Let’s Make A Deal: Buying, Selling, or Merging your Company

by Jim Luff

JUNE/JULY 2010 LCT: Make the perfect deal through planning, researching, and examining data. Check out 17 TIPS on preparing for a transaction.

In this economy, many operators are selling their businesses to larger companies or people ready to plunge into the industry without starting from the ground up.

Others are merging, hoping that two companies combining resources may provide more stability for success. Maybe you are doing so well that you want to buy out your struggling competitors. All of these transactions require plenty of planning and performing due diligence with data on hand to make the best deal for the parties involved.

Mergers

These are by far the easiest transactions, as the concept is a simple blending of assets where each company has a certain value on the date of the transaction and each company is backed by the assets brought to the table. For instance, if Company A has a value of $1 million and merges with Company B that has a value of $500,000, the new company has a combined value of $1.5 million and the principal from Company B would have an approximate interest of 33% in the new company if the deal was simply structured.

In the case of Bay Area Racing Limos, owned by Curt Chandler, and Mosaic Global Transportation of Palo Alto, Calif., owned by Maurice Brewster, a merger was a great solution for both companies. Mosaic established itself as a corporate car provider focusing marketing efforts and equipment on serving corporate accounts. Chandler, meanwhile, pursued the retail party crowd by investing in NASCAR theme “wrapped” limos and retail marketing. By merging, the two companies achieved a goal of serving different markets without buying new vehicles. Mosaic had a fleet of 30 vehicles and Bay Area Racing had a fleet of seven.

For Chandler, his options were to downsize, sell the business, shut it down, or merge. Because of his four-year affiliate relationship with Mosaic, the last option was the best move for both companies. Since the merger, Mosaic had more monthly revenue in March than during the previous two years, Chandler says. The merger began with a simple email sent by Chandler to affiliates to see if anyone had an interest in buying his vehicles. Brewster responded to that e-mail. After several attempts to negotiate the perfect contract, the rest is history. Both companies still exist under their brand names, but all phone calls go to Mosaic dispatchers while Chandler markets for both companies.

Acquisitions

To buy an existing business requires finding out first why the existing owner no longer wants the business. It could be a case of wanting to retire or a medical condition, but it also may imply the business is not sustaining itself. Examining the past three years of a company’s financial records should provide an insight to sales performance and expense load. The most reliable window to a business is the past three years of tax filings.

Becky Laramee purchased All Points Limousine of North Oxford, Mass., after performing such due diligence. Laramee also enlisted the aid of a business broker and an attorney to help examine finances and draft legal documents. Laramee said she performed exhaustive reviews of cash flow, balance sheets, and credit card statements. She also reviewed the competition for both the threat level and the ability to work together as affiliates.

Despite all the effort, Laramee realizes she missed many other areas such as the client base, airport rules, DOT requirements, and biggest of all, the expensive insurance policies required. The existing owner’s insurance broker lacked the expertise required in the industry. Laramee called the problems created by the lack of knowledge “insurmountable.”

Because of her lack of experience, she was forced to pay double the amount of insurance premiums as the previous owner and was blindsided by the cost after being told by the broker the premium would “stay about the same” after the sale.

Since the purchase, Laramee says she has learned how unlicensed operators affect the market as well. “It is not only what you know, but who you know,” she says. This includes local and state police officials, DOT inspectors, airport personnel, and fellow livery operators, who all keep All Points Limousine on the correct path.

Selling your transportation company

William Stieren of Allied Business Intermediary International, a firm assisting in business transactions, says selling your business begins with gathering documentation necessary to show a prospective buyer a picture of your business.

This includes having profit and loss statements and tax returns for the past three years ready for review. You also need a list of all fixtures and equipment to be included in the sale and an estimate of their value. Stieren recommends getting help from a professional business broker, since most people tend to overvalue by putting sentimental value into the dollar valuation rather than just fair market value.

Copies of lease and loan contracts to be assumed should be presented so the buyer knows the obligations to be incurred. The amount of debt being assumed is counted against the value of equipment, fixtures, and real estate included in the transaction.

Stieren also advises that you have a preferred price in mind and a payment arrangement; should the buyer make payments or pay the entire amount up front? Do you want the freedom to completely walk away? Other considerations include how much inventory is on hand and if the inventory will be included in the sale or removed on the last date of business under the current owner. The new buyer may wish to employ the seller for a period of time to allow a smoother transition.

How to value your business

Determining the value of a business is not as easy as checking a Kelly Blue Book like you would for the sale of a used car. It begins with a review of what exactly is for sale.

This can include vehicles, real estate, client lists, and even the telephone number. The name and age of the company also play an important role. Many other factors can affect the value of the business, such as market conditions and the number and size of competitors. A business intermediary can help you determine what the market will dictate rather than an estimate by the owner.

Almost everything the new owners will receive under the terms of the purchase have some type of value. One way to compile such data is to examine the monthly payables and determine if the new owner will be responsible for a particular monthly payment and/or the entire value of that item or service. Client lists showing repeat usage and average annual sales per client can certainly add value to a business. If you prepaid for an annual sponsorship that will benefit the new owner, then it must be factored into the value.

4 MERGER CONSIDERATIONS

01 Financial situation of both companies

02 A “exit strategy” if the merger fails

03 What the financial “deal” actually consists of

04 The business philosophies and growth goals of each owner

6 BUYER QUESTIONS

01 How old is the business?

02 Why is the owner selling?

03 How much are you willing to spend?

04 What financial terms do you expect or desire?

05 What is the time frame of your purchase?

06 Do you have a complete understanding of the business operations?

7 SELLER PREPARATIONS

01 Three years of tax returns available for inspection

02 Three years of P&L statements

03 Three years of bank statements

04 A comprehensive list of what is included in the sale price

05 Copies of leases, contracts and ongoing obligations assumed by buyer

06 An offer to remain as an employee or consultant during the transition

07 Make sure everything being sold is in tip top shape

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