And it is a journey. Each transaction is different and comes with its own special circumstances. To illustrate this process, we've created an example case based on one of our firm's recent transactions. To preserve confidentiality, we’ll call the selling company "Company, Inc."

1. Prepare the Information Memorandum

Sometimes called "the book" or "the memorandum," this piece describes the selling company so buyer candidates can gain an initial understanding of the opportunity. It can be less than 10 pages or more than 75 pages, or you and your advisor may choose to limit it to just an executive summary, with additional information to be provided at a later date to serious buyers only. For Company, Inc., we prepared a traditional book that included key details about its History, Clients, Markets, Services, Management & Staff, Systems, and Financial Performance. Most of the client names were omitted to protect confidentiality, with only a few listed by name because they could further a buyer's interest by knowing their identity. It’s important to note that if the selling company possesses significant client concentration (that means over 25% of revenues for ARM companies), then client name(s) should be disclosed. An important part of describing the financial performance is illustrating what the true cash flow of the business would be under new ownership. This is necessary given the perks enjoyed by many owners of mid-market businesses and the one-time or unusual costs that arise and need to be explained. Knowing which obvious and not-so-obvious items that buyers look for is essential to this process. In the case of Company, Inc., our client had favorable growth trends in terms of revenue and profit, which we wove throughout the memorandum.

For further info, see “Preparing for a Sale – Getting Your Financial House in Order”
“Valuing Your Business: Clients Make all the Difference”
“Maximizing the Value of Your Business Starts With Your Management Team”
At www.kaulkin.com/go/insight/articles

2. Determine Which Buyers to Approach and How to Approach Them

While you are preparing your information, you'll also need to determine who you will approach from the vast universe of potential buyers. Depending on the size of the company, you might approach large industry buyers, high net-worth individuals, financial buyers, or perhaps buyers from related industries. Engaging an M&A advisor that specializes in your industry can give you an advantage, as it helps you select the right buyer candidates. For instance, a specialist will already know many of the potential buyers for your business, which means they won't need to broadly market it for sale. This can substantially alleviate possible confidentiality issues. A knowledgeable advisor will also help determine which industry buyers to include in the sale process. They may also conduct additional buyer research, which should be done in any case.

You will also need to determine your approach to the buyers you select. Will you approach just one buyer? This is known as a “negotiated transaction.” Will you approach a limited pool of buyers? This process is referred to as a “limited auction.” Or will you approach a wider group to ensure maximum exposure? That is a “broad auction.” Each of these approaches has pros and cons and each can be very effective under the right circumstances.

On occasion, you might receive a completely unsolicited offer from someone who wants to buy your business. We would be remiss if we didn’t mention that in order to maximize your value potential, it is important to maintain a competitive process up until the point in which you are prepared to take your company off the market. While deals can and do get done on a regular basis between a single seller and buyer, sellers will never know if they have maximized their value and preferences in a transaction unless they are in a position to negotiate multiple offers and choose the best one.

For Company, Inc., we approached a moderate sized group of very qualified buyers to create competition. Because of our experience in the industry, we knew who would be interested and why, how they typically structure deals (i.e. cash and other components), how quickly they can close deals and the resources available to them.

For further info, see “Selling to a Financial Buyer” At www.kaulkin.com/go/insight/articles

3. Approach buyers

Once the information is prepared and the buyers are identified – a process that can take up to a month – the exciting part begins: contacting potential buyers. Before you begin however, be sure that you are approaching the decision-makers directly. This requires a bit of homework up front, but it is essential that you reach the person who has authority to conduct a transaction. This will avoid delays in the process and it will protect confidentiality. The actual approach can be done via the telephone, e-mail, mail, or fax. Typically, the name of the business for sale is not disclosed at this point, just a brief description of the opportunity that's interesting enough to gain their attention, but not so detailed as to divulge the identity of the seller. For Company, Inc., we approached prospective buyers by e-mail primarily and asked them to reply or call us if interested. We had initial dialog will all the buyer candidates on behalf of our client.

4. Protect Confidentiality – Execute a Confidentiality Agreement

An extremely important aspect to any deal is keeping it under wraps until the appropriate time. If the word gets out prematurely, it can be detrimental to the sale of your business, so you need to maintain control of when clients, staff, or competitors learn about the sale. Interested parties who respond to the initial approach should be immediately asked to execute a confidentiality agreement. This document is intended to give the seller assurance that the buyer will not disclose that a sale is being contemplated, nor divulge its confidential information to anyone outside of its acquisition team for a specific period of time, usually one to three years. If information is disclosed, the seller has legal recourse.
Once the confidentiality agreement is executed, both parties and their advisors are usually comfortable enough to speak freely about the details of opportunity. If the buyer appears to be qualified in terms of both their interest and their financial ability, the information memorandum is sent to them for review.

5. Conduct Q&A With Buyers

Buyers rarely submit a qualified or bona fide offer for a company based solely on the information memorandum. They often have additional questions about the company. During this period of Q&A, it's essential for the seller to stay focused on their business and only divert their attention when necessary. Buyers will go about gaining further information in different ways:

• Submit questions and base their initial offer on the answers,
• Request a conference call with the shareholder and/or management, and
• Request a meeting or a site visit at the office(s).

During this stage, the goal is to determine which buyers will distinguish themselves by expressing a higher level of interest and ultimately submit a qualified offer. The use of deadlines throughout the process is typical in order to keep the process moving. These include target dates for executing confidentiality agreements, deadlines to receive buyer questions, dates to receive initial offers, etc.

In the case of Company, Inc., we received multiple lists of questions from interested buyers, some of which were answered via e-mail and others that were answered in conference calls with the shareholder. All buyers received answers to all questions, including those asked by others, to ensure everyone was basing their offer on the same information. In this particular case, our client was willing to schedule conference calls with select prospective buyers in the hope that it would speed up the process by not only providing answers to their questions but also allowing them to ask any follow on questions that arose.

6. Receive Offers / Letters of Intent

After receiving answers to their questions, interested buyers will be asked to submit an offer to acquire the company, indicating the price and terms that the buyer is willing to pay, any contingencies to a closing, and their funding capabilities. To accomplish this, some submit a letter of intent (LOI), which often has a legal format to it. Others might submit a less formal offer either verbally or in writing that simply indicates the price and terms but omits any "legalese." In either case, the offer is non-binding and is subject to confirmatory due diligence of the company information already received.
For Company, Inc., we received a total of six offers, which is an impressive amount in any deal and particularly this one, given the limited group that we approached. Increased competition among buyers always ensures that the seller will receive maximum value. Three of the offers we received were in LOI format and the other three were verbal.

7. Conduct Management Meetings

If multiple offers are received, the seller should conduct in-person meetings to evaluate potential buyers and determine the best candidate. This gives the seller the opportunity to fully explain the company’s performance, growth potential, profitability and vision, which can help increase the company value to the buyer. These management meetings also allow owners who may stay on with the business in some capacity to asses the culture fit with the new organization.

Of course, the buyer is also making an evaluation of the company during these meetings. It is customary during this phase for the seller to provide updated financial or other information necessary for the buyers to fine-tune their offers.
After these meetings, buyers may submit a "best and final" offer and may be invited to visit the office in order to do this. The seller may negotiate with multiple buyers, but ultimately, the seller will select one buyer with which to move ahead and close the transaction.

8. Engage in Due Diligence

Once an LOI is executed with one buyer, the process of confirmatory due diligence begins. In this process, the buyer scrutinizes all the aspects of the company with the goal of confirming what has already been presented. They will want to review client and vendor contracts, licensing, systems, staff, benefits, visit the office(s)…Everything! Imagine the class bully holding a kid upside down by his ankles to shake out everything in his pockets, and you get the idea! They will also want to meet with company accountants to review financial statements. They may require a financial audit. A buyer could assemble a small army of accountants, lawyers, and operational due diligence to turn over every stone. This phase is critical in the sale of a business, and being well prepared ahead of time can help smooth the process considerably. Be sure to refer to the articles highlighted at the end of this section for helpful tips on how to prepare.

The signing of the LOI is also when the clock starts ticking. In other words, the LOI will stipulate that the deal must close within a specified timeframe, during which due diligence typically occurs on an exclusive basis. If the deal doesn't close within that timeframe, the LOI expires and unless both parties agree to an extension, everyone can go back to their business of either talking to other buyers or searching for other sellers, as the case may be.

We recommend that sellers do a fair bit of due diligence of their own, prior to signing the LOI if possible, to make sure they know the buyer and understand their intentions after the sale. This is particularly important if the seller will remain at the company post-sale for any period of time.

As Company, Inc. had multiple offices, site visits needed to be carefully coordinated. While those visits were taking place, the buyer's financial team worked with the company's accountant to review the financial performance and understand all the details. All of these items needed to occur, including approval of the due diligence findings, within a timeframe specified in the LOI.

For further info, see “Pitfalls to Avoid in a Company Sale: Forgetting About Collection Licenses”
“Success Factors in a Company Sale: Managing Client Introductions During Due Diligence”
At www.kaulkin.com/go/insight/articles

9. Negotiate Definitive Purchase Agreement and Other Agreements

While due diligence occurs, the transaction attorneys for both buyer and seller will draft and negotiate a definitive purchase agreement. The word "definitive" is used because it is the governing document over the proposed transaction, and if an item is not stipulated in that agreement, it's simply not part of the deal. In addition, other agreements that are often included in a sale and negotiated at this time include employment agreements and non-competition / non-solicitation agreements.

10.Close the Deal

Closing occurs after:

• Due diligence is completed and approved
• Financing is secured
• All agreements are executed

With an organized approach, a well-facilitated process and a little luck, the definitive purchase agreement is signed and the deal is closed. If cash (at closing) is part of the deal structure, it is typically wired to the seller's bank account at that time. As a final part of any deal, everyone shakes hands and moves on to the next phase in their lives.

This whole process often lasts four to six months, sometimes shorter, sometimes longer, depending on either side’s focus on the transaction. With experienced advice to help you navigate the bumps in the road, you can significantly improve your chances for a successful deal and one that will bring you many years of lifestyle happiness and financial freedom. Knowing that, it's not really scary at all, is it?

A Final Word

This executive brief is designed to give you an idea of what to expect when selling a business, and is not intended to be a substitute for legal or advisory consulting services. Selling a business is a critical decision that should not be based solely upon just one source of information. We strongly recommend that you consult with a trusted advisor.
For more information, or for a confidential discussion of your business goals, please feel free to contact any senior member of our strategic advisory team:

Mike Ginsberg, President & CEO 240-499-3800
Mark Russell, Director 240-499-3804
Michael Lamm, Associate 240-499-3808
Michael Klozotsky, Analyst 240-499-3836
Dimitri Michaud, Analyst 240-499-3840
Kaulkin Ginsberg Company 401 North Washington Street, Suite 450 Rockville, Maryland 20850 Phone: 301-907-0840 • Fax: 301-907-0808
E-mail: hq@kaulkin.com • Website: www.kaulkin.com

About Kaulkin Ginsberg

Kaulkin Ginsberg is the leading source of M&A, strategic advice, and timely information for the Accounts Receivable Management (ARM) industry. Since 1991, credit and collection professionals, owners, and investors have relied on us for the insight, access and information needed to make well-informed decisions.

When it comes to M&A, no one can match our level of industry experience and proven expertise. We have completed over 125 transactions representing in excess of $3 billion in shareholder value for a variety of clients – from small family businesses to Fortune 500 companies. Our M&A services include buyer and seller representation, strategic alliances and partnering, and raising capital.

For ARM service providers, our value-add services also include strategic advice for improving growth and exit strategies. For credit grantors, our focus is on optimizing their receivables management strategies.

The Kaulkin Ginsberg family of companies also includes Kaulkin Media, publisher of the most popular sources of timely industry information such as insideARM.com® and The ARM Insider™; and Kaulkin Information Systems, provider of secure, affordable document management and workflow systems.

Read more about Kaulkin Ginsberg at www.kaulkin.com
Kaulkin Ginsberg Company 401 North Washington Street, Suite 450 Rockville, Maryland 20850 Phone: 301-907-0840 • Fax: 301-907-0808
E-mail: hq@kaulkin.com • Website: www.kaulkin.com