take you through a due diligence process similar to what buyers will do when examining your company and help you address any hidden “skeletons” in your financial records business operations.

▪ They will prepare marketing documents and an executive summary of your business — known as the “teaser”; a confidential comprehensive memorandum detailing your transaction goals, financial and operational performance, industry and market position, management team, competitive advantages, intellectual property and other market differentiators.

▪ Experienced advisers will build a buyer list, take you to market, narrow the potential buyers, negotiate the transaction terms and help you close the deal.

This team allows you to run the business while they “run the process.” This is critical as it keeps business owners focused on managing the business and not becoming distracted, which can hurt business performance.

The value of an experienced transaction M&A legal team.

Paul asked whether he could use his current outside counsel since he was a trusted adviser and had served him well as long as he could remember. I told Paul that selling your company is not business as usual. It is an extraordinary transaction. You need counsel with significant transaction expertise to take you through the entire process. I explained that, more often than not, your lawyer who has provided excellent counsel for all manner of general business issues, contract negotiations and litigation management has little or no experience with anything but the smallest of merger or acquisition transactions. If you use him, this could be very problematic.

For most middle market transactions, you will need legal representation with resources appropriate to the size and complexity of the transaction. At the very least, the legal team should include an experienced partner, a senior associate and an experienced paralegal, each with expertise in corporate and commercial transactions with resources for particular complex subject matter such as tax issues and potential post transaction legacy liability.

In finding that representation, I advised him:

▪ Bigger may or may not be better. Plenty of large law firms will charge you top dollar. They have very specific expertise and lots of manpower at their disposal. For most middle market transactions, representation by smaller to mid-size firms will be far less expensive and may be of higher quality.

▪ The sector a company does business in usually has little effect on the legal requirements of the transaction. Experienced M&A counsel can adapt to the basic legal requirements of most sectors and industries.

▪ Your lawyer is probably not your investment banker. They do not have their pulse on the current market conditions and pricing multiples. Also, lawyers are almost never set up to conduct an auction process and do not have a Rolodex of buyers readily at hand.

▪ The legal services required for most middle market transactions run a varied path from initial structure through post-closing matters.

The latest research indicates that business owners who use an expert deal team greater chance of success in selling their businesses than those who don’t. Don’t be penny wise and pound foolish. Often your deal team will be able to negotiate a higher multiple of your EBITDA with much better terms than a business owner who tries to sell his own business — in addition to the mistakes that are avoided by using a strong deal team.

Gary Miller is founder and CEO of GEM Strategy Management Inc., advising middle market company owners how to maximize the value of their companies, leading them through the transaction process, raising growth capital and building strategic business plans for growth and expansion. Reach him at 970.390.4441 or

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Pitfalls to avoid after the deal is closed


PAGE E9 | SUNDAY, March 8, 2015


Gary Miller

Pitfalls to avoid after the deal is closed

By Gary Miller GEM Strategy Management

It never ceases to amaze me how many deals that close successfully, fail miserably as the companies begin to integrate. This is particularly problematic for middle-market companies.

Once the agreement is signed and the closing is complete, the deal is done in the eyes of the investment bankers, lawyers, accountants and consultants. But in fact, the steps necessary to make the acquisition or merger a success are just beginning.

It is during this post-merger integration period that the two companies’ resources should be combined into a single entity. What makes this period so disaster-prone? There are four primary reasons:

  • Few senior executives acknowledge the importance of this part of the acquisition process.
  • Senior management underestimates the complications, intricacies and idiosyncrasies of the two companies and the time that must be invested to form a working relationship.
  • An “integration leader” is often installed with little knowledge of the tasks required and limited understanding of the structure of the deal and is charged with combining the companies as quickly as possible so growth targets can be met.
  • Integration is complex, and there are no automatic approaches to speed and to simplify the process.

Creating the integration plan is a must and should focus on five major areas — size, culture, resources, financial strength and management sophistication — that spell danger if they are not addressed.


In the process, it is important to avoid certain concepts that have been incorrectly mythologized as successful integration behavior.

Race to integrate: A substantial investment has been made and the directors and shareholders are watching, which implies a rush to satisfy them. Another pressure is the desire to immediately utilize the synergies and tap the opportunities that made the acquisition attractive in the first place. However, the synergies and opportunities must be evaluated against reality. This process takes time.

Rapid changes instituted immediately after the acquisition have an additional negative effect. Either the acquired company’s managers become demoralized because their input has been disregarded, or they become so distracted by the demands of the purchaser they literally stop managing the company. In either case, the acquired company stops running effectively, and new problems begin.

Sameness is divine: This concept is applied across industry lines, companies of all sizes and in all corporate cultures. I have found it a rare occasion for a company not to utilize the same incentive compensation system for all managers instead of adopting tailored compensation systems that maximize the growth potential of the acquired company. Often, information systems are consolidated into the same information system for all business units. The rationale for sameness is ease of administration or one system company-wide.

Stars conquer: Mergers and acquisition are discussed frequently in terms of marriages. In reality, an acquisition or merger typically comes closer to a conquering army. The purchaser’s managers descend and in their eagerness to exercise their new responsibilities and show results, they begin giving orders: “We own you now, so you will do it our way.”

The conquered resist this condescending approach and often reject even systems that are an improvement. Key personnel who don’t decamp may begin to undermine the acquisition. The stars should have moved to develop trust and a future working relationship instead of wielding their power.

The deal and the integration don’t mix: Separating the integration phase from pre-merger negotiations often leads to failure. Covenants of the acquisition agreement that impact the integration process have been cast in stone before the companies join up, and so the leader responsible for the integration should be involved upfront.

For example, earn-out agreements, in which sellers must “earn” part of the purchase price by meeting performance targets over a period of time, are a popular way to encourage the acquired management to stay. However, this structure can make it difficult to track capital invested by the acquiring company and improved profits from the elimination of redundancies also may be postponed.

What can be done to improve the probability of success?

Move slowly and carefully. Recognize and maintain critical uniqueness of the acquired company. Develop a partnership. Begin the work of integration before the contract is signed.

These simple rules combine to create a framework that causes the purchaser to thoroughly think through and develop a plan for a successful integration process.

GEM Strategy Management Inc. founder and CEO Gary Miller advises middle-market company owners on how to maximize the value of their companies, leading them through the transaction process, raising growth capital, building strategic business plans for growth and expansion and assisting post-integration processes. You can reach him at 970.390.4441 or gmiller@