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How to sell your company: the art of deal making.

It's a mind game between buyer and seller that takes time and money, but informed preparation can provide the winning edge.

Many executives mistakenly think that selling their companies (being acquired) is a financial game. Actually, the process is much more a mind game, like chess-a contest of power and control, complete with winners and losers.

To be victorious in an acquisition, there are four key factors you must investigate in detail: you, your company, the acquisition process and your adversary.

Most think of acquisitions only in financial terms, such as a company's current, quick and debt-to-equity ratios, fixed asset utilization, gross margins, pricing levels, market projections, sales levels and future profit course. These are important factors, of course, but there are subtleties that require a deft touch and the wisdom that comes from caution.

Despite my financial training and experience, a third of my early merger and acquisition deals would die between the letter of intent and closing. It took time to realize I only knew the company. I had missed my client's needs, the most critical aspect of the whole acquisition process.

I soon discovered that acquisitions were fundamentally mind games only secondarily affected by financial results. Having learned that, deals that made it to the letter of intent stage no longer fell apart before closing.

It became apparent that selling a company required acting on four important "knows." If you apply them, I discovered, you will win the acquisition contest and get your price; if you don't, you'll probably come in second best.

Know Yourself

Why are you selling? Have you evaluated alternatives like transferring the business to a younger family member, hiring a manager or allowing an employee buyout? An owner should satisfy himself that selling his company is what he wants. It's the most attractive alternative from a personal and financial standpoint, but the final decision should be based upon the individual situation.

For a partnership, all personal and financial objectives must be resolved: personal tax situations; how long each partner prefers to remain and at what compensation level; and whether to handle the transaction themselves or use an outside advisory firm. Is their current accounting firm capable of providing the specialized tax advice necessary? Does the company's legal counsel have enough merger and acquisition experience to assure that the purchase agreement does not leave the owners at risk after the deal is consummated?

Know Your Company

You must understand how to determine your company's future earnings and the risks involved in achieving them; know its present and future market position; its competitive position; personnel quality; and adequacy of location, machinery and plant layout. Be aware of a potential acquirer's perceived risk factors.

All of these variables interrelate to determine the market value of your company. They aid in establishing a value that will find an acquirer who will pay an attainable premium price that will allow him to realize a fair return on his investment. Determining the value of a private company differs from a public company, but in either case setting a bargain price to attract buyers is not the objective.

Know the Process

After you have evaluated yourself, weighed your alternatives, placed a value on your company and decided to sell, you can start the acquisition process. It should begin with an evaluation of what your company does and does not offer to a buyer. This analysis is used to develop a memorandum of information (MOI) to attract a buyer.

It explains marketing strategies, personnel capabilities, location attributes, historical financial results and, in some instances, financial forecasts. It defines positive attributes and reinforces how and why the company will provide a good return on investment. Thus, it is imperative that the MOI establish credibility and meet the prospect's preliminary "need to know."

Throughout the acquisition process, never give more than you get. Reserve information on key customers, product pricing, margins and key operating information until a commitment to acquire at your attainable premium price is made.


The MOI should protect the confidentiality of your company, omitting the firm's name and location. The seller's specific needs will dictate how far the cloak of confidentiality is dropped.

There are two critical aspects in writing the MOI: Highlight positive things and avoid other things that are either neutral or negatives. Loss of confidentiality is a negative or, at best, a neutral factor.

The longer a sale takes to complete, the more likely the loss of confidentiality. An acquisition should be completed in six to 12 months. Typically, the eventual buyer surfaces in two to four months.

Steps to be taken to minimize the loss of confidentiality include:

* avoid marketing the company in home


* rule out competitors or customers as

prospects, except as a last resort, lest

they use intimate knowledge of your

company against you;

* withhold from an acquirer the name of

your company until he has committed

to visit the facility.

Formal confidentiality agreements are useful only if you have to sue for the misuse of such information, but they do not create a cause for action or guarantee successful results. Avoid a lawsuit by doing your homework in advance.

Screen Potential Acquirers

Don't pursue talks with acquirers in whom you have no confidence.

Acquisitions are a contest of power and control, a win/lose situation in which you are trying to gain control of an acquirer (the adversary) until a deal is consummated.

How do you obtain control? Require the buyer to be as open with you as you are with him. Deny him the position that, as the buyer, he has a right to know, and, as the seller, you must show all. Both are offering something; you, a company for sale; he, acquisition capital. Mutual, timely disclosure will determine if there's a match.

It is your responsibility to determine an acquirer's intent before revealing your identity or specifics about your company, and certainly before the first visit.

Meeting with an Acquirer

Your first meeting with an acquirer should happen within two to four months. Probably he knows your company only from your MOI-his first impression. Cultivate this impression, stress your positives and be prepared to discuss your negatives.

A prudent acquirer tries to assess all risks that might affect future earnings. In reviewing your negatives, prepare a list of questions an acquirer might ask. Putting a positive "spin" on the negatives should be part of your plan. The orchestration of the steps in the acquisition process can be delicate. Timing related to divulging certain information is often more critical and has a greater influence than the information exchanged. Always respond honestly to questions, but knowing when to disclose can be as important as what is disclosed.

Plan thoroughly for the first meeting because it establishes the acquirer's credibility and your control of the session. Remember that small things sometimes have a disproportionate effect on people.

Your company may have changed since the MOI was developed. Keep prospects up to date with your current business conditions. Emphasize positive developments to increase the company's attractiveness as you discreetly and subtly "sell" your company's benefits. Two primary elements that are paramount during this part of the acquisition process are establishing credibility and gaining negotiating control.

For you to have control, you must know the potential acquirer's needs and operating methods. You must investigate each prospect's suitability as thoroughly as he does yours. Prepare a list of questions about an acquirer and his company that examine the following areas:

* business operating and control methods;

* personnel policies;

* company's personnel turnover experience;

* plant modernization investments


* company's market share and penetration


After the First Visit

After completing his initial plant visit, an interested prospect will begin the complex and comprehensive study of you, your company, its industry position and how it relates to your market.

During this investigation, the acquirer will ask for substantial information not included in the MOI. You should respond to all reasonable requests. Any general financial information short of specifics is reasonable. Items such as profit by product, pricing, pricing determination by customer or category are taboo to protect competitive information and customer-base identity.

If the prospect decides to make a buy offer, you are at the fourth "know."

Know Your Adversary

You are now at the stage preceding the letter of intent and, ultimately, to a definitive purchase agreement, financing arrangements and eventual sale. Until the deal is completed, the acquirer now becomes your adversary. Conflicts arise because any prudent buyer wants your company for the lowest price versus your objective to get the highest price. A seller's negotiating team plays the "heavy" in the bargaining sessions, letting them ruffle feathers. To maximize price, it is imperative that your team be skilled negotiators as well as experts on your adversary. This is where the probing homework previously performed on the acquirer pays off.

Negotiations in their truest sense are a test of wills. The bottom line is control. The failure to maintain control will assure your failure to obtain a premium price for your company.

There are five critical points to keep in mind as negotiations progress:

* don't worry about battles: win the war;

* don't let egos confuse issues;

* have only one team spokesperson;

* keep your negotiating team unified;

* understand the dynamics between

the acquirer and his team because it

may affect your negotiations.


Though often considered to be a financial game, experts in the acquisition field know that it is a test of wills between a buyer and a seller involved in a complicated information and negotiating process.

The buyer dedicates his efforts to understanding how the dynamics of the marketplace affect the value of his prospective purchase. The seller seeks to emphasize his strengths and minimize his weaknesses. For financial gain, both try to control the negotiating process. Preparation and closely following a few governing rules determine the winner.
COPYRIGHT 1991 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Small Foundry Directions
Author:Spilka, George M.
Publication:Modern Casting
Date:Feb 1, 1991
Previous Article:Employee medical program: benefits beyond good health.
Next Article:Foundries: victim of the Soviet system.

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