As a business owner, one of the most difficult and emotional decisions you’ll make is the decision to sell all or part of your business. The process is complex, can be messy, and is certain to include some unexpected challenges.  More likely than not, buyers will be better equipped and will be veterans of this process. You’ve got some catching up to do in preparing to win.

Consider the circumstances faced by General George Washington – Commander of the Continental Army, during the winter of 1777-1778. Having had limited success over the previous two years  against the much larger and better equipped British forces, his army was poorly equipped, faced shortages in food and other critical supplies, and was being depleted through desertion and disease. A victorious conclusion to this quest for independence was far from certain.

Representing American interests while living in Europe, Benjamin Franklin understood that Washington’s army could benefit from having access to “hands-on” military experience and expertise.  Amongst those that Franklin dispatched to America was Baron von Steuben – a Prussian officer with general staff experience, who joined Washington’s army during this winter at Valley Forge.  Chartered by Washington to improve the army’s readiness and ability to fight and win, von Steuben developed and implemented a regimen that emphasized the “basics” of military drill and discipline. Under his watchful eye, he provided guidance and enabled the unit leaders to develop the key fundamental skills of marching in formation, maneuver in battle, rapid fire, and bayonet use. The “seeds” planted during the winter of 1777-1778 reaped a bountiful harvest during the battlefield engagements that were soon to follow.

Back to the question: “How do I best prepare in order to win?” In a fashion similar to the actions taken at Valley Forge, the business leader asking such a question should consider the benefit of involving those who have been in a similar situation and have successfully traversed the path that led to eventual success.  You’ll want a team of advisors with relevant “hands-on” experience.

Most of our professionals at Corporate Finance Associates have had dozens of years of experience and multiple successes in operating and running businesses.  Not only are we qualified deal-makers in facilitating transactions, but we’ve also been through the transaction process from the perspective of a business owner. We understand the challenges. We appreciate the value of teamwork and will help in building your team of trusted advisors that will prepare you to win.

Posted by Jim Gerberman.

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CFA also left their mark on several other Thomson Reuters league tables including the Small Cap Worldwide chart for transactions up to $50 million (#41), the U.S. Mid-Market chart for transactions up to $500 million (#25), and India involved transactions for both Small Cap (#24) and Mid-Market (#31).

“This has been a fruitful year for Corporate Finance Associates.  During a time when some M&A firms experienced a lackluster business environment, we added new offices and additional investment bankers, made an impact on the M&A charts and celebrated a win at the M&A Atlas Awards,” said Peter Heydenrych, Chairman and CEO of CFA.  Peter adds, “We are looking forward to the coming years as the baby boom generation looks toward retirement and business exit planning shifts into high gear.”

I am not a pessimist, quite the contrary! I do believe we are past the bump and well into a period of responsible expansion. My point here is that data can be read and interpreted in different ways and that many variables, often subjective, will affect how one views his/her options.

Selling your company is a business decision surrounded by emotions. If, over the past year or two you have taken the steps to prepare yourself and your company for that moment, and now you feel that your time is right, then embrace your decision and go to market with confidence. You will be successful.

If, on the other hand, you don’t feel that you are ready but you see the time to make a decision looming, seek professional advice now. It’s never too soon to have a good understanding of the available options and of what it will take to prepare and position your company to be attractive to each type of prospective buyers.

Over the life of your business, it is very likely that you will have experienced booms as well as busts. Regardless of the situation, you adapted, organized your resources, and delivered your product or service with the same conviction. Exiting a business is no different: it is just the last of a series of strategic business decisions that you have been making as a manager throughout the life of your company. As with all those decisions, when YOU are ready to pull the trigger, don’t hesitate.

Posted by Eduardo Berdegué.

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Based on CFA’s 57+ years of transaction history, we have extensive experience working with all types of attorneys. Furthermore, through my own participation as the only non-lawyer in the International Business Law Consortium (www.iblc.com), I have been afforded a unique perspective into how attorneys and their firms are best selected and utilized in a variety of transaction types. In today’s article, we examine the Five Biggest Mistakes Clients Make When Hiring An Attorney; in my next article, we will examine the biggest mistakes clients make when utilizing their attorney for their transactions.

The Five Biggest Mistakes Clients Make When Hiring An Attorney

1.    Lowest Price Does Not Necessarily Mean Lowest Cost. Often when our clients ask for a referral to an attorney, they are concerned about fees. Just as often, these same clients are more worried about cost than quality, assuming all attorneys are alike.

Unfortunately, the hourly rates (or total project cost) quoted by the attorneys you interview may not directly correlate to the quality of work/service provided. We know from experience attorneys in larger markets (New York, Boston, Chicago, DC, LA) typically charge much higher rates than lawyers in slightly smaller markets (for example, Cleveland, Detroit, Portland, Dallas).

Furthermore, while one transactional attorney may have a higher quoted hourly rate than another, he/she may be more efficient and will be able to get the work done in less time. Time and again, we have seen experienced attorneys accomplish a task in half the time of their less experience colleagues, thus reducing the overall cost of their services. Accordingly, higher rates do not always lead to higher costs.

It is also important to remember the more complex the transaction and the more “moving parts,” the higher your legal bill. For example, we had a client who complained about the cost of his legal fees, stating, “When my brother sold his business last year, his legal fees were 50% less than what I have been charged.” Upon further discussion, we learned his brother had a simple sale of assets for all cash at closing in a transaction valued at less than $2 million. Our client was involved in a transaction involving three separate entities with separate owners/shareholders, two complex real property leases, a stock/equity roll-over agreement, and several other ancillary documents in a transaction valued at $33 million. I told our client, based on the data provided, he was getting a GREAT DEAL if his fees were only 50% higher than his brother’s.

When interviewing a prospective attorney, you might consider asking the following questions to help you determine the overall cost of his/her work, not just the quoted hourly rate:

• How will you utilize your associates and other team members on this project?
• Can you provide me with a “best guess” estimate of how much the total project will cost?
• What can cause the legal fees for this deal to go above your estimate?

2.    No Relevant Experience. The following quote may terrify your advisors, “My (brother/sister/child/fraternity brother/next-door-neighbor) is an attorney, he/she will be happy to work on this transaction for me.” Yes, it is true, any attorney who has passed the Bar exam is allowed to work in any area of the law, but you are wise to hire an attorney who has significant, and relevant transactional experience.

Clients often tell us, “But my attorney is my friend. We grew up together. He has done lots of real estate deals so I know he can handle the sale of my business to this private equity group.” Unfortunately, while real estate deals are transactions, they are quite different from M&A transactions. Experience in one discipline does not necessarily connote expertise in the other.

An analogy we often use in this area is: Imagine a situation where a loved one (your child, your spouse, your parent) sustained a serious head injury. Would you entrust their care to a heart surgeon or a dermatologist? Of course not! You would seek the services of the best neurologist you could find. So why would you retain an attorney to guide you through a complex M&A transaction who does not have relevant experience?

Furthermore, you want to know your attorney has experience with the type of transaction you are contemplating. That is, if you are looking to take on a $30 million subordinated debt-placement, does your attorney have experience with these type deals? If you are doing an equity recapitalization with a Private Equity Group, how many of these type deals has your attorney done recently?

The following are some of the questions we suggest you ask your attorney when you interview them:

• Please tell me about the last three to five transactions you worked on: when did you complete them, how large were they, what type of deals were they (note: the deal business changes rapidly, the more current experience your attorney has the better).
• How many deals have you or your firm done in my industry?
• Are you familiar with the ABA and/or SRS Deal Points Study(ies)?  (note: if your attorney is not familiar with these studies, this should be a major red flag).
• I am thinking of doing a/an (equity recap, dividend recap, senior loan, acquisition, stock sale, asset sale). How much recent experience do you have with this type of transaction?

3.    No Bench Strength. To paraphrase a famous First Lady, “It takes a village.” Deals today are very complex and getting even more complex by the day. Whereas 20 years ago the simplest asset sale could be completed with a 10 page Definitive Purchase Agreement, today, the Agreement for the same deal would have 10 pages of definition of terms!

When interviewing an attorney for your transaction, it is important for you to determine the strength of his/her entire firm (their team, if you will). Because of the complexity of deals today, it is impossible for one attorney to be expert in all aspects of a deal; they will need to call upon their colleagues in the following disciplines: ERISA, Environmental, Intellectual Property, Information Technology, Labor, Real Property, and Tax laws, just to name a few. They and their firm will need to be comfortable with FCPA, AML, HSR filings, and more.

We have seen situations where our clients insist on using the services of their local, one-man law firm. These hardworking professionals can do a great job, but they can be overwhelmed by the transaction. Rest assured, if you are selling a business for more than $5 million, the acquirer will have a stable of attorneys working for them. Make sure your legal team is up to the task or you risk getting outmaneuvered in the deal.

What are some questions you should ask a prospective attorney about their “bench strength” before retaining their firm?

• Do you have specialists in your firm for the various aspects of the deal and how do you interface with them?
• What happens if you need to take a vacation or get busy on another deal? Who is your back-up…and may I meet this person as well?

4.    Only Hiring Local. Given the preponderance of technology used in business today, the days of only hiring a lawyer in your backyard are gone. Yes, you do need to be considerate of using an attorney or firm who is cognizant of the laws of your local jurisdiction, but, at least in the USA, a sharp attorney in Kansas City will be able to close transactions across the country (consulting with local counsel as necessary, of course).

We have had the pleasure of working with outstanding lawyers and law firms in Omaha, Denver, Salt Lake City, Savannah, and Des Moines, just to name a few. We have referred clients in California to firms in Omaha and clients in New York to firms in Denver.

Given the use of email in today’s legal community, it is rare for opposing counsel to meet face-to-face on transactions.

We see two key benefits for seeking counsel outside of your local area:

• If you do live/work in one of the higher cost locations noted above, hiring an attorney from a lower-cost regain can provide you the opportunity to retain a top-flight firm at a lower overall cost.
• If you live/work in a smaller market which is not fortunate to have experienced transactional attorneys, looking outside the region will provide you with a larger pool of attorneys from which to choose.

5.    Not Trusting Your Instincts. Hiring and retaining a transactional attorney is a personal experience. You will be spending a great deal of time speaking with and listening to this person. While they do not have to be your best friend, you do have to trust and respect them and their opinions and counsel.

Too often, we see clients who hire their attorney for all the wrong reasons (most often price/cost driven). We believe if you do not genuinely “like” the person you are contemplating hiring to represent you, your experience will be poor and you will not be satisfied with the outcome of the work provided by your attorney.

Go with your gut, trust your instincts. If you do not have some sort of “connection” with the attorney you are interviewing, you probably should move on and interview another firm.

Clearly, if you are reading this article you are successful in your business and you have been successful because of your ability to make difficult decisions. Hiring an attorney is not an easy decision, so you have to take proper precautions to make the right decision, including putting faith in your ability to listen to your “inner voice” and trust your intuition.

Recently, I was at a conference where Admiral (ret) Eric Olson was a keynote speaker. He made a statement which perfectly sums up the need to have a connection with your attorney and trust your own instincts. Admiral Olson said: “When the map differs from the terrain, go with the terrain.”

Our next article will dive into the biggest mistakes clients make with lawyers in their transactions. Remember, the legal business is a contact sport: make good connections, conduct proper interviews, and you will be pleased with your results.

Posted by Jim Zipursky.

This communication is not a solicitation for the offer or sale of any particular security, product or service, and no investment or other decision(s) should be made based on this communication.   For securities purposes, Corporate Finance Associates Nebraska is associated with Colorado Financial Service Corporation (“CFSC”), Member FINRA and SIPC. Corporate Finance Associates and CFSC are independent entities.  The solicitation and consummation of any particular securities transaction(s) are subject to compliance with all applicable securities and other laws, rules and regulations, including but not limited to those relating to any/all required registrations and qualifications and/or exemptions thereto.

Taleb is a former successful hedge fund analyst and trader. While on Wall Street he developed innovative models around risk management. His models demonstrate that down side risk cannot be predicted by normal bell curve distribution but rather have more of a “long tail” distribution. In colloquial terms he popularized the term “Black Swan” events to illustrate his ideas about risk and risk management.

Much like in nature, when due to a freakish genetic mutation, a rare black swan is born; in Talab’s world Black Swans are hugely disruptive events that seem to come out of nowhere. They are not predicable, and while they are rare, they WILL occur.

“Anti-Fragile” is Taleb’s term for systems, things (and yes, people) that are not vulnerable to Black Swan events and in fact can grow and thrive under the stress of disruptive events.

Back to our business, I think about Taleb’s ideas in the context of the company owners we know – especially those over 55, with the majority of their net worth in their businesses. How Anti-Fragile are they? Too many eggs in too few baskets is the epitome of Fragile. How vulnerable are these good people to a Black Swan event, e.g. 9/11?

Many of us have been business owners and celebrate the can-do spirit of entrepreneurship. We generally believe the right time to sell a company is when the owner is ready to sell the company. But keeping an optimistic outlook is being tested right now. There are a lot of known risk factors that appear pretty frightening: a moribund US economy; trillions in national debt and no plan to deal with it; gridlocked government; unlimited Fed money printing; coming inflation and higher interest rates; contraction in Europe and much of the world; severe Middle East tension; North Korean nukes.

These known risk factors make a compelling case for the older business owner to move from a “Fragile” to “Anti-Fragile” position. When coupled with the current (but probably temporary) seller’s market, the case grows even stronger. Now throw in the risk of the out-of-nowhere Black Swan event and the case becomes overwhelming.

Company owners have to make their own decisions and when hired, our job is to unlock the highest value possible in the market. We don’t push owners into the decision to sell. But I’m torn between this passive stance and a sense of responsibility that company owners need to understand the risks involved with hanging on to a business in their later years with little life “runway” for a recovery.

Is a Black Swan event going to happen tomorrow, next month, next year?  We don’t and can’t know. But the Black Swan IS out there.

Posted by Jeff Wright.

1. Excessive precision. When I see models that have numbers in the millions and show accuracy to dollar, or even worse the cent, red flags fly. That much precision is a distraction and is usually wrong, especially if it is a forecasting model. In the words of Niels Bohr, “Prediction is very difficult, especially about the future.” Thus models that predict amounts to the dollar a year away are wrong. Ask yourself, what level of accuracy is needed. If you are dealing in tens of millions and you show numbers to the thousand, the error level is 0.01% which is more than enough precision. Another test is would you be willing to bet on the outcome being right to that level of precision, and if not ask why are you showing it. Remember the old adage – “I would rather be 90% right and imprecise than precise and 100% wrong.
2. Hard coded numbers. Models that have hard coded numbers in them also raise red flags. Users forget they are there and they remain forever with no rhyme or reason leading to bad results. Also if things change it is hard to find them and change them in all the cells that need changing.  Finally, requiring hard coded numbers to change a model to get it to produce correct results, could mean the model is fatally flawed in design and operation – time to start again.
3. No tracking of results. Recently met a firm that had a model it had been using for all its forecasting for years. I enquired as to how accurate it was and the answer was that the last month had been a huge surprise, but no one had ever tracked its results against actual. If the model is not measured, its effectiveness is not know or cannot be fixed. Thus one could be relying on something totally wrong for years and not realize it. No model is perfect and they are like an iterative process, use them, measure the results and then adjust them to get to improve the results.
4. Understand the logic of the model. Understand what the model is trying to accomplish. Often it is good to diagram out how all the parts are going to fit together and where the different parts will reside in the model. In addition think through all the parts carefully about how they work and what they do. It is my experience that usually 6 – 10 items contribute to the majority of the values and so they need the most precision, the rest will not change things much and we don’t need to focus on those as much. In addition, beware of some important items, i.e. exchange rates. A model I  received recently had no exchange rate assumptions even through the company had significant European operations – this oversite would lead to incorrect forecasting. Finally remember all the parts – again the same complex financial model for business forecasting that I mentioned above showed P&L, Balance Sheet and Cash Flow statements as well as many other iterations of the data; however, the model didn’t distinguish between book and tax depreciation which would lead to incorrect cash flow statements as well as errors elsewhere.
5. Layout. A model should be like a book or an essay – an introduction – the characters – the plot – the conclusion. Many I have seen have everything mixed up and you cannot follow the logic or flow which makes it hard to read and work with. Make the model easy for the user to follow and read.

Thus, I would recommend:

• Put in a tab which explains what it does and describes what is on each tab as well as the color coding if you are using it.
• Use the cell indents for indentation, not another column.
• Use colors – it makes it very easy to see what are inputs, assumptions, outputs etc. If all input cells are yellow then the user can easily know what to change.
• Use lists to control inputs – prevents mistakes accidentally happening.
• Spell check – it is built in so use it.
• Make it clean and easy to read.
• More tabs with a purpose are better than one huge tab that is difficult to navigate around.
• Break tabs down into: Assumptions, Working, Results. Makes it much easier to follow.
• All assumptions should feed into the appropriate parts of the model – just showing them is useless. In addition, remove cells that contain assumptions that don’t feed into anything or do calculations for no specific purpose.
• Put in check boxes – if you are building a forecasting model put in a line showing that the balance sheet balances. Thus if it doesn’t you can easily see it rather than suddenly realize it when it is too late.

I hope that you find these useful. Good luck forecasting.

Posted by Marc Borrelli.

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The fact is that entertaining an offer from just one buyer is probably one of the worst things that could happen.  Especially an offer that is unsolicited.  It’s true that sometimes you can improve the offer  just by bringing in a professional on your side, because the buyer often takes it more seriously.  However, with just one offer you have zero leverage, no other options, you don’t control the timing, you don’t have a team ready, and you aren’t prepared for a transaction. 

How did this happen?  In most cases it is because the business owner wasn’t looking to sell, didn’t have a reason to sell, or the business wasn’t “on the market.”  Then, why take the buyer’s call in the first place?  Could be curiosity, or the idea that “if the right offer comes along, then I’d sell.”  Really?

In today’s world, the right offer doesn’t just “come along.”  Any buyer is going to have professionals on his side that value the company at the “market level” and bring a commercial-grade proposal  (usually on the low side) which is often a waste of time. Remember, he approached you directly for one reason…to avoid competition for your company.

How can you get the right deal and be sure it’s at a premium?  Step one is to decide if you want a deal.  Assuming you do, then go get one – proactively, on your terms, and under your control – through the use of a carefully managed process.

The process begins with steps to create a good book about the company.  Analyze sales, financials and the company fabric a dozen different ways, and research all realms of potential buyers.  Anticipate and answer the questions before they’re asked.  Determine the ideal time for the company, the industry and the market to seek a transaction.  Then, through highly confidential methods, contact potential buyers and generate interest in the company.  Manage the process so that you receive several offers at the same time.  Then, you have all the options: negotiating leverage, control of the timing, and the team to complete the deal.    

Any of the professionals at CFA can help explain these transactions and what you can expect.  Contact any one of us to learn more about getting prepared – and controlling the process for your own benefit.

Posted by Dan Vermeire.

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Citing a real world example, Doug compares two EBITDA calculations and how each impacts the business valuation.  Doug notes, “There is a striking and vast gap between the actual market value ($14,000,000) and the owner’s Expected Market Value ($20,950,000).  One can easily see why many business owners have experienced great disappointment and have rejected a purchase offer at market value because of the distortion caused by using the Reported EBITDA multiples.”

I recommend reading the entire article.

As you can imagine, the “Great Recession” overran all of his hopes and financial plans several months after my client spoke these words. By January of 2009, when he expected to report his “best year ever”, GDP had dropped 5% and Standard & Poor’s index dropped 46%, his” best year ever” didn’t happen and his outlook for the next five years was down substantially.

I had lunch with that former client in 2011, and he was still waiting for his company to be worth what it was when he said those words.  He was 64 when he decided to wait just 12 months.  Five years later, he’s now 69 and still has most of his net worth in one, smaller, basket.  Things are finally looking up now, and I hope that he’ll be able to sell his company sometime soon.

There are three messages in this story that are important for company owners to think about:

1. The value of your company is driven by both internal and external factors.  They don’t always work together.  Waiting to maximize the value on internal factors doesn’t pay off if the external value drivers go the wrong way.  On the flip side, if it is a “seller’s market (like it is today), take advantage of that and don’t wait to get everything inside the company perfect. 
2. Trying to squeeze the last few dollars out of a deal isn’t smart.  The sure-fire plan to double earnings in the next quarter rarely happens smoothly.  Even if it does, savvy buyers won’t pay a premium for a last-minute spike in earnings; experience shows that they’ll lessen the value of that by going back to a multi-year average of earnings for their valuation. 
3. Owning a private company is an inherently risky investment.  Most of our clients have over half their net worth in a single investment whose value is subject to lots of outside forces.  Its value is at risk of not just a big recession, but also risks like losing a key employee, losing a big customer, increased taxes, government regulation, worker’s compensation, interest rates, international politics, energy prices, health care laws, and more.  If it looks like your internal value drivers are good and the external value drivers are good, then it is a good time to sell. 

There are always reasons to delay a sale, but sooner is almost always better when most of your net worth is on the line.

Posted by John Hammett.

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