Finance
Closing Time
Attracting potential buyers to your business
By Tracy Barbour
FINANCE
illustration of man sleeping on money
Closing Time
Attracting potential buyers to your business
By Tracy Barbour
studiostoks | Vectorstock
S

elling a business is a complex transaction with many moving parts and intricate details shaped by the needs of the different parties involved. It requires meticulous planning, from cleaning up inadequate books and tax records to sprucing up a business location or even increasing sales and reducing expenses to justify a higher asking price. These, and other strategies, can make it easier for business owners to attract potential buyers.

One of the most common reasons owners sell their business is retirement—especially if the company is profitable. Other situations that precipitate a sale are new opportunities, burnout, financial reasons, divorce, health problems, and death. Regardless of the rationale, experts say the deal should be a win-win for the buyer and seller.

Using Advisors to Facilitate the Deal
Alaska is home to an array of financial, legal, and business experts who can facilitate the sales transaction for sellers and buyers, including bankers, merger and acquisition consultants, and law firms. A bank can be a great place to start for those looking to sell or purchase a business, says Adam Baxter, a vice president and commercial loan officer with Northrim Bank. Bankers are uniquely connected to the community, so they can be a great source to put sellers in contact with investors or buyers. They can also refer sellers to advisors such as certified public accountants (CPAs) and brokers who buy and sell businesses for a living. “Banks are a great resource for all things,” Baxter says. “It’s a good place to start a conversation.”

A bank can also add value by connecting business owners with professionals who evaluate companies—plus it can offer upfront guidance on how the company will be evaluated. Essentially, a banker can act as a sort of partner who helps negotiate and structure the deal. “We can look at financial statements and tell them what is possible or not possible,” Baxter says. “We can help a customer get something that works for both parties but also works in their best interest.”

“Having that financial metric to show that the company is profitable is key. In addition, it would be really helpful if a seller could confirm what the business has been doing in the past and that it has room for expansion and growth.”
Andrea Canfield, Senior Associate, Stoel Rives
Baxter recommends starting the conversation with a banker and CPA. “The CPA firm is going to be able to provide a lot of expertise as far as the financial viability of the business and the best way to do things from a tax perspective,” he says.

First National Bank Alaska provides a variety of financing options for potential buyers, according to Shin Suzuki, a vice president and commercial lending unit manager at First National. This includes conventional bank financing, SBA-guaranteed programs, Alaska Industrial Development & Export Authority participations, and the Bureau of Indian Affairs Loan Guarantee program, as well as escrow services for the transactions and commercial and industrial financing for the future operations.

As a lender, First National typically works with the borrower or buyer to provide a range of services. By reviewing the nature of the transaction, Suzuki says, the bank consults with the borrower to find the best possible loan structure to achieve their financing and operational goals. It also discusses the customer’s future succession plans. “Whether selling their company to employees, family members, and/or unrelated entities, we assist our customers in the early stage of succession planning and provide customized solutions to meet their unique needs,” he says.

Law firm Stoel Rives also serves as a partner for buyers and sellers. The Portland, Oregon-based company has the broad expertise to offer general guidance on deal matters as well as specialized expertise in various areas, according to Andrea Canfield, an Anchorage-based associate in the firm’s corporate group. “We’re able to represent both the buyers and sellers because we’re a full-service law firm, and we offer a wide array of specialty experience for the parties,” says Canfield, who specializes in mergers and acquisitions.

As the “deal” attorney, Canfield manages the overall purchase transaction. This involves everything from offering guidance on the deal’s structure (whether it’s an equity or asset purchase) to the purchase price (whether fixed or adjustable) and general due diligence advice. For sellers, Stoel Rives can help with the collection of and response to due diligence requests. For buyers, the firm can assist with the examination of due diligence materials and other aspects of the deal.

“We go beyond just general deal guidance; we also offer specialty advice in areas such as government contracting, labor and employment, and tax,” says Canfield, who was recently inducted into the National Black Lawyers Top 40 Under 40 for Alaska and received the 2020 Chambers USA “Associates to Watch” ranking. “For example, if we represent a buyer entity and the target corporation is an S corporation, we have tax attorneys available who can advise the buyer on the tax matters relating to acquiring an S corp.”

Canfield says using a full-service law firm can be especially beneficial for a small business in a unique industry or one that operates a business regulated by federal law. “It’s best to get a full-service law firm because then you don’t have to deal with hiring multiple advisors and paying those advisors on different fee schedules,” she says. “Try to look for a firm that can handle the entire purchase.”

Alaska Mergers & Acquisitions represents a specialized resource for sellers who want to attract buyers and buyers looking to purchase a business. The company provides business evaluation, marketing, and sale negotiation, statewide and nationally.

As managing member of Alaska Mergers & Acquisitions, Matthew Fink advises buyers and sellers in all aspects of the closing process to assure a successful transaction. “Usually the buyer and seller both have their own attorney and CPA,” he says. “The CPAs will verify the numbers, and the attorneys will make sure the contract is fair and equitable.”

When helping sellers, Fink typically conducts a three-year cash flow analysis of the business and uses this information to determine its value. Then he creates a sales brochure that is ultimately presented to potential buyers. “I try to make a list of ten potential buyers of who or what companies I should reach out to first,” he explains. “When I find the right buyer, I help to negotiate the transaction from start to finish.”

He adds: “The hardest part is not getting a mutually accepted agreement in place but closing the transaction thereafter. There are always fine details specific to each business sale that come up prior to closing that may have a potential to derail the transaction. Resolving these challenges fairly for both parties is the key to every successful transaction.”

Basically, Fink views his role as a facilitator for the transaction and feels his conflict-resolution experience is his strongest attribute. “It has to be a ‘win-win’ for both parties,” he says. “The buyer and seller need to feel like they are getting a fair and reasonable deal.”

Important Considerations for Sellers
Sellers can implement a range of strategies to make their business a more worthwhile and attractive asset to prospective buyers. Baxter says it’s important to keep in mind that a buyer wants to purchase an asset or business that is generating cashflow, has assets that will be a “value add” to the operation, or will be a segue to another market that provides diversity to an existing income stream.

Therefore, it’s paramount for the seller to have well-presented financial records. If the quality of the financials and historical records are subpar, the seller may have to pay to have records produced that are sufficient to a bank or buyer. “If I were a seller, I would make sure I had coherent, well-presented financial information that’s accurate and represents the business fairly,” Baxter says. “If it’s an asset-intensive business, I would make sure I had a list of all my assets, purchase dates, and other pertinent information. The seller should also have a list of debts, too, because that will be part of the discussion.”

In terms of buyers, Fink says there are two main types: investor buyers and owner-operator buyers. Owner-operator buyers represent most transactions under $2 million. Usually, once the $2 million threshold is overcome, investor type buyers are more prevalent.
Suzuki expresses similar thoughts about maintaining sufficient financial records. He says, “Keeping good financial records and demonstrating your business’ success in terms of strong cash flow and balance sheet strength will help to attract a future buyer.”

Canfield agrees, “A seller really needs to have a historical record of the business operations being profitable.”

There are also some basic strategies the seller can apply to ensure an optimal outcome for both parties. For example, the seller can adopt a cooperative approach to the sales process, Canfield says. In fact, she says collaborative deals tend to provide the best outcome for both buyers and sellers.

For instance, the seller should push for the parties to sit down and map out the process and each party’s expectations before drafting the purchase agreement. At the beginning of the transaction, the buyer usually sends a term sheet or letter of intent to the seller that outlines the high-level terms of the deal, including the purchase price, potential closing date, and other important issues. “There are a lot of expectations, however, that can be discussed outside of the term sheet or letter of intent,” Canfield says. “If the parties can discuss expectations before drafting the transaction documents, all of the other details will kind of fall into place. I always suggest that sellers talk about their expectations with the buyer as soon as possible. That way, the deal will go smoother and the parties tend to be happier in the end.”

When it comes to working with business owners, Fink focuses on selling operation cashflow or EBIDTA. EBIDTA, a business’ earnings before interest, depreciation, taxes, and amortization (occasionally owner’s compensation is included), is important because it helps determine the sales price. “The seller is going to get a multiple of the operation’s cash flow—typically two-and-a-half to five times for smaller businesses, sometimes more for larger ones, depending on the business and industry—when they sell the business,” Fink says. “Determining the actual cashflow from the business operation is important to fairly value the business or company.”

A principle prerequisite for sellers, Fink says, is to make sure their accounting and other numbers are accurate. This means a close inspection of their profit and loss statement, balance sheet, and tax returns, which is something Fink can do. “I basically, forensically, review their books, but I’m not a CPA,” he says.

Many small business owners expense all types of items—to the extent that they can by law, Fink says. And part of his job is to find the potential fluff or discretionary items and re-adjust those numbers back into cashflow. Fink carefully reviews discretionary items and ensures these expenses are an accurate reflection of ordinary expenses for that specific business.

So, for example, Fink may help clients ensure their inventory level is not over or under the median level for any given year. “It’s a matter of keeping inventory to an average level and making adjustments thereafter at or prior to closing,” he says.

In addition, Fink says another essential practice for sellers is to disclose, disclose, disclose. He explains, “They should disclose all necessary information to back up all their numbers; hidden procedures or accounting practices will only cause problems down the road to closing.”

“The hardest part is not getting a mutually accepted agreement in place but closing the transaction thereafter. There are always fine details specific to each business sale that come up prior to closing that may have a potential to derail the transaction. Resolving these challenges fairly for both parties is the key to every successful transaction.”
Matthew Fink, Managing Member
Alaska Mergers & Acquisitions
Chief Concerns for Buyers
In terms of buyers, Fink says there are two main types: investor buyers and owner-operator buyers.

Owner-operator buyers represent most transactions under $2 million. Usually, once the $2 million threshold is overcome, investor-type buyers are more prevalent.

While these two kinds of buyers will have varying considerations, the viability of the business remains a crucial deciding factor. Prospective buyers look at a company’s potential—its longevity and growth opportunities. “If a business doesn’t have staying power, future potential, or synergistic value to an existing company, they are not going to sell,” Fink says.

Canfield says a business should also be able to show profitability and sustainability. Buyers, she says, will usually look at the EBIDTA to determine if a business is a worthwhile investment. This information can help them analyze and compare profitability among companies and industries, as it eliminates the effects of financing and capital expenditures.

Typically, buyers will examine the previous fiscal year’s EBITDA. If the business can provide a two- or three-year look back, that’s even better. “That will show to buyers that the profitability isn’t a fluke; it’s historical and something must be going right with the company,” she says.

“Having that financial metric to show that the company is profitable is key. In addition, it would be really helpful if a seller could confirm what the business has been doing in the past and that it has room for expansion and growth.”

For a small business, Canfield says, buyers typically are looking at the operational perspective. They’ll be looking at the management of the small business and exploring an assortment of revealing questions: Is the management team efficient? Do they work well together? Do they have a good reputation in the community? Is the management team collaborative? Do they know how the business runs?

Buyers will also assess the back office. They’ll consider compliance relating to accounting practices, benefits programs, taxes, and other key areas. “Buyers want to make sure that when they purchase your company, they’re not inheriting something that’s problematic,” Canfield says.

Good recordkeeping is also important to buyers, Canfield says. Potential buyers want to see a strong recordkeeping system replete with accurate balance sheet, statement of income, cash flow, and tax reporting information. And for the operations of the business, there should be records of the owners of the business, disciplinary issues with employees, and past and current litigation. “Buyers are uncomfortable with buying a business with insufficient records. Buyers often think that if you don’t know what’s going on with your business, they will not know either,” she says. “But when the records are readily available and complete, the buyer always feels a little bit more comfortable.”

Expert Advice
Canfield recommends that business owners who are interested in selling be proactive. They should begin searching for potential buyers and feel comfortable approaching them first. “There’s no harm in going out and looking for a buyer,” she says. “That may make the process move a little quicker. Sellers do not have to wait for a buyer to approach them.”

Baxter says people should make sure they understand upfront what they’re trying to accomplish with the sale and what the legal and tax implications are. “The most important thing is to get a good team in place—a banker, CPA, and attorney—whether you’re buying or selling,” he says.

Likewise, Suzuki says: “Whether you are a current business owner or a future potential buyer, maintain a good relationship with your business banker and/or loan officer. A good lender should be accessible and have the local knowledge to help you reach your business goals.”

In addition, small business owners can take advantage of the SBA’s online course: Selling or Exiting Your Business. The self-paced, thirty-minute training provides an overview of how to sell or close a business, along with topics that include defining a business exit strategy, transferring ownership of a business, steps to closing a business, and preparing a sales agreement.