Thinking of selling your company?

Posted on November 1, 2003 by LCT Staff - Also by this author

Having spent what seems like a lifetime buying and selling transportation companies, I believe that I have made most of the mistakes that can be made in the mergers and acquisitions arena, some of them more than once. The 30-plus transportation company deals that I have facilitated are grossly outnumbered by roughly 100 deals that I have been involved in but failed to close. I’m told this ratio is not uncommon, and my experience has been that there is as much to be learned from failed deals as there is to learn from completed deals.

These “Six Most Important Things Not To Do,” in order of importance, are from the perspective of the seller.

Don’t deal with someone you don’t trust Trust your instincts when they tell you that you are dealing with someone who is not a good person; forget the economics involved and walk away.

This may seem obvious, but the closer you get to having the buyer’s money, the more tempted you will be to overlook warning signs.

In one of my earliest deals, the buyers were rumored to have ties to organized crime. Since there was no hard evidence to prove the rumors, and since I wanted the buyers’ money, I completed the transaction. Within one year, the buyers had failed to pay millions of dollars of liabilities they had agreed to pay and had fired most of the company’s former employees, some of whom had been with the company for 30 years.

Don’t let your heart determine your asking price Most of the failed deals that I have been involved in were ultimately sold for substantially less than what I offered. Multiple lessons are involved here:

* The amount of money that you need for the rest of your life is not what your company is worth.
* Your company is not necessarily worth more than what your competitor says he got when he sold his company, especially considering that he is probably lying.
* Your company is likely not worth what it was at the peak of the U.S. economy.
* Your company is worth what the market is paying today for assets, revenue streams, and cash flow history and potential.

You should get competent professional help and determine approximately what that value is. If you can’t sell at today’s values, don’t sell. But don’t kid yourself about what your company is worth. And don’t wait too long to sell for what might seem like a realistic price to you but that really isn’t.

Don’t believe a buyer’s first-offer price The buyer’s first offer is usually not the price at which the deal gets closed, and the adjustments are usually downward, not upward. Negotiating a deal is an imprecise art that is fraught with danger and imperfections. One of the inevitable struggles is that you will probably not want a prospective buyer looking at your most confidential data until there is a signed Letter of Intent.

Examples of information and personal contacts that buyers often do not have access to until an Letter of Intent has been signed are customer names, meetings with customers, meetings with key employees, strains in the organization that endanger continuity of management, pricing plans, computer system flaws, unconventional accounting practices, risks involved in operations programs recently (or soon to be) implemented, and full details of pending legal problems.

Even the most well-intentioned buyers learn things that can change their opinion of what your company is worth after the Letter of Intent has been signed.

To make matters worse, sellers often do not fully understand some of the risks that their company are facing and, even more often, are not fully forthcoming concerning the risks that they do see.

Don’t confuse the liquidation value of your assets with the value of your company as an on-going business

Many sellers of transportation companies mistakenly believe that, after paying off all liabilities, their company is worth the market value of their assets plus its potential future cash flow.

Stated most simply, after paying off all liabilities, your company is worth either its value in liquidation or the value of future cash flows, whichever is higher.

The liquidation value includes the price at which your customer list and trade names can be sold. But it must also be reduced by the cost of liquidation, which is usually more than you expect.

Historically, transportation companies were generally worth more based on the value of future cash flows. However, this is less true in today’s depressed transportation markets, especially since profits have been harder to predict after 9/11.

Also remember that the taxes owed if you sell your assets are probably higher than if you sell the company as a going concern. This is especially true if you structure the transaction as a stock transaction, in which you receive cash or some other form of consideration in return for the common stock of your company.

Someone who knows more than you is not necessarily an expert

This is especially important when selecting professionals to help you in your prospective transaction.

You need an attorney and a CPA who are highly experienced in corporate acquisitions and with the tax implications of the alternative forms of transactions that are available to you.

The attorneys and CPA’s that have traditionally served you will probably accept the assignment and will inevitably know more than you and, hence, sound competent. But make sure they refer you to five clients they have facilitated deals done for. If you can’t confirm five such past deals, select someone else.

You would be well served to also hire a mergers and acquisitions consultant who is experienced in finding buyers and closing deals in the passenger transportation industry.

Don’t count on your job once someone else owns your company

Sellers do sometimes stay with the new owners and become productive employees. However, it only happened four times in my 30-plus deals. The new owners almost always make changes and the sellers usually believe the changes are a rejection of what they spent years building.

Just as important, even if you might like working for the new owners, they might not like you.

Stay and give it a try if you wish or need to. There is a chance it will work. But don’t base a large part of the price you receive for your company on the expectation that you will be there for the long term.

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