By James Thompson

There are 7 million private companies in the U.S. with owners over age 55, and $2 trillion in investor capital available to purchase those companies. In the next 15 years, $16 trillion in assets will change hands as the baby boomer generation retires—an unprecedented transfer of wealth.

With the “graying” of the water-treatment industry, properly managed business-succession planning is critical to monetizing one’s life’s work. A large portion of the acquisitions that are made in water treatment is to just a handful of public companies, which severely limits seller leverage. A properly managed process with many bidders is key to getting the best price, structure, and cultural fit.

Succession planning is a complex effort to best prepare for a busi­ness transition. It involves investment bankers, attorneys, wealth managers, accountants, and, most importantly, business owners.

Here are eight things to consider when preparing for a company sale:

  1. The potential buyers of your business fall into two groups: strategic acquirers and financial acquirers. Each group has different incentives and motivations for acquisition. To reach the best outcome in a sale, you should get to know both groups and what attracts them to acquire. Identifying the appropriate relationships to cultivate can be overwhelming, so finding a mergers and acquisitions (M&A) advisor with industry knowl­edge and established relationships in each group is prudent.
  2. Each industry has key metrics that investors use to assess the value of a business. Understanding those metrics, including what baselines to expect and how to improve them, will help you achieve a premium valuation for your business. Seeking an early understanding of these metrics allows you to set a culture and incentive structure that motivates your management team to achieve specific goals.
  3. A wide variety of exit opportunities is available. Many exit scenarios exist for business owners, including some they may never have considered. Sellers can choose to sell their whole business or retain a percentage of ownership and sell a minority or majority stake. They could choose to sell to a larger company in their industry in a strategic sale or to a financial company, such as a private equity firm, in a financial sale. There are often opportunities for sellers to roll their own equity into the new, combined entity post-transaction. There are many options that can provide you with the solution you are seeking based on your end goal.
  4. Investment bankers and brokers are important advocates for you as you explore your options. However, make sure you find someone you trust and has your best interests in mind. To the right investment banker, your life’s work will not be just another transaction.
  5. Asset sale or stock sale—which is best? Generally, buyers prefer asset sales, and sellers prefer stock sales. When a company is sold via an asset sale, the buyer purchases individual assets, while the seller frequently maintains longer-term liability obligations. When a company is sold via a stock sale, the seller typically experiences tax advantages and no longer maintains liabilities. Prior to considering an offer under either scenario, you should have a tax professional calculate your net proceeds and any potential long-term liabilities.
  6. “Cash free” and “debt free” are not as simple as they sound. Most M&A transactions are negotiated on a cash-free and debt-free basis. This means that the seller keeps all cash and pays off all debt at the time of the sale. However, it is never that simple. Cash and debt issues are often identified later in the transaction and negotiated in the purchase agreement. It is important to have M&A attorneys and investment bankers negotiating on your behalf.
  7.  The working capital peg can become a negotiation sticking point. While sellers intend to sweep excess cash from their business at closing, they must leave enough money in the company’s bank account to allow the business to operate normally. This amount is called the working capital peg, and the precise amount is negotiated between the buyer and seller, preferably with the assistance of a competent advisory team. The peg is typically determined by determining the average of a normalized or adjusted net working capital for the last 12 months or, in some cases, a shorter period. A higher or lower working capital peg has a direct impact on the amount of cash a seller takes home.
  8.  Your financials should withstand due diligence. Clients frequently ask us if we think their financials are in good enough shape for their company to sell: “Do I need reviewed or audited financials? How sophisticated must my accounting team be? How quickly should we close out each month?” Initiating a sale process without credible financials can be a quick path to a disappointing result. An M&A advisor can analyze your financials and determine if they simply need fine-tuning before your business goes to market, or if they need a full review by a reputable accounting firm.

The M&A process is complex and time consuming. Speak to an advisor and find out what you don’t know. Is your business ready? Could some small tweaks significantly improve your company’s value to potential buyers? Are there other buyers who should be included in the process to make it more competitive and increase offer prices? An M&A advisor can guide you through the process and ensure you procure the best outcome for yourself and your business.

About the author
James Thompson is managing director at Alexander Hutton. He holds an MBA from the University of Washington and has more than 20 years of experience in the water-purification industry as a former CEO, CFO, and SVP of UK-listed HaloSource. He is a board member at Brown Strauss, Inc


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