The advisory team

Our third in a series of articles for distributors about selling a distribution business focuses on putting together a team of advisors to help you through the process.

by Jane Baynard and Scott Benfield

You’ve devoted countless hours, untold amounts of energy and a lot of money building and running your wholesale distribution business. It may well represent your life’s work and the lion’s share of your personal net worth. You’ve decided to sell, and your first big decision is to realize that now you need help.  You may be thinking, “I built this business from the ground up, I can certainly sell it myself”.  But, like the ancient adage goes about attorneys, "he who represents himself has a fool for a client." 

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Buyers love it when sellers represent themselves. Why?  First of all, few sellers are experienced in divesting of businesses or valuing them. Second, all sellers are emotional when it comes to selling their "baby"; no seller can be objective.  Third, in order for an owner to receive the highest price for his wholesale distribution business, a good deal of “value” may need to be “extracted.”  Most distributors are superb when it comes to building and running a business, but positioning a company for sale requires a whole new set of skills. As an example, traditionally, the “value” perceived by the owner/seller is often light years away from the actual value of the company in the transaction marketplace. Sometimes it is lower, often it’s higher. Our intent with this article and also with this series is simply to save you time, money and heartache when selling your distribution business.  Do your shareholders and heirs a favor and hire an expert team to assist you in the process.

In addition, finding a buyer or seller and closing the deal is a time-intensive and complex process. If you as the owner or members of the senior management team want to do the job, the key question on both the buy and sell sides is who will run the business and keep it profitable during the months that it takes to complete the transaction. It is very difficult to do both jobs simultaneously.

As the owner, you need to keep your eyes on the ball - the primary operations of the business. Your company's accountant and lawyer, as we discuss below, are invaluable contributors to the process through their specialized skills but their experience or knowledge of current market conditions fall short of what is needed to consummate a viable transaction.

Psychological risks exist to going it alone as well. The distributor may be viewed by the other side as lacking seriousness, credibility or in a position of being taken advantage of. Without a transaction professional, there is no fallback person to facilitate negotiations. In addition, a general lack of experience may lead to costly mistakes or time-consuming delays. For example, in selling a distribution business, you must take care to avoid the appearance that the company has been shopped and turned down by a number of buyers. That situation often produces a “damaged goods” image which significantly decreases the value of the business. Distributors not employing a team risk being caught off guard or unprepared to handle the myriad of large and minute problems, issues and details that arise throughout the process or lack the depth of creativity to manage them. Going it alone also may limit the number of prospective buyers or acquisition candidates if you don’t have enough time to spend on the process.

How to build your team
Think about your team like a three-legged stool. Each leg bears equal weight and without one, the stool will not bear weight nor will it remain stable.  That’s the analogy we’ll use for the “deal team.”  Essentially, it should consist of three outside advisors; we affectionately refer to them as the “A-Team”: an Attorney, an Accountant and an Acquisitions specialist.  Should you choose to go it alone, you most certainly want to substitute a business appraiser for the acquisition specialist.

Attorney: Think of attorneys in the sales process like a justice of the peace at a wedding: you need someone to “make it legal.”  Most companies have a lawyer that they use. This person has become your trusted ally over the years, helping avoid crises and making sure that everyday dealings with leases, operating agreements and employee benefits are handled in the most upright, by-the-book manner. They may even be a personal friend. These trusted advisors can be invaluable in drawing up confidentiality and other transaction related agreements and contracts.

Accountant: Someone to minimize taxes. As you've realized through other transactions with your business, you've always had a silent partner -- the IRS. And they'll be there when you sell your business, silently salivating for their slice of your American Dream pie. You'll want a tax advisor skilled at minimizing taxes in a business sale transaction. 

Okay, you're poised to enlist the company's attorney and accountant to run the deal because they are trusted allies you’ve worked with for years. The lawyer has kept the corporate minute book up-to-date and the accountant has done your quarterly and yearly tax filings for decades. But how experienced are they at selling businesses?

Reaching the decision to sell, divest or acquire is very much a function of a savvy distributor. However, executing the decision is more problematic, often because the owner is entering unfamiliar territory of the increasingly competitive mergers and acquisitions market. Anyone can sell or buy a company; however, the risk looms large: receive too little or pay too much. Specialized skills and knowledge are required to complete the deal on the most favorable prices, terms, and conditions.

For this venture, you need a specialist. You need a business transaction professional, someone who specializes in valuation and mergers and acquisitions work. Think about this: your attorney and accountant and their firms have been billing your company quite handsomely for years. Working for you provides them their standard of living. Once the deal is done, they will no longer earn income from you. In plain language, your motives and theirs are just not the same. That’s why you need a third party to quarterback the project.

Acquisition specialist: Keep in mind, selling a business is a sales activity. Even though it is done discretely, selling a business successfully requires the same elements as any successful sale -- preparation, presentation, representation and negotiation. It won’t happen on its own.  Your first step is to look for expert guidance. When a mergers and acquisition specialist is involved in the sale, he will channel the process to keep the transaction within safely silent bounds.

The role of an M&A specialist is as the transaction catalyst.  It is their imperative to make it happen. A competent M&A advisor will prepare you and your business for success. He will help you estimate the value, prepare a professional offering document, devise an appropriate yet confidential marketing strategy, locate and motivate the best buyers to come to the table, and facilitate the financing necessary to close the deal.  More specifically, an experienced intermediary can offer assistance in 1) pricing the business, 2) setting the terms, 3) compiling a comprehensive presentation package, 4) professionally marketing the business, 5) screening potential buyers, 6) negotiating and evaluating offers. The result can be a considerable saving of your and the buyer's time and effort.

You should expect your M&A advisor to do the following:

• Serve as exclusive financial advisor.

• Prepare a descriptive offering document.

• Develop a marketing strategy and identify appropriate buyer candidates.

• Coordinate negotiations and create a competitive environment.

• Manage the project through due diligence and closing.

• Be an independent party and present a more impartial and un-emotional picture of your business.

Appraiser: For those who are dead-set on going it alone and not working with an M&A advisor, we recommend at the very least you get a professional to provide you with an expert valuation of your company, often called a Business Appraisal or Fairness Opinion.  The point of this is to garner an independent opinion of value; therefore, the appraiser is NOT your advocate.  The opinion of value must be totally independent to maintain credibility. Distributors often incorrectly assume that the business appraiser they hire is, like their attorney, a hired gun. If this were so, then their opinion and subsequent report would be void of objectivity and therefore its credibility would be eroded.  The ideal business appraiser is a person who can deliver a reasonably accurate, understandable and clearly independent appraisal to you in a cost-effective and timely manner. We’ll address follow-on valuation issues in subsequent articles.

So, when you decide to sell your business, obtain the help of specialists who will maximize your odds of success. You can't afford anything less.  If you’d like assistance in some things to consider when assembling your transaction team, we’ve put together a list of “Frequently Asked Questions about Transaction Teams.”  Just e-mail us and we’ll forward it to you. In the next installment of our series we’ll look at performing the corporate “scrub.”

Jane E. Baynard is an investment banker and Scott Benfield is a consultant for distribution. They have co-authored two books on wholesale distribution, including Pricing Management: Capturing Value for Distributors, and can be reached at their respective e-mail addresses: Jane E. Baynard at jb@baymengroup.com and Scott Benfield at bnfldgp@aol.com.

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