Preparing A Business For Sale Requires Time

January 28, 2008
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GRAND RAPIDS — It takes several years of planning and preparation to ready a small business for sale, so at the first thought of selling a business, an owner should assemble an advisory team that includes an attorney, CPA, an investment banker and, possibly, a financial planner.

That’s the recommendation of Ron Miller, senior managing director of BlueWater Partners, an investment banking firm that serves manufacturing, business-to-business service companies and distribution companies in Michigan that have annual revenues of $5 million to $50 million.

The advisory team helps the small business owner work out the various issues that crop up in the sale process. The investment banker’s role on the team is to prepare the business for sale, take the business to market and find prospective buyers.

Miller said it typically takes two or three years to prepare a business for sale.

BlueWater Partners works in the market every day, talking with both financial buyers and strategic buyers, so the company understands what buyers are looking for, Miller said. Business owners tend to have one view of their business, its value and its attractiveness to a buyer, but the buying market often has other views, he said.

“We spend a lot of time with clients, first, to determine whether the client has a realistic view of the value of the business as they go to market,” he said. “We also look at the bigger view, which is the marketability — the issues that make the business attractive or unattractive to a particular buyer. The more time we have to spend with them before they go to market, the more time we have to address those issues.” 

In the Midwest, where many companies are focused on the automotive market, buyers are looking at how a potential acquisition could fit into the global market, not just the regional market, Miller said.

If, for example, an automotive-related manufacturing company has a heavy concentration with the former Big Three versus a heavy concentration with the “New Domestics,” potential buyers will have a substantially different view of the prospects of that business going forward, according to Miller.

The value of a business is driven by its future prospects, he explained. Though historical financial performance is important and serves as a guide, if a business is heavily concentrated with companies that aren’t expected to grow much, its value on the market depreciates. 

“In this region we see a number of manufacturers who are selling to the automotive market trying hard to do more with the New Domestics versus the Detroit Three,” Miller noted.

Companies in the $5 million to $50 million range often lack experience in mergers and acquisitions and have limited resources relative to preparing and managing the sale of the business, said Matthew Miller, managing director for mergers and acquisitions at BlueWater Partners. Professionals at BlueWater, he said, are involved in preparation, due diligence and negotiation to the closing of the transaction, managing the process very closely with the client all the way through.

Over the years, due diligence has become an increasingly involved process, said Ron Miller. Sellers now make a lot of financial details available — information on their customers, products and processes and deeper insight into the management team and the company’s historical numbers.

Buyers have a need for detailed information, but the typical small manufacturer is not addressing that kind of detail, Ron Miller observed. 

“That’s one of the biggest challenges in the market that we serve,” he said. “For example, our buyers want to know what car a certain metal part goes on because their research can tell them what the projected volume for that model is in the future. If a small metal stamping company is producing parts for several platforms that are on the sales decline, then the future prospects — of at least that portion of the business — is doubtful.”

He said that when BlueWater is introduced to a business owner who’s thinking about selling in a year or two, it tries to encourage the owner to start thinking about the process earlier so the company can accumulate the financial data it will need. 

The economy and the cycles of the economy don’t necessarily drive an owner’s decision to sell a business, Matthew Miller pointed out. He said most owners decide to sell a business based on their desire to retire at a certain stage of life or by a desire to pursue some other life goal.

“But for some, when we go through the business valuation process, our opinion of the business’s valuation doesn’t meet their expectations, so they may pull back and wait,” Matthew Miller noted. “We’ll also advise them about things they can do to prepare, such as building up their management team or diversifying in terms of industry and customers.”

The management that’s going to be left in place when the owner sells the business is the first thing buyers look at, he said. They’ll also look at both historical and projected sales growth, profits and cash flow margins. He said buyers really want to see some kind of uniqueness or market differentiation, as well. BlueWater Partners has a constant stream of buyers that call looking for certain opportunities, and they share their specific criteria, he pointed out.

“We do get a lot of attention, especially right now, from financial buyers and private equity groups that have very specific acquisition criteria and are very hungry for the right company,” he continued. “There’s a lot of money chasing a few good companies.”

Regardless of all the negative news about Michigan, BlueWater Partners sees some fairly positive activity on the manufacturing side. There has been a substantial increase in manufacturing productivity in this decade, made by companies in West Michigan, in particular, and around the state, and those companies are now more efficient and competitive, Ron Miller noted. 

“We’ve seen a lot of manufacturing companies strengthening their financial position, he said. “We’ve seen stronger competition even with Asia recently, and seen some of our clients bringing business back from Asia because they’ve been able to improve their cost here. Proximity to the customer, too, is becoming more and more important all the time.” 

The technical engineering support that companies in Michigan can provide their customers is also becoming increasingly critical because customers are decreasing their in-house engineering, he added.

“That’s giving their suppliers an opportunity to provide services and functions that companies half-way across the world cannot. We’re seeing some fairly decent activity and growth in the tool and die industry, which is something that hasn’t been seen in five or six years. Buyers are more actively looking for acquisitions because it’s getting harder and harder to grow a business organically.”

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