The Denver Post | BUSINESS
By Gary Miller GEM Strategy Management
Posted: 03/15/2015 12:01:00 AM MDT
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@ gemstrategymanagement.com.