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ENTREPRENEUR RESOURCE CENTER
Mergers & Acquisitions
Merger refers to the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Acquisition refers to purchasing a majority interest in one company, in which all assets and liabilities are absorbed by the buyer. Most small business are eventually bought by a larger competitor.
If you are thinking of selling your business to another company, and depending on your business size, there are several steps that you can take to ensure your business can be acquired smoothly:
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Get a business valuation. One of the first things you should do is obtain a realistic idea of what your business is worth from an objective, outside source. A professional valuation will give you a basis for gauging buyer offers and will give you an idea of what you can expect to net from the sale. It will also tell you your business's market position, financial situation, strengths and weaknesses (which you can hopefully correct prior to putting it on the market). Valuations can be obtained from a number of sources, ranging from local accounting firms to regional business brokers and investment banking firms. As a rule, you should make sure the company performing your valuation has access to the most current national data regarding privately held transactions in your industry. Experience in selling firms of your type is obviously helpful as well. |
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Get your books in order. Buyers evaluating your business generally require at least three years' worth of financial information. The more formal your statements, the better the impression you'll make and the easier the due diligence for a buyer. |
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Understand the true profitability of your business. Most privately held businesses claim a variety of non-operational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal automobile lease. In addition, there may be infrequent expenses you have incurred during the past three years that should be excluded in a buyer's analysis of recurring cash flow. There may be moving expenses if you've moved to a larger facility or unusual legal expenses. |
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Consult your financial advisor. It's wise to speak to your tax advisor for help planning your financial future. Understanding your personal and corporate tax situation may also help you recognize your options with regard to deal structure. |
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Make a good first impression. Buyers look for companies that show well, as an orderly shop is often indicative of an orderly management team and back-room operations. |
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Organize your legal paperwork. Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, etc. Make sure you have them readily available, current and in order.
Consider management succession. You should have a succession plan in place before going to market. Who will a buyer be able to turn to for help running the business after you leave? |
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Know your reason for selling. Buyers are always curious as to why a seller wants to exit a business. Be prepared to state your reasons for selling the business. |
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Get your advisory team in place. Start interviewing attorneys and accountants who are proficient in mergers and acquisitions. Strongly consider hiring an intermediary, either a business broker or an investment banker, to represent you and help you through the selling process. |
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Keep your eye on the ball. Do not let your business performance decline because you're too focused on the sale of your business. This will only give buyers additional negotiating power to lower their offers. |
If you are looking to buy then the best place to look for a business is within an industry you know and understand. Buying a business is a serious commitment; be sure you choose one you will be happy running. You should have a solid familiarity with and some experience in the general industry.
Your next consideration is geography. The business should be in an area that meets your personal lifestyle and business requirements. Make sure there is an adequate labor pool and that the costs of living and of doing business are acceptable to you.
Look at every business in the area that meets your requirements; just because it isn't on the market doesn't mean it isn't for sale. Use your networking skills to find potential companies; let friends and colleagues know what you are looking for.
For more information, please refer to:
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