You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject.
The actual sale process typically takes 9−12 months or more for a full sell-side process, or it can take at least 3−6 months if a serious unsolicited buyer comes to your door. In either case, proper preparation helps to improve valuation and terms and ensure a smoother process.
The first thing to understand is whether you are ready to sell. Answer the following questions before you start the process:
- What are your goals, post-sale: stay with the company or start another one?
- Are you prepared to go through the process?
- Can you live on the proceeds of the sale?
- Are there alternatives to a sale, such as an ESOP, bringing on someone to run the shop for you, or merging with a compatible business?
It is never too early to prepare for a sale; ideally, you would begin to prepare before you even start your company. Some of the most important items are properly prepared financials, good corporate record-keeping, periodic legal review, environmental review, and a general policy of continual improvement in operations, sales/marketing, management, training, and technology.
Even with the best intentions, companies can develop certain risks that concern buyers. The key risks are customer concentration, key-person risk, seasonality, lumpy or inconsistent revenue, slow or inaccurate financial reporting, lack of sales and marketing efforts, employee problems, environmental issues, lack of investment, etc. Some of these issues can be worked on in the short term, and others are more difficult. In general, the fewer of these issues the better; eliminating as many of them as possible will increase valuation, help get better terms (more cash vs. seller notes or earn-outs), get lower and shorter escrow terms, and ensure a smoother sell process.
To prepare your company for a sale, it is important to assemble the Deal Team. The Deal Team consists of a deal attorney, an experienced CPA, a wealth advisor, and an investment banker. The team must be experienced in M&A issues, and should have enough depth in their firm to handle a wide range of issues. Ideally, they would all have experience in the PCB/assembly sector, or at least in manufacturing. The team can help you judge what to improve before going to market, as well as prepare the owner mentally and financially.
One of the key aspects of preparing for a sale is to understand the valuation of the business. A CPA/valuation firm can give you one set of figures, and an investment banker can give you a range of values and terms, as well as some ideas on the marketability of your company. Most owners have valuation expectations that are equal to or higher than the actual market value of the business, so it is important to make sure you are on the same page as your advisors. Plus, make sure other stakeholders are on board with the range of valuation and terms. The wealth advisor will help you understand your financial needs in retirement, as well as make sure your other goals are met, such as giving to children, charitable gifts, etc.
Once the company is prepared, the owner can either reach out to buyers who have called over the years, or an investment banker/business broker can be utilized to sell the company. An investment banker will help assess the value of the company, prepare the marketing materials, help prepare the company for due diligence, develop the buyer list, contact buyers, sign NDAs, send out the confidential memo, answer questions, arrange calls/meetings, negotiate offers, assist with due diligence, and in general guide the process through to closing.
All of the above are important, but one of the key reasons to hire an investment banker is to stoke competition among buyers. A banker has done this many times, and the owner probably has not sold a company before. The banker knows how to work with buyers to obtain the best deal (and not kill the deal if issues come up). Competition not only helps increase the value for the company, but also helps improve terms and sets the table for a quick due diligence period.
Throughout the process, the owner must keep an even keel, and not get too caught up emotionally in the ups and downs that arise. The advisors will filter out much of the noise (for example, the investment banker may hear 100 “no thanks,” but it only takes hearing “yes” a few times to find the right buyer). The owner should not take any negative comments from buyers personally: It’s just business. Be honest, report issues quickly, and keep the process moving. Above all, don’t take your eyes off the business, as the most common reason why deals fail is the seller’s sales and/or profits start to fall.
Here is a sample sell-side time line:
1) Preparation phase: time depends on condition of business
2) Marketing materials preparation: 1-2 months
3) Launch/contact phase: two months
4) Non-binding indications of interest, visits with top buyers, negotiate letter of intent: 1–2 months
5) Due diligence, purchase agreement, close: 2–3 months
Each project is different, and the typical timeline from signing an investment banker to close is 9−12 months.
You may have noticed that I wrote more about preparation than the process. As Abe Lincoln said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” A prepared and educated seller is the buyer’s (and the investment banker’s) best friend, and can certainly help valuation, terms, and the smoothness of the sell-side process.
Tom Kastner is the president of GP Ventures, a tech-focused M&A advisory firm.