From Jeffrey Davis' Desk...

The economy continues to change. It is a buyers market, and cash is once again king. At the same time buyers are wary, sellers are getting restless and for many, determining the value of a company seems more of an art than a science.

On one hand, there is a growing list of struggling companies that have recently been sold or are desperately looking for buyers. They include Cambridge based Arthur D. Little, Energy Giant Enron, Quincy based telecommunications service provider Network Plus Corp. and Waltham based Polaroid, just to name a few.

On the other hand, buyers like Bermuda-based conglomerate Tyco International Ltd are still bellyaching over recent acquisitions for which they paid too much, and that certain accounting and business irregularities were recognized after the deal was done.

Do not overreact to the bad news. Successful business owners are not sticking their head in the sand. They are still negotiating and making great deals happen. But what does this mean for those who, for one reason or another, are considering the sale of their business?

This newsletter and our March 26th Mage Breakfast Seminar at the Newton Marriott with Neil Aronson of Boston Based Law firm Mintz, Levin, Cohn, Feris, Glovsky and Popeo, P.C. are designed to provide direction and sound advice to business owners and executives who are thinking about selling their business in this uncertain economy. We look forward to seeing you there.

Jeffrey Davis
Chairman and CEO
Mage, LLC

Selling Your Business in an Uncertain Market

The struggling economy, depressing stock market and limiting senior bank financing has greatly reduced corporate valuations for all transactions. Buyers have less financial resources and must rely heavily on the balance sheets of both companies to fund acquisitions. Many corporate buyers, private investors and financial firms have lost large portions of their funds from their recent buying frenzy, in which acquisitions were grossly overvalued. Many of these companies made huge acquisition mistakes over the past five years and are currently struggling to keep their own business above water.
Struggling sellers are finding it much more difficult to find buyers willing to pay for future promises. We see interested buyers waiting for the last minute, hoping to pay a desperate price.

With that said, good deals are still getting done. If your business is suffering, it may be tempting to cut your losses and sell to the first buyer that expresses an interest. This is often a mistake that can cost thousands and maybe millions of dollars.
Before you sell, it is important to understand the forces causing your business to suffer. Often they can be solved, giving the seller an opportunity to make decisions from strength. Under duress, savvy business executives often forget the most basic rules of negotiations: competitive offers maximize value; and true value is rarely reflected in the first offer. Moreover, selling a business without internal due diligence and preparation spells disaster in good times and bad.

Before making any decisions, a business owner must do an internal analysis to understand how a buyer would evaluate their company. What can be changed, or emphasized that will attract the hungry buyer, providing the opportunity to receive the maximum return for years of hard work.

You just might come to the conclusion that waiting another 6-12 months before selling your business may provide the time necessary to solve many of the difficulties you are currently facing, greatly increasing value. Timing is very important and your business should be performing well when its time to sell.

Preparation:
Advanced planning is an important part of making sure your business is performing well. This includes looking for the weaknesses in your business, including the obvious and obscure, many of which may be clouded by emotions and/or lifestyle. In such cases, hiring a skilled business advisor to assess and recommend changes to your business could be the first step towards maximizing value. Experienced advisors who have been through the process of selling businesses can quickly detect reasons why buyers might offer a lower bid for your business.

This can include:

• Management- Who runs the business? Does the business mostly rely on the selling shareholders? Do they want to remain with the buyer? What positions are filled at the management level and what is needed? Family participation? The answer to questions like these, have a tremendous impact on valuation and overall payment structure.
• Balance Sheet- What is the financial position of your business? Debt? Accounts Receivables/Payables? Working capital? Cash? Assets? Often key dollars are won and lost over balance sheet negotiations. It will pay to know in advance the story your financial statements tell, and be prepared to negotiate with the facts.
• Customer Base - If 80% of your revenues come from 20% of your customers (the basic 80/20 rule), you need to look towards diversification. Most buyers are very interested in purchasing your customer base. It's important to know what they are looking for. Size? Diversification? Variety? Contract? Recurring orders or project bid? Relationships?
• Internal Controls - What systems to you have in place to prevent waste and mismanagement? Management Processes? Overhead? Reporting? Operations? Organizational Structure? Different companies have different needs.

Negotiating:
Understanding the view of each bidder is the first step in negotiating. What are the buyer's motives for wanting your company? More specifically, what value does your company bring to the table: a financial investment, access to new markets, distribution channels, new and/or innovative products, a large and profitable customer base, patented technology, talented/skilled employees? There is no need to waste time and money building a strong management team when the ideal buyer is looking for a new product line to roll in with theirs.

Why hire a business Advisor?
Many people try to sell their business alone, but never truly understand the time commitment it requires. If done properly, it quickly becomes a full time job. Successful Presidents and CEOs do not have the time to properly market their company and maintain confidentiality, while continuing the success of their business. Furthermore, an intermediary between you and the buyer will allow you to leverage successful negotiation tactics such as "good guy /bad guy." Hence, while you continue to run your business efficiently, the right team of business professionals can identify a group of competing buyers, conduct due diligence and successfully negotiate the sale of your business at its maximum value.

Selecting the right advisor(s)
If you are ready to hire a business advisor to assist with selling your business, you need to know what factors to consider during the selection process. What makes a company the most qualified to position your company for sale? Look for a group of business advisors that:

• Find ways to strengthen your business, its financial position and organization. Do they know how to add value?
• Utilize good writing and communication skills. It is important they communicate the proper message about your business in their documentation and conversations.
• Have experience from both sides of the transaction. It's important to understand the buyer's perspective, first hand.
• Know how to properly manage the process. Many egos are involved and most deals die during due diligence and final negotiations. Experienced leadership through this process is the only sure way to best close a transaction.
• Will aggressively pursue potential buyers and present the best overall image and prospects for your business
• Posses excellent negotiation skills and a win-win attitude.

The M&A world is full of brokers who will sell your business too quickly, take a large commission with as little work as possible and move on to the next deal. It is important to think about these types of questions:
Do they look at your organization and suggest ways to improve performance during the M&A process? This economy may not be the best time to sell your business. Do they suggest alternatives? You also need a contingency plan in case you don't find a suitable buyer for your business. Do they offer to work with you in an advisory capacity to prepare such a plan? You will succeed in finding the right advisor if you ask the right questions, do your homework and check for references.

This past year has been unpredictable. Consumer confidence has fallen. The stock market is depressed. Most agree this is not the best economy for selling a business. The good news is that companies are still making acquisitions and sellers are still positioning their companies for success. You may have all the ingredients you need to maximize value if you have selected the right business advisor(s) who can then identify a group of competing buyers, conduct due diligence and position your company to negotiate from strength.

By Dana Schneider
Principal Mage, LLC

Assess the legal Risks of Potential Buyers

Best Strategies for Selling our Business

What makes your company truly valuable to a buyer? How can you best insure that a buyer will pay the highest price for your business? In preparing your business for sale, you need to put yourself in the shoes of a potential buyer. While you can't eliminate all of the risks inherent in your business, there are many steps you can take to present a compelling proposition. Ask yourself these questions:

1. Do You Own Your Key Assets? If you have a technology-based business, do you indisputably own all of your key assets? Have you reviewed the technology you own to make certain that it is appropriately covered by patents, trademarks, and trade secrets? Have you hired a lawyer to review what patents and trademarks are owned by competitors?

Another key area of protection is trade secrets, those key processes you use which are not patented. Have all of your employees signed enforceable confidentiality and assignment of invention agreements? What about consultants? Do you have a trade secret protection program in place? Remember that courts will only enforce trade secrets if you take commercially reasonable steps to properly protect these trade secrets.

2. Can You Assign Important Contracts? If you rely on contracts for part of your business, can you assign your rights under these agreements to a buyer? When drafting any important agreement with a partner, distributor, sales representative or supplier of technology or services, you want to make certain that you can assign these rights to a buyer automatically, without the need for a written consent.

3. Can You Deliver Key Employees? How many times have you heard the phrase: "My company's most valuable assets leave the building every night"? Buyers want to make certain that key employees will both stay after the acquisition and that they will have a financial incentive to stay. As a seller, you can't guarantee that employees will stay but you can certainly make certain they have an incentive to stay. For example, what happens to employee options after an acquisition? If vesting of all options accelerates in full, there is no economic incentive for the employee to stay. Develop appropriate vesting schedules for stock options. If your company does not share equity with employees, you may want to consider a bonus program that provides a cash bonus for each year the employee stays with the company following an acquisition.

4. Did I Rid My Company of the Skeletons in the Closet? In an imperfect world, every company faces issues it would prefer to forget. It might be the litigation with a disgruntled former employee, a claim by a competitor or concerns over complying with governmental regulations. In any event, you can be certain that at least one member of the buyer's due diligence team will assume an outcome worse than you could ever imagine in your most horrific nightmare. And, of course, the buyer will want a purchase price adjustment (read "money out of my pocket") … assuming it goes forward with the acquisition! Whenever possible, work ahead of time to clean the skeletons from the closet. The neater and cleaner the bundle you present, the less the buyer's anxiety about the deal as a whole.

5. Did I Shoot Myself in the Foot? In almost every instance, a potential buyer will look not only at historical results but ask for projections as well.

For historical results, make certain that you have results reviewed or audited by a reputable independent accounting firm. Remember that the buyer is looking to an auditing firm for assurance. Same with taxes. If your controller prepared the tax returns, have them independently reviewed. If there are tax audits pending, consider trying to resolve them as soon as possible.

For projections, the buyer will look to you to fulfill those projections. Often, a buyer will suggest an earn-out (in which part of the purchase price is dependent on future financial performance). Be careful as a buyer will use your "hockey stick" projections against you. Work with your finance team (both inside and independent advisors) to develop credible projections with adequate backup and a description of all key assumptions.

6. Did I Mend Fences? Another regular component of a buyer's due diligence is to speak with your key customers and suppliers. Any hesitation or concern expressed by a key customer or supplier could kill a deal. Mend fences ahead of the due diligence and, whenever possible, try to establish multiple sources of supply of materials and services.

7. Am I Selling at the Best Time? Look ahead and give consideration to determining the optimal time to sell your business. For example, many medical device manufacturers actually can attain their highest values right after FDA approval and before they actually have to manufacture in bulk and sell the product. How does the regulatory environment for your business look? Is there a possibility that new regulations could be promulgated in the next few years which might hurt your business? What about the competitive landscape? It's best to sell when your company has momentum and when you can "auction" the business to multiple strategic buyers.

Be prepared for each of these issues and surround yourself with legal, accounting and business advisors with significant experience. Start early to address these concerns and the sales process will go smoothly and you will maximize the value you receive for your business.

Neil H. Aronson is co-chairman of the Business and Finance Department of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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SELLING YOUR BUSINESS
IN AN UNCERTAIN MARKET