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For many business owners, the sale of their company is the largest, most complex transaction of their career. Due to its magnitude and impact on a business owner’s (the seller’s) future, it also is one of the most stressful. A seller will often find solace and security in an experienced, determined acquisition advisor who can provide guidance during this process. It can be especially helpful for selling owners, if the advisory firm is headed by an advisor who understands the intensity and depth of emotions that an owner is facing.
There is very little information available on middle market transactions (defined as deals valued between $2 million and $250 million) to enable a potential selling owner to know what is involved in the sale process. Correspondingly, prospective sellers are often under numerous misconceptions that can be harmful. During many years in acquisitions and input from thousands of owners/entrepreneurs, I have determined that there are six common pitfalls, based on erroneous beliefs, for middle market owners.
Nothing could be further from the truth. A properly conducted valuation involves the complete investigation of a company’s business foundation. It includes defining the company’s future opportunities and major risks along with its projected impact. The following factors must be evaluated during this process:
a. The strength of the company’s marketing program, including the diversity and control of its customer base.
b. For manufacturing companies, the ability to produce a high quality, low cost product, and the caliber and productivity of its research and development function.
c. For distribution or service businesses, the demographics of its trading area, the quality of its product and/or service line, the attractiveness of its locations and the ability to run its operation in a cost-effective manner.
d. The quality of the management team and the presence of a reasonably paid, well-motivated work force.
These factors become a prime determinant of the multiple to apply to the company’s expected future earnings.
Planning and timing the sale of a company increases the transaction price.