Groce, Rose & Moore, LLC
“Top 10 Mergers & Acquisitions Firms”
Awarded by Financial Services Review Magazine
Honorable Mention in Axial's Middle Market Investment
League Tables in the Client Quality Category.
INTERNATIONAL MERGERS, ACQUISITIONS, CONSOLIDATIONS, BUSINESS VALUATIONS,
FINANCIAL & STRATEGIC SERVICES
The Proven Process to Sell Your Business
Selling a business can be a daunting task! You might think it should not be that difficult and you are probably correct! However, there are proven processes that can ensure your transaction closes successfully and that you are paid a fair value for your business. This article will unpack these processes and explain the transaction cycle.
Steps of a Transaction
The following outlines the typical steps involved in many transactions. Once a Letter of Intent is executed, closing should occur in 90-120 days.
Complete financial and operational review with your Banker.
With the Banker’s assistance, identify potential Buyers and rank them.
Solicit a non-binding Letter of Intent (“LOI”) and execute a Non-Disclosure Agreement (“NDA”).
Banker to assess terms and conditions of LOI, considerations of the offer and preliminary qualifications of Buyer.
With the Banker’s assistance, a term sheet is negotiated among the parties.
Execute LOI and exclusivity period which is typically 90-120 days.
With the Banker’s assistance, the Buyer will visit the facility to better understand the condition of the assets, operations and meet the management team.
Start due diligence with the selected Buyer. Establish a timeline with the Buyer when due diligence should be completed. With the Banker’s assistance, information provided during due diligence should be provided promptly and thorough as possible. Completing the financial section first is advisable, which is most critical.
Once a timeline for closing has been tentatively set, Seller’s attorney to draft a Sale and Purchase Agreement using the term sheet as a guide.
Unless specified in the term sheet, the Seller is responsible to pay off the outstanding debt and update liens against the business.
Consult with Accountant and Tax Advisor regarding purchase price allocation and tax implications from the sale.
If applicable, discuss an Employment Contract with the Buyer which should be specified in the term sheet.
With the Banker’s assistance, calculate Net Working Capital based on formula defined in the Sale and Purchase Agreement. The parties will negotiate the minimum amount of cash to be retained by the Seller for working capital.
Finalize Sale and Purchase Agreement and Employment Contract with Buyer.
Closing and execute all agreements.
“Getting Your House In-Order”
Upfront preparation by the Seller to bring a business to the market is extremely important. This work pays dividends in terms of successfully closing your transaction but also builds confidence and trust with the Buyer. Unfortunately, many transactions fail to close because of disclosure problems, or the Buyer has concerns about the financial performance of the company.
At Groce, Rose & Moore, LLC (“GRM”), we believe honesty is always the best approach with full disclosure. For example, the impact of COVID has been difficult for many firms and the past several years is not representative of the on-going business. GRM works with Sellers to explain these abnormalities and make adjustments to EBITDA.
Additionally, Buyers want to acquire a business that has solid growth prospects and penetration into markets they cannot otherwise do themselves. The Banker’s job, with the Seller’s assistance, is to communicate the value proposition and how the growth targets can be achieved.
Information Your Banker Needs
Your Banker needs to prepare confidential marketing materials about your company and summary key financial metrics to send to prospective Buyers. Buyers will use this information to determine what they think your business is worth. As noted above, it is important this information accurately depicts your business and financial performance, both historically and in the future.
3-5 years of historical financial statements, income statements, balance sheets; Audited or reviewed financial statements from your accountant is preferrable.
For the current year actuals, year-end or trailing twelve months of the income statement and most recent balance sheet.
12 months of the current year operating budget; Provide forecast or other forward looking financial models.
Number of years in business.
Headquarters and location addresses (physical or virtual).
Revenue stream information, payor mix, service mix, line of business mix.
Number of employees, payroll file and related info on hires, turnover etc.
Corporate entity organizational chart and/or list of legal entities.
Service areas if applicable.
Management Team organizational chart, redact names if desired.
Brief description of information technologies deployed.
Background information, marketing materials or other information that conveys the value of the business.
Type of transaction(s) sought (sale of assets or entity).
“Looking Underneath the Hood”
Knowing how a Buyer will look at your business is valuable insight so you set realistic expectations of the process and start organizing important documents for due diligence. Due diligence involves “looking underneath the hood” with a detailed review of your company. The Buyer will complete due diligence of the following areas: financial; human resources, staff and benefits; legal; sales and contracts; operations; and corporate documents.
Your Banker, in coordination with the Buyer, will develop a detailed schedule of diligence items, categorized and tracked them with comments from both the Buyer and Seller. As mentioned earlier, it is important to set a timeline for completing due diligence. Unexpected concerns or issues may delay due diligence and can impact the transaction moving forward. Typically, due diligence can take 30-45 days to complete once all the information has been provided to the Buyer. It is best to complete financial diligence first so any item can be addressed early in the process.
Having Realistic Expectations in How Much Your Business is Worth
When you engage an advisor or investment Banker to sell your business, most reputable firms will independently determine how much your business is worth from the perspective of a Buyer. This is one of the most important steps and there should communicate with your Banker to ensure proper alignment and expectations will be met.
Unfortunately, determining how much your business is worth is more of an “art than science”. At GRM, we consider a number of methods to determine value. A range of consideration is established, and any perceived risks are discussed that might impact the price a Buyer would pay.
While considering historical, projected, current year or the trailing twelve months actuals, GRM prepares a discounted cash flow (“DCF”) analysis over a 10-to 15-year period and calculates the present value of all cash flows. These cash flows capture normalizing adjustments which are discussed below. Based on a range of discount rates, a median present value is used to reflect the expected value. For comparison purposes, an implied adjusted EBITDA multiple is calculated based on current or forward adjusted EBITDA.
With the Banker’s assistance, the Seller will prepare a list of normalizing adjustments that are added or subtracted from the Stated EBITDA. The Buyer will expect a detailed explanation and description of these adjustments during due diligence, so it is advisable to gather financial records to support these adjustment. Typical normalizing adjustments include one-time income or expense items, owners’ expense, personal vehicle expense, and other extraordinary expense such as legal costs or consultant fees. Normalizing adjustments should not include on-going operational expenses the Buyer will incur to operate the business.
The Banker compares results of the DCF multiple to actual transaction multiples or published industry multiples. The best comparable transaction multiples involve companies of similar size, product type, private/ public, and location. For this reason, obtaining multiples can be difficult so a range of market multiples are used and compared to the DCF results.
Lastly, the Banker compares the expected valuation to the total assets listed on the balance sheet. Because most transactions are debt-free, a Buyer needs to pay off all outstanding debt with proceeds of the acquisition at closing.
Choosing the Right Buyer
After years of hard work, it can be difficult for the Seller to pick the right Buyer, and hand over the keys to the shop. Not to mention monetary considerations, owners want the business to continue to flourish and grow with a reputable operator. The Seller also wants their staff to be taken care of under new ownership. During the site visit and due diligence, its great opportunity to ask the Buyer questions how they will operate the business.
As part of the vetting process, in greater detail your Banker will investigate the financial qualifications of the Buyer, understand the plan of financing of the acquisition and address any concerns with meeting the closing date. A term sheet outlining all agreed upon terms and conditions are listed, which is helpful for drafting of the Sale and Purchase Agreement by the attorneys.
Drafting Sale and Purchase Agreements
Once due diligence is completed and term sheet is finalized, the Seller’s attorney prepares the Sale and Purchase Agreement, negotiation of other transactional items such as the formula for Net Working Capital and Earn-Out Compensation, if applicable. The attorney will also draft any employment contracts or transition service agreement among the management team and Buyer. This process can take at least 30 days to finalize.
Closing the Transaction
From start to finish, the proven processes to successfully close the transaction can take 90 to 120 days. Your Banker will coordinate closing details with your attorney, the Buyer, the Buyer’s attorney to make sure wire instructions and logistics are in place.
About Groce, Rose & Moore, LLC
Founded in 2019, Groce, Rose & Moore is a financing advisory firm based in Spartanburg, South Carolina. GRM is led by Warren Rose and Dennis Groce, both Senior Partners of the firm. Paul Moore, Senior Partner, recently retired from GRM.
The firm has expertise in the areas of mergers, acquisitions, consolidations, business valuations, and financial and strategic services. The firm assists clients in selling, acquiring, growing, downsizing, and changing the nature of their business or competitive position. GRM represents a wide range of clientele, all with unique needs.
In 2022, GRM formed a new division for their Financial & Strategic Services, LLC which provides a variety of corporate finance consulting services including business valuations. GRM offers financial analysis, detailed business assessment, project evaluation, finance, and acquisition services, all on a “project-to-project” basis, or when desired, as long-term assignments to meet critical resource demands.
GRM received a much-coveted award from the selection committee at Financial Services Review Magazine, as one of the Top 10 Mergers & Acquisitions Firms.
GRM’s 3 Senior Partners and 24 associates offer decades of experience with different backgrounds across various sectors.
This article was written by David Kopplin, Managing Director of Corporate Finance and Strategy with GRM
Groce, Rose & Moore, LLC
Top 10 Mergers & Acquisitions Firms
As Awarded by Financial Services Review Magazine