August 2023 - Linden Law Partners

Pat Linden Featured Guest on M&A Talk Podcast

Posted on August 25, 2023October 23, 2024 by lindenlawpart1

Pat Linden was a featured guest in August 2023 on the M&A Talk Podcast, the #1 ranked podcast on mergers and acquisitions. M&A Talk focuses on interviews with M&A experts in private equity, business valuations, law, finance, and other related aspects of mergers and acquisitions. Its guests include CEOs, investment bankers, M&A attorneys, private equity partners, business appraisers, VC investors, authors, and more.

The in-depth conversation with Pat on the show focused on the importance of being prepared before even starting the M&A sales process. He shared tips on maximizing the final price, negotiating from a strong position, maintaining a poker face, recognizing sunk costs, dealing with emotional stress, and getting things right in order for selling business owners to maximize their sale price.

Listen to the full episode on Morgan & Westfield ‘M&A Talk’ Podcast, or at:

Spotify
Apple Podcast

Pat Linden in 2024 Best Lawyers In America®

Posted on August 17, 2023October 23, 2024 by lindenlawpart1

Pat Linden was recently included in the 2024 edition of The Best Lawyers in America® for Corporate Law. Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers recognitions are compiled based on an exhaustive Purely Peer Review® evaluation.

For the 2024 edition of The Best Lawyers in America®, more than 12.2 million votes were analyzed, which resulted in more than 71,000 leading lawyers honored in the new edition.

To learn more about Pat’s practice and background. In addition to the Best Lawyers® designation, Pat was recognized as Colorado’s best M&A attorney in 2018 and 2020 by Law Week Colorado in its annual Barrister’s Best publication and was named Colorado’s best private equity attorney in its 2019 and 2021 editions. He was also one of approximately ten Colorado attorneys to be recognized by Super Lawyers® for mergers and acquisitions in each of 2020, 2021, 2022, and 2023.

2023: Maximize Company Sale Value

Posted on August 15, 2023October 23, 2024 by lindenlawpart1

How to Sell Your Company in 2023 for Maximum Price

Selling your business can be a life-changing event, but maximizing the sale price can be a daunting task. With proper planning, preparation, and guidance, you can make the most of this opportunity and achieve a successful exit. In this blog post, we will walk you through the steps to sell for the highest price possible, from preparing your business for sale to closing the deal and transitioning ownership smoothly.

Short Summary

Prepare your business for sale by assessing its financial health and business processes, streamlining operations, and reducing owner reliance as part of your initiative to attract buyers.
Value the company through professional appraisers or valuation multiples based on annual profit or EBITDA.
Work with a qualified broker or investment banker to identify and qualify possible buyers, negotiate the sale price, assist with the selling process, and close the deal successfully for maximum value.

Preparing Your Business for Sale

Before diving into the process of trying to sell your business, it is crucial to prepare the business for sale in advance as part of your exit strategy. Many small business owners overlook the importance of assessing their company’s financials and business tax returns, streamlining operations, and reducing owner reliance, which can make a significant difference in attracting buyers when it’s time to sell your business. Partnering with a small business M&A advisor can provide valuable guidance and resources to ensure your business is in the best possible position for an optimal sale outcome. You want to present your business in the best possible light to fetch the highest price when the right buyer comes along. Taking the time to prepare your business for sale will help ensure that you maintain a strong negotiating position through the entire process and get the best return on investment. Doing so will also help you get to the finish line as often time weaker deals fall through.

Assessing Your Company’s Financials

An essential aspect of preparing your business for sale is ensuring your financial records are transparent, well-organized, and demonstrate profitability. Buyers will scrutinize your financial statements, intangible assets, tax returns, and outstanding debt to evaluate your annual cash flow, so it’s critical to have these documents in order. Consider working with your accountant or a qualified valuation professional to analyze your financials and tax returns, and identify areas for improvement. Remember, a financially healthy business is more likely to attract interested buyers and command a higher sale price. This is particularly the case if a buyer will be relying on a loan backed by the U.S. Small Business Administration.

Streamlining Operations and Reducing Owner Reliance

Next, optimize your business operations and minimize your dependence on the owner as part of your exit strategy. Possible buyers may perceive a company heavily reliant on the owners as acquiring a job instead of a scalable business. To make your business more appealing, establish manuals and standard operating procedures (SOPs), and automate processes where feasible. Diversify your customer base if a single customer accounts for more than 20% of revenue, and invest in technology and employee training to add long-term value to your business. Also endeavor to lock in your management team for the years to come, including after you transfer ownership.

Valuing Your Business

Once your business is ready for sale, the next step is determining its value. Understanding different methods of business valuation and the factors affecting your company’s value is crucial to setting a fair market value. Enlisting the help of a broker, investment banker, or valuation expert can lend credibility to your asking price and ensure you’re not undervaluing or overvaluing the business.

Methods of Business Valuation and Factors Affecting Value

There are several methods to value small businesses, such as using a professional appraiser or calculating valuation multiples based on annual profit or EBITDA. Small businesses typically sell for 2-4x their annual profit (EBITDA), while larger companies may command higher multiples, ranging from 5-10x (EBITDA). Engaging a certified valuation specialist or a professional appraiser can provide a comprehensive professional valuation of your business’s worth and lend credibility to your listing price.

Several factors can influence your company’s value, including market demand, industry desirability, recurring revenue, and differentiation. For most deals, a stable customer base and recurring revenue opportunities suggest sustained sales, which is a fundamental factor in determining business value. Analyzing these factors and understanding how your business compares to others in the market can help you set a realistic asking price that attracts buyers and maximizes your returns.

Working with a Business Broker or Investment Banker

A broker or investment banker can be an invaluable partner in the sale of your company. They can assist in developing your business into one suitable for sale, formulating the narrative of your business, advertising to and locating prospective buyers, evaluating multiple buyers, controlling the deal flow, aiding buyers in obtaining funding, guiding you through the due diligence process, and helping to maximize your earnings.

In this section, we’ll discuss how to select the right broker or investment banker and understand their role in helping get your business ready and assisting you throughout the sales process.

Selecting the Right Business Broker or Investment Banker

Choosing the right broker or investment banker is crucial to a successful sale. Consider qualities such as persistence, motivation, proficiency, competence, a strong moral compass, a good reputation, networking skills, negotiation skills, industry knowledge, analytical mindset, organizational skills, communication skills, and a proactive approach. Optimally they should also be familiar with other businesses similar to yours that have recently sold.

Ensure the broker or banker has experience in the same industry as your business and a validated history of successful sales, as this demonstrates their capability to effectively manage the process of selling a business and getting the best price.

The Role of the Business Broker or Investment Banker

A business broker or investment banker serves as a mediator between the seller and the buyer, taking on many laborious tasks throughout the sales process. They can help craft the narrative of your business, advertise it to possible buyers to create a competitive environment and manage the negotiation process. Moreover, a business broker or investment banker can assist with assessing buyers’ financial capabilities, business experience, and readiness to purchase, preventing unsuccessful transactions and ensuring a smooth sale.

Identifying and Qualifying Potential Buyers

Finding the right potential buyer for your business is essential to a successful sale. In this section, we will explore how to reach out to each potential buyer and evaluate their suitability. Ensuring they have the financial capabilities, business experience, and readiness to purchase your company is key. Researching each potential buyer is the first step when selling businesses. You can use online resources to find information.

Reaching Out to Prospective Buyers and Evaluating Suitability

To identify buyers for your company, leverage your business broker’s or investment banker’s network, digital outlets, and professional acquaintances. Keep in mind that evaluating potential buyers based on their financial resources, industry experience, and strategic fit is crucial to ensuring a successful transaction. By casting a wide net and utilizing various channels, you increase the chances of attracting the right buyer for your business.

Once you have identified potential buyers, it’s essential to assess their suitability. Evaluate their financial capabilities by examining their financial statements, credit history, and other relevant financial documents. Consider their business experience, including their previous record of successful business acquisitions, familiarity with the industry, and ability to manage the transition period. Finally, ascertain their preparedness to purchase by evaluating their timeline, ability to obtain financing, and eagerness to negotiate.

Negotiating the Sale

Negotiating the sale is a critical step in maximizing the sale price of your company. In this section, we will delve into the negotiation process and the various deal structures that can affect the final sale price. Understanding these aspects will help you make informed decisions during the negotiation process and secure the best possible deal for your business.

It is important to understand the different types of deal structures that can be used in a sale.

Understanding Deal Structures and Navigating the Negotiation Process

Different deal structures can impact the sale price and terms of your business sale. Familiarize yourself with asset vs. equity purchases and earnouts to determine the best option for your business assets in tandem with your retirement planning.

An asset purchase involves the buyer acquiring all or specific assets of the business, while an equity purchase entails acquiring the entire business’s equity (assets minus liabilities). Earnouts are arrangements where the seller stays with the business for a specified period, potentially receiving additional compensation based on the company’s financial performance.

Effectively negotiating with potential buyers is crucial to securing a favorable deal for your business. Understand the motivations of the other party, establish realistic expectations, and be prepared to compromise. Employ tactics such as patience, active listening, and persuasive language during negotiations.

Remember, a successful negotiation should result in a deal that benefits both parties and ensures a smooth transition of ownership.

Closing the Deal and Transitioning Ownership

After reaching an agreement with the buyer, it’s time to close the deal and transition ownership. In this final section, we’ll discuss how to ensure a smooth transition.

First, you need to finalize legal agreements. This includes signing contracts, transferring titles, and other transaction agreements. Strong legal contracts are important and will make a difference in helping your transaction get to the finish, as often times poorly documented deals fall through.

Finalizing Legal Agreements and Managing the Transition Period

Work with a business M&A lawyer to prepare and finalize necessary legal documents, such as a non disclosure agreement, purchase agreement, employee agreements, non-compete agreements, and intellectual property transfers. These documents are crucial to protect your interests and ensure all parties understand their obligations during the transition process. While it may seem counterintuitive at first glance, a good M&A attorney will also help you save money by identifying areas of the contract that may not adequately protect your financial interests. Your M&A attorney will also help you maintain confidentiality.

A well-drafted and negotiated purchase agreement can prevent misunderstandings and potential disputes down the line. Getting to the final terms of an M&A acquisition agreement can be an arduous process, so be sure to engage an experienced M&A lawyer who is familiar with what to look for and understands how to negotiate the purchase agreement.

The successful handover of your business is the culmination of the sales process. Plan for a smooth transition by providing sufficient transition time and offering ongoing support to the new owner. Ensure the new owner assimilates into the company culture, as this is essential for a successful transition.

By effectively managing the transition period, you can ensure a positive outcome for both you and the buyer, setting the stage for your business’s continued success under new ownership. This will be important for most buyers when selling a business.

Conclusion

Selling your business for the maximum price requires thorough preparation, accurate valuation, effective negotiation, and a smooth transition of ownership. By following the steps outlined in this blog post, you will be better equipped to navigate the complex process of selling your business and achieve a successful exit. Remember, the key to a successful outcome lies in understanding the process, partnering with the right professionals, and being prepared for every stage of the journey that comes with selling small businesses in the vast majority of cases.

Frequently Asked Questions

Is it a good idea to sell your business?

For owners who have experienced persistent burnout, selling the business can provide a valuable opportunity to pursue more fulfilling activities.

Therefore, it is generally a good idea to sell your business before burnout sets in.

Is it easy to sell a company?

Selling a company is a complex and lengthy process that requires preparation, documentation, and action from both the buyer and seller. Consequently, it is not an easy task.

How can I sell my small business quickly?

Follow the 7 steps outlined in the process to sell a small business quickly: button up your business financials, create a confidential information memo, confidentially market your small business, screen and email interested buyers the CIM, negotiate an offer, manage due diligence, and handle the closing.

Creating a confidential information memo (CIM) is the first step. This document should include all the necessary information about the small business, such as financials, operations, and any other relevant information.

The second step is to confidentially market your business. This can be done through a variety of methods, such as advertising the business online, or through the business broker or investment banker you engage.

What factors should I consider when preparing my business for sale?

Consider your company’s financial health, streamline operations, and reduce owner reliance to maximize the attractiveness of your business to potential buyers. The more iron clad these items are, the more likely you will reach the right business deal.

The M&A Deal: A Marathon, Not A Sprint

Posted on August 8, 2023December 12, 2024 by lindenlawpart1

Introduction

Selling your company might appear on the surface to be a swift sprint toward success. However, an M&A deal is more like a marathon or a hard-fought boxing match.

To successfully complete M&A deals, selling business owners must thoroughly understand the complexity involved. This includes understanding operations, sales, cash flow, revenue recognition, balance sheets, income statements, accounting policies, and the roles of financial and legal advisors. Prepare for the M&A endurance race.

The Misconception: A Quick Sprint to the Finish Line

Starting a new venture can be thrilling, and the same goes for selling a business when you’re the target company. Just as marathoners feel excitement at the starting line, the prospect of an M&A deal can get pulses racing. Don’t be fooled. The journey is complicated and requires a close look at, for example, sales, revenue and other financial records, a business plan, and details like adjusted EBITDA, working capital, cash flow, net income and your associated income statement, analysis of expenses, taxes, earnings quality, and a quality of earnings report. Buyers will also focus on a seller’s command of their sales and business operations.

The Reality: Why It’s Harder Than You Think

1. M&A Due Diligence:

This phase is critical for a potential buyer and the seller, including for example, sales, operations and financial due diligence, analyzing due diligence reports, and responding to extensive M&A checklists and informational requests to help assure the business is a viable long-term investment for the buyer.

2. Uncharted Territory:

Many sellers are beginners in the M&A field, confronted with the task of managing accounting models, intellectual property, a virtual data room, and much more that will test the limits of the target company’s ability. It is also important that sellers not lose focus on their sales and other business operations during the deal process as dips in performance or profits before closing can negatively impact the ultimate purchase price.

3. The Complexity of the Deal:

Even straightforward M&A business sales can present red flags or unexpected challenges. Tactical changes may become necessary throughout the deal in order to aching the primary purpose – an optimal deal outcome which maximizes the seller’s profits and other deal objectives.

4. Timing: Longer Than Expected

Complexity equals time. M&A deals require meticulous attention, drawing out the timeline.

5. Skillset Mismatch:

Success in business doesn’t directly translate into M&A expertise. It’s a whole new ballgame.

6. Sophisticated Buyers:

Seasoned buyers and their investors normally have the advantage. Their experience can outmatch novice M&A sellers, emphasizing the need for expert financial, accounting, and legal advisors to help selling business owners navigate each phase of the transaction.

Quality of Earnings: The Heartbeat of the Deal

What it Means:

Quality of earnings (Q of E) refers to the sustainability and authenticity of revenue, net income and cash flows, i.e., the earnings quality. In most M&A deals, the buyer’s outside team of accountants will prepare a quality of earnings report as a financial reporting tool to be used as part of the buyer’s and its investors financial analysis of the target company’s earnings to provide the buyer with a complete picture as it evaluates symmetry with its typical investment decisions. A seller’s financial performance over the trailing twelve month period is a particularly important income measurement. Potential buyers will also be wary of too many related party transactions and add back expenses.

The Q of E Process:

Having a clean quality of earnings report builds trust with potential buyers. The process of doing the work to prepare the quality of earnings report is similar to an audit of your financial statements conducted by the buyer. Among other things, for example, the earnings report will evaluate the seller’s revenue and expenses, income statement (and/or profit and loss statement) and associated net income, working capital, free cash flow, balance sheet, fixed assets, accounts receivable, accounts payable, other current assets and current liabilities, and the detail supporting this financial information. A seller’s financials will normally be adjusted to examine what they would look like under generally accepted accounting principles (GAAP). The buyer will be interested in whether the accounting shows declining net income or whether there has been any earnings manipulation. Sellers are often required to provide detailed reports to assist the buyer’s advisors with their examination of the target company’s expenses, taxes, financial statements, financial accounting practices, and previously reported earnings. Sellers may also be asked to model financial projections for future periods or including sensitivity analyses to take into account other variable factors.

Impact on Valuation:

Consistent revenue and strong net income and associated quality of earnings report enhances the valuation (and any prior earnings presented) of your company as it means your company will likely have sustainable earnings quality for a specific period after the closing.

The Risk of Deal Fatigue:

1. The Long Game:

The lengthy process can lead to deal fatigue. The momentum wanes, mistakes occur, and the final M&A transaction outcome may not be as good.

2. Psychological Readiness:

A seller must mentally prepare for the long haul and steel themselves for what will seem like a need to respond to endless tedious and exhausting discussions, deal negotiations, and exchange of documentation.

3. Building the Right Team:

Assemble a skilled team of M&A advisors, including financial and legal advisors who are M&A specialists, to help you successfully manage the deal and assist you in your analysis.

Avoiding Common Pitfalls: Lessons from the Trenches

1. Over-optimistic Expectations:

Realism is key in the business plan presented to prospective buyers for analysis of a potential transaction.

2. Lack of Preparation:

The due diligence process requires meticulous preparation, including assessing and reworking financial statements.

3. Poor Communication with the Team:

M&A communications are very important, and therefore consistent discussions and coordination with your deal advisors are crucial throughout the deal cycle.

The Importance of Resilience: The Marathoner’s Mindset

1. Expect Deal Setbacks:

An M&A deal always presents unexpected challenges. Resilience is your ally for the long term in M&A transactions.

2. Learn from Mistakes:

Every phase of the M&A cycle provides insights, and there will likely be deal mistakes. A few mistakes can be overcome, as long as you are a quick study, learn from them, and change deal tactics as needed.

3. Embrace the Journey:

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Final Thoughts: The Finish Line is Worth the Effort

Selling your business to the right buyer isn’t a sprint or leisurely jog. It’s a demanding marathon requiring planning, persistence, and determination. Embrace the marathon and make the most of this vital chapter in your entrepreneurial journey.

Understanding M&A deals, and the dynamics between sellers and buyers, is valuable when you plan for the long term. With the right mindset, preparation, and team of M&A advisors, you can not only reach but exceed well beyond the distant finish line.

Considering Selling Your Company?

At Linden Law Partners, we specialize in orchestrating all aspects of M&A transactions. Our experience, unique insights, and personalized attention make us an ideal partner in this exciting but challenging adventure. Contact us today to discuss how we can help.