Experts tell how business owners can pull off a deal of their own

Patricia May walks with a bit of a swagger these days. That’s because her company in Lakeville, Tembua, which provides language translation services for businesses, acquired an Oregon-based firm earlier this year. All at once, she says, vendors, suppliers, customers and colleagues view Tembua as a company that’s arrived.

“We’ve been saying things like, ‘When we completed our FIRST acquisition….’” May says with a laugh, poking fun at the image of a small-business owner as a major wheeler-dealer in mergers and acquisitions. But the respect is real.

“To be serious about it, you have to go over a certain threshold before large companies consider you even worthy of notice,” May says. “We’ve passed the threshold, but this is something else. When you acquire another company it gives you an ability in the eyes of other companies.”

One of the things she’s heard is, “Wow, you guys have really grown.” And another is, “Holy cow, to do that during the recession? Good management on your part!” Yet the self-effacing May isn’t letting it go to her head, because she knows the truth of what was required to pull off an acquisition over months and months of work. “It’s just eating beans for a year,” she thinks to herself when she hears such comments. “Yes, no problem.”

May is an example of a major trend that lies beneath the surface of the mega-deals that dominate the headlines. Sure, a deep-pocketed German family buys Caribou Coffee to major fanfare late last year. Of course, the founder of The Geek Squad, who sold his company to Best Buy several years back, moves on to greener pastures, armed with a fat payout.

But below the radar are deals like May’s: small-business owners buying other companies that add to their offerings, such as Tembua’s acquisition of the Oregon firm adds to its ability to serve the growing need of med-tech and biotech firms for language translation. And on the other side of the coin, small-business owners selling their companies after a lifetime of toil, finally realizing the fruits of all that labor.

With an unprecedented amount of money sitting on the sidelines, waiting for suitable deals to buy, and a “silver tsunami” of baby boomers wanting to retire at long last and move on to what’s next, we talked to six m&a experts to learn the art of the deal, including attorneys, accountants and investment bankers.

As for May, she has one piece of advice: hire an attorney and other advisers with deep experience in m&a; this is not the time to scrimp. In her case, she relied on Gaylen Knack of Gray Plant Mooty in Minneapolis, and found his counsel to give her an advantage over the seller, who used “boilerplate” contracts rather than tailor-made documents. “You pay for it, and you pay a lot for it,” she says, “but I don’t want something around the corner and don’t know what it is.”

Plus, she believes her attorney’s advice led her to a good deal: an acquisition at only 2.5 times revenue, which is considered low, and financing by the seller, who granted a 10-year loan. “I asked and she said OK,” May says. “Which is what the attorney said—just ask.” For more advice on doing your own deal, read on.

Keep your objectives top of mind, Fredrikson & Byron attorney says

JAMIE SNELSON, ABOUT M&A ACTIVITY: It’s been a volatile time for the past few years, and the past few months have been a microcosm of that. We had a big wave of m&a activity toward the end of last year, much of which was related to tax changes. Through 2007, it was one deal after another. Mid-2008 things fell off the table. And since then it’s been choppy, up and down.

ABOUT THE PLAYERS: We’ve seen activity from both of those sources—financial buyers and strategic buyers are quite interested in doing deals. It’s been well documented both those groups have a significant amount of cash at their disposal and are looking for ways to deploy it. And on both sides there is disposition activity as well. That’s the private equity model, to buy, grow and sell, so as to dispose of their assets they’ve grown to be more valuable.

ABOUT BEST ADVICE: Up front, it’s important and it will benefit you to identify what you’re trying to accomplish with the deal. There’s a lot of twists and turns in the process, and you can let the objectives fade into the background. Part of that is having a good grasp on your alternatives. If a party goes into a deal without alternatives they’re probably not going to get a great deal. To sum it up, it boils down to planning.

If house is in order, company’s sale will go smoothly, CPA says

KEVIN MOQUIST, ABOUT M&A ACTIVITY: I personally have had three clients that were looking to sell the last year or so, and two went through and one didn’t. And I’ve had one looking to buy that didn’t go through yet. The Minnesota market is at a four-year high in 2012; it was a 40 percent increase from 2011. It seems like the market is active. It seems like there’s a high emphasis on acquisitions, partnerships, joint ventures.

ABOUT ADVICE TO OWNERS: They’re all kind of different, but the key thing is preparing the company for that process. It takes a lot of time, so having a strong management team that keeps the company running effectively while they’re going through that process is a must. The CEO/CFO have to put a lot of time in. The legal and governance documents must be in place.

Also, having an experienced team of advisers. You usually have the attorney, brokers, and others that understand the roles in the clients’ best interest. And then I think developing a tax and legal strategy, a selling strategy on how the sale will occur, whether it’s a private negotiated sale, or an auction process, or a targeted solicitation.

ABOUT NEGOTIATING: People are attached to the business and they might have unrealistic expectations of the sale price. It needs to be objective and fair on both sides to get it done. What it’s worth, the valuation, is pretty important. There are a lot of internal factors that affect the valuation: the management team, competitive position, customer base.

ABOUT HURDLES TO A DEAL: Often times a company not being adequately prepared in terms of having their own internal house in order, that can pose a road block to closing. Deals that close, you kind of have to have everything in order, so that’s a prerequisite. Sometimes in the last couple of years there’s been more difficulty getting financing. There’s a lot of cash available now, but deals are scrutinized more and more.

Selling business not life or death, but it’s ‘serious stuff,’ Lindquist attorney says

TIM MURPHY, ABOUT BEST ADVICE:  If there’s only one thing that they can do, I would say that you want to try to draw out a plan that is two to four years out from your ideal exit event. That gives you time to get your house in order to the extent it needs to get in order.

It gives you time to study the value of your business. You may have an idea in mind of what you think your business is worth, but you need to be objective. Value is based on quantifiable criteria, not your personal estimation. It takes people time to understand that, to study that.

And then a close second to being planful, put together an experienced team of advisers. You wouldn’t go to your general surgeon for a bypass surgery. This is not as serious as life and death, but it’s pretty serious stuff. You want a lawyer who’s done m&a work, and an accountant that understands the tax situations. There are so many ways you can trip up, that it makes good sense to have people who know what they’re doing.

Also your readers ought to understand, selling your business is a hard thing. It takes a lot of time to educate the prospective buyer about your business, and to answer their endless questions, but at the end of the day it’s worth it. Treat them like a guest, have a good attitude about the process.

Fill Company ‘holes’ before going to market, WCF Advisors says

JEFF MILKIE, ABOUT PREPARATION: I’m a big believer that most companies underestimate the benefit of being thoughtful in going to market. A lot of times what we see is, Hey, now I’m ready to sell, mentally or personally, so let’s go to market tomorrow. Or as quickly as possible. I think most companies in the middle market, in our size range, tend to have components to them that are very, very attractive to private equity buyers for example, but there are some holes in their story. And that’s very common—if you didn’t have those holes you’d be a Fortune 500 company. So how do we prepare you to become as attractive as possible, and that can take a couple of months or nine months. That’s critical. It could be the difference between getting a higher value, or even getting a deal at all.

ABOUT COMPETITION: No matter what kind of company you are, whether you’re likely to be sold to a strategic buyer or a private equity buyer, I’m a believer you have to have private equity buyers in the mix because they create competitive tension. There are a lot more private equity buyers than strategic buyers. We extract value from buyers by running a diligent process and creating competitive tension.

ABOUT ATTRACTIONS: So there are certain things all private equity buyers look for: Having a strong management team and management depth. So maybe I’m the CEO—who could step in behind me? So good bench depth is important. Getting any kinds of key contracts in place, suppliers or customer contracts, if they’re about to expire it’s not a good time to go to market, so let’s make sure those things are shored up. Basic things like making sure your internal reporting is tightened up. The question all buyers are going to have is how you manage your business, what are your processes that you can point to.

ABOUT DEAL BREAKERS: Customer concentration is one of the biggest things we see. Anything over 35 percent or 40 percent, that’s a deal-breaker for a lot of private equity firms. If you can’t do that, having some sort of contract in place, if you can that’s fantastic. If not we have to be able to build a very credible story around why that isn’t a risk to a new buyer.

‘Is this a good deal for you?’ is key question for Lommen attorney

TOM DOUGHERTY, ABOUT M&A ACTIVITY: I’m seeing it on two levels. The first level is the lower level where clients that have been employees of another company that maybe took retirement packages, still in their 50s, want to do something and stay active, are out looking for businesses. I see them acquiring businesses that are complementary to the skills that they developed with larger companies, and looking at companies where they can come in and grow the company and grow the sales and to stay active and earn a living.

ABOUT BEST ADVICE: My focus is to encourage them, before they buy, to go in and look under the hood and understand the company. With some of these smaller companies, they don’t always have audited financial statements, so there’s always risk that there are liabilities on the balance sheet. One client of mine went in for 30 days, and worked there and understood everything about the company, and I’m convinced when it was over just because of his discipline he knew more about the company than the sellers did.

ABOUT THE SECOND LEVEL: Now the other thing I’m seeing is, companies that are more mature that have a steady cash flow, a lot of private equity firms are out looking for that; obviously it’s nothing new but it’s heating up now again. Some of these private equity firms are looking to acquire a business in this region and a business in another region where the sum of the parts is greater than the whole.

ABOUT THE PSYCHOLOGY: In most of these transactions the seller has also retained a company to help them market their company to these private equity firms, but I do ask the question, OK, how much are you getting for the company? If you continued to own the company, how long would it take to earn what you’re being paid? That’s just another way of saying, is this a good deal for you? Then once you get the money, how are you going to invest it? A lot of these owners have their entire net worth tied up in the company, and now they have to turn their money over. If they’re buying stock—it’s a whole different mindset.

Fix problems first, even little ones, Cummings CPA says

PETER MADDALENA, ABOUT M&A ACTIVITY: I have a client who’s selling his business today. People have been waiting. Older business owners got into the recession, so people have been holding off, waiting to sell, maybe they can’t try to retire yet. But they’re getting to that age where they can’t wait any more. You can only wait so long to make those life decisions.

ABOUT CONSISTENCY: One of the important things we do is make sure we do the same work we do for them every month. We don’t want anything to change. We do their monthly financial statement and annual review for them, and you want to keep that consistent because the buyer wants to see that stability, so the buyer has confidence. The buyer could change his mind right up to today.

ABOUT FEES: The seller never realizes how much work is going on behind the scenes, and I try and set that stage. When I first talked with this fellow about selling his business, he had sketched up some numbers and said legal fees $5,000, and accounting fees $5,000. We had to let them know, legal fees are closer to $50,000, but it’s well worth it. It’s nothing you just want to handshake. In this transaction the price is $2 million, and the total transactions costs will be 10 percent. I think the broker gets 7 or 8 percent, and then the attorney is going to be $30,000 to $50,000, and then CPA accounting will be another $10,000 to $20,000. So it will amount to 10 to 12 percent, and he’s getting a better price than if he’d done it himself. He’s going to come out ahead.

ABOUT FIXING PROBLEMS: You don’t want any outstanding issues. Even if you think it’s something small, just bring it up with the professional, deal with it in an open way. It’s that little surprise that puts a little bit of doubt in the buyer’s mind. That can scuttle a good deal.