Financial Issues to Consider When Selling a Company
What should be taking into consideration when selling a company?
There are many different reasons why business owners decide to sell their company. Maybe it gets to a point where he or she is unable to take the business to the next level. Or, there is no one in the family or in the company who can be groomed to take the helm. At this point he realizes that selling the company can provide financial security for his family and a lot less stress for him.
My experience has taught me that there are some business owners who choose to sell to the highest bidder, take one big bite out of that apple that they grew from seed, and move on to a life of leisure. Then there are those who want to remain involved with their company to for a host of different reasons:
€ They enjoy working, but want a bit more leisure time and a lot less stress.
€ They want to make sure valued employees continue to have job security.
€ They want to have a role in shaping the future of the company and benefit from its potential growth.
€ They want to make sure they grow their wealth to better provide for their family and heirs.
In any case, and for whatever reason, business owners should have a team of professionals they can turn to for advice when it comes to making high quality decisions about the future of their firm and their personal finances. That team should include their accountant and lawyer and an experienced wealth manager who can help them understand just what to expect during each phase of the sale process. If necessary, the team can also help business owners explore ways they can stay involved with the company after the sale.
One way sellers stay involved with their company is to work with a private investment firm who, along with its investors, will acquire a controlling or substantial minority position in a company. The private investment firm will then bring capital, and, if necessary, add professional management to a business so it can look to maximize the value of that investment. It also lets the business-owner-turn-seller remain with the company in some high-level capacity, thereby letting them sell without saying good bye.
To get a first hand account of what it is like to work with a private investment firm and to uncover ways a wealth manager can add value throughout the three step process of selling a business, I have interviewed several current and former business owners. Most recently, I had an opportunity to interview Chris Michalik, co-founder and managing director of Kinderhook Industries, a private investment firm based in New York City with $770 million of total capital. He detailed the business relationship from his perspective. Here are excerpts from that conversation.
Scott Mahoney: What motivates owners to sell?
Chris Michalik: The most frequent circumstances include any or all of the following:
1) Business owners seeking outside capital to help diversify personally. We have encountered many business owners who have levered themselves through the roof personally to build their businesses. This leverage often has come with personal guarantees and cross-collateralization of both personal and professional assets held by the owner. The reality is that they have done a great job building the business, but they want to take some chips off the table so that they can be secure in their personal lives. They want to be free to focus on growing the business rather than worrying about the second mortgage. We understand that desire. It takes a long time for an independent business owner to get to the point at which they have access to additional capital from a lender without posting a personal guarantee. We have strong relationships with many regional and national banks with whom we've completed multiple transactions. They don't require personal or corporate guarantees of Kinderhook and we don't require an owner/ partner to personally guarantee any portion of the financing provided by either Kinderhook or our lending partners.
2) Business owners seeking to accelerate growth and build their team. Owners often don't want to take on the personal risk of dramatic expansion and remain unsure of where to turn to hire the staff capable of driving growth. As they have grown their business over the years, they have built industry relationships, customers, etc. but they have reached a point at which they need more capital, outside relationships or advice to take their company to the next stage of development. Kinderhook, for instance, currently has 45 operating partners with whom we work to accelerate growth across our portfolio. All of the operating partners have been successful CEOs, CFOs, COOs or heads of sales. They are available to advise the CEO and help recruit industry contacts who are prepared to take up permanent residence in a company to immediately add the skills required for success.
3) Business owners seeking to transition out of their business while protecting their legacy. An owner may have reached a point at which they want to retire or simply transition into the next stage of their life and face the dilemma that they don't have family involved in the business in a capacity that would enable them to €pass the torch€, so to speak. At this point they decide, There is an opportunity to sell my single biggest asset and provide financial security for my family. At the same time they face the question of, how to transition the business to a firm that they trust will do right by the business that they, or maybe even their parent, founded.
When seeking a private investment firm, a business owner should look for a team that has experience in all these situations. At the end of the day, each person and each transaction has a unique set of needs. They (the business owner) have spent years developing a culture and forming concrete ideas about their business and the private investment firm should respect that.
Scott Mahoney: What considerations ought to be taken into account when selling?
Chris Michalik: Let's not kid ourselves; you are putting away your life's nest egg here and price is always an important factor, but it isn't the only thing that should be taken into account.
We believe there are several additional factors that need to be considered:
First, information risk. You are going to be opening your books to a stranger, or many strangers, and all of your confidential business secrets will be at risk. The broader you go in search of a buyer the greater the risk that your competitors will learn these secrets. Dealing with a trusted investment firm limits the dissemination of information and ensures that there is a substantial organization standing behind the Confidentiality Agreement such that any inadvertent release of information doesn't occur.
Second, certainty of close. Selling a business is a difficult process. You only want to have to go through it once. You should look to deal with the most reputable buyer / partner who has developed a long term track record of successful execution. The only way to reference this is to make calls to former sellers. Ask the potential buyer to allow you to speak to the last five sellers from whom they have acquired businesses. If they can't give you five completed deals, then their experience is in question. If they won't give you the last five, then look elsewhere.
Third, partnership/ legacy. Every seller should begin by asking themselves €what are my thoughts on the future of my company and my involvement?€ By asking themselves this question, they can begin thinking about who they would like to have as their partner. Every seller should remain cognizant of the fact that their future partner will play an integral role in determining the seller's legacy and their involvement in the business going forward.
Ultimately, everyone wants to ensure that they get a fair price, but finding the right partner that will minimize information risk, maximize certainty of close and protect their legacy goin
There are many different reasons why business owners decide to sell their company. Maybe it gets to a point where he or she is unable to take the business to the next level. Or, there is no one in the family or in the company who can be groomed to take the helm. At this point he realizes that selling the company can provide financial security for his family and a lot less stress for him.
My experience has taught me that there are some business owners who choose to sell to the highest bidder, take one big bite out of that apple that they grew from seed, and move on to a life of leisure. Then there are those who want to remain involved with their company to for a host of different reasons:
€ They enjoy working, but want a bit more leisure time and a lot less stress.
€ They want to make sure valued employees continue to have job security.
€ They want to have a role in shaping the future of the company and benefit from its potential growth.
€ They want to make sure they grow their wealth to better provide for their family and heirs.
In any case, and for whatever reason, business owners should have a team of professionals they can turn to for advice when it comes to making high quality decisions about the future of their firm and their personal finances. That team should include their accountant and lawyer and an experienced wealth manager who can help them understand just what to expect during each phase of the sale process. If necessary, the team can also help business owners explore ways they can stay involved with the company after the sale.
One way sellers stay involved with their company is to work with a private investment firm who, along with its investors, will acquire a controlling or substantial minority position in a company. The private investment firm will then bring capital, and, if necessary, add professional management to a business so it can look to maximize the value of that investment. It also lets the business-owner-turn-seller remain with the company in some high-level capacity, thereby letting them sell without saying good bye.
To get a first hand account of what it is like to work with a private investment firm and to uncover ways a wealth manager can add value throughout the three step process of selling a business, I have interviewed several current and former business owners. Most recently, I had an opportunity to interview Chris Michalik, co-founder and managing director of Kinderhook Industries, a private investment firm based in New York City with $770 million of total capital. He detailed the business relationship from his perspective. Here are excerpts from that conversation.
Scott Mahoney: What motivates owners to sell?
Chris Michalik: The most frequent circumstances include any or all of the following:
1) Business owners seeking outside capital to help diversify personally. We have encountered many business owners who have levered themselves through the roof personally to build their businesses. This leverage often has come with personal guarantees and cross-collateralization of both personal and professional assets held by the owner. The reality is that they have done a great job building the business, but they want to take some chips off the table so that they can be secure in their personal lives. They want to be free to focus on growing the business rather than worrying about the second mortgage. We understand that desire. It takes a long time for an independent business owner to get to the point at which they have access to additional capital from a lender without posting a personal guarantee. We have strong relationships with many regional and national banks with whom we've completed multiple transactions. They don't require personal or corporate guarantees of Kinderhook and we don't require an owner/ partner to personally guarantee any portion of the financing provided by either Kinderhook or our lending partners.
2) Business owners seeking to accelerate growth and build their team. Owners often don't want to take on the personal risk of dramatic expansion and remain unsure of where to turn to hire the staff capable of driving growth. As they have grown their business over the years, they have built industry relationships, customers, etc. but they have reached a point at which they need more capital, outside relationships or advice to take their company to the next stage of development. Kinderhook, for instance, currently has 45 operating partners with whom we work to accelerate growth across our portfolio. All of the operating partners have been successful CEOs, CFOs, COOs or heads of sales. They are available to advise the CEO and help recruit industry contacts who are prepared to take up permanent residence in a company to immediately add the skills required for success.
3) Business owners seeking to transition out of their business while protecting their legacy. An owner may have reached a point at which they want to retire or simply transition into the next stage of their life and face the dilemma that they don't have family involved in the business in a capacity that would enable them to €pass the torch€, so to speak. At this point they decide, There is an opportunity to sell my single biggest asset and provide financial security for my family. At the same time they face the question of, how to transition the business to a firm that they trust will do right by the business that they, or maybe even their parent, founded.
When seeking a private investment firm, a business owner should look for a team that has experience in all these situations. At the end of the day, each person and each transaction has a unique set of needs. They (the business owner) have spent years developing a culture and forming concrete ideas about their business and the private investment firm should respect that.
Scott Mahoney: What considerations ought to be taken into account when selling?
Chris Michalik: Let's not kid ourselves; you are putting away your life's nest egg here and price is always an important factor, but it isn't the only thing that should be taken into account.
We believe there are several additional factors that need to be considered:
First, information risk. You are going to be opening your books to a stranger, or many strangers, and all of your confidential business secrets will be at risk. The broader you go in search of a buyer the greater the risk that your competitors will learn these secrets. Dealing with a trusted investment firm limits the dissemination of information and ensures that there is a substantial organization standing behind the Confidentiality Agreement such that any inadvertent release of information doesn't occur.
Second, certainty of close. Selling a business is a difficult process. You only want to have to go through it once. You should look to deal with the most reputable buyer / partner who has developed a long term track record of successful execution. The only way to reference this is to make calls to former sellers. Ask the potential buyer to allow you to speak to the last five sellers from whom they have acquired businesses. If they can't give you five completed deals, then their experience is in question. If they won't give you the last five, then look elsewhere.
Third, partnership/ legacy. Every seller should begin by asking themselves €what are my thoughts on the future of my company and my involvement?€ By asking themselves this question, they can begin thinking about who they would like to have as their partner. Every seller should remain cognizant of the fact that their future partner will play an integral role in determining the seller's legacy and their involvement in the business going forward.
Ultimately, everyone wants to ensure that they get a fair price, but finding the right partner that will minimize information risk, maximize certainty of close and protect their legacy goin