The middle of a deal is no place to be surprised. The last thing you want is to be in talks with a buyer for your business and then be asked for a bunch of information you didn’t know you would need.
John Varnathos, an attorney at Bridgewater-based Norris McLaughlin & Marcus who specializes in business law, has seen this happen to more than one company. A small, family-owned business is suddenly asked for detailed records it never kept in the right format and the process becomes immediately overwhelming. “They get floored,” Varnathos says. “They had no idea how much it would involved and they’re up until three in the morning.”
Varnathos, along with Alan Scharfstein, president of the DAK Group, a Bergen-based investment banking firm specializing in mergers and acquisitions for middle-market companies, will present “Maximizing Value from Your Biggest Asset” on Tuesday, November 29, from 7:30 to 9:30 a.m., at Norris McLaughlin & Marcus’ Bridgewater office. The workshop is free. Call 908-722-0700, ext. 4224, or visit www.nmmlaw.com .
Varnathos, the son of Greek immigrants, honed his head for business early. His father owned a diner that Varnathos says taught him what the entrepreneurial mind was like, and what it takes to manage a business. He went to Rutgers, where he earned his bachelor’s degree in 1979 and his J.D. in 1987.
For most of his career Varnathos has worked for Norris McLaughlin & Marcus. For the first 10 years he practiced general business law, covering anything and everything related to businesses. As his client list grew Varnathos started helping business owners go through the M&A process. Eventually he positioned himself as an M&A specialist. He still practices general business law, “but M&A takes up at least half my time,” he says.
Varnathos has seen several iterations of buyers and sellers markets in his 20-plus years in business law. Right now, he says, sales are starting to happen again, after a hiatus following the crash of 2008. “People are still skittish and money’s still tight, but there are deals happening,” he says. “People are looking to invest again.”
Deals, regardless of the market conditions, rely on a business’ EBITA numbers. EBITA is an acronym referring to a company’s earnings before the deduction of interest, tax, and amortization expenses (if you also factor in depreciation, then it becomes EBITDA). In a bad economy, EBITA numbers are not as high as they are during a good economy, which means that potential sales are more difficult to convert to actual sales. Varnathos’ job is, in part, to help client firms prepare, so that their EBITA numbers are as high as possible, and, thus, more likely to attract the right kind of attention.
Mergers and acquisitions make for complex transactions. And these transactions are, usually, the biggest ones business owners will ever experience. Varnathos advises companies to do their homework before embarking on a path toward a sale. Improper preparation can cost a company millions of dollars when it comes time to sign the deal, or it might cost the company the deal itself, along with its standing in its industry.
#b#Know your market#/b#. Before embarking on a plan to sell your business, you need to understand the industry and market conditions your business occupies, Varnathos says. A good first question is, are there consolidations and sales happening in your field?
You also need to know who the players are in your field. Who is most likely to buy? Who is most likely to sell — and why? This all will get you to the point at which you ask yourself, “Is my company where it needs to be?” Varnathos says.
Varnathos recommends asking that question well before you embark in earnest on your M&A plans. Approach it as if today you were to announce that you want to sell. Do you know all you need to know — credit rating, debt, profitability? And do you know how your EBITA adds up? You should. It could mean the difference between a $2 million sale and a $10 million sale.
#b#Know the players — yours and theirs#/b#. In addition to knowing your records, you need to know who is going to be involved in any M&A deal. Knowing your competitors is a good start, Varnathos says. But so is knowing the vendors, the venture capitalists, and anyone else within your industry. Any mix of these is your potential buyer, and you need to identify who the best options are.
A lot of the reason, Varnathos says, has to do with the sensitivity of your information. After all, you’re about to open your records to buyers, and they are going to want to know everything about your cash flow, profitability, market share, HR policies, debts, and accounts. You definitely do not want to open up those records prematurely, because once word hits the streets that you’re looking to sell, anything can happen.
Timing your disclosures is a specialty in itself, which is why so many businesses looking to sell hire investment bankers, Varnathos says. Investment bankers understand the subtleties of M&A deals in general, and they research an industry to find the pool of potential buyers within it. They often will compile a “no-name document,” which outlines what your business does and where it stands without identifying the business. Then they send these documents out to a series of potential buyers — maybe 10, maybe 300 — and identify from the responses who are the best candidates.
There is little disclosure at this point, Varnathos says. But as the pool of potential buyers whittles down to a half-dozen or so, more specifics are told to those who already have signed confidentiality agreements. Investment bankers are expensive, Varnathos says, but the trade-off is usually higher sales prices and smoother transactions.
On your own side of the deal, you need to know who will represent your company internally. Who is the management team that will handle all the paperwork, all the legwork, and all the liaison work? “There is a significant due diligence process involved,” Varnathos says. “I’ve done deals where people were very confident in their company, and they got floored. None of this is rocket science, but it is like a chess game.”
#b#Avoid distractions#/b#. Being asked for something you didn’t anticipate — say, your HR records — throws a lot of business owners. So does finding out that your definition of debt differs from the buyer’s.
Varnathos once did a deal with a flavor and fragrance company that lost $500,000 off the final price because some of its inventory was more than one year old. The inventory was usable and saleable, Varnathos says, but according to federal generally accepted accounting procedures, this inventory was not allowed to be factored in as an asset.
These kinds of things tear sellers away from what they need to focus on most — the deal itself. Had the flavor and fragrance company known that part of its inventory would be disqualified as an asset, it could have prepared for it, rather than having to readjust during negotiations. And for every adjustment, that is time taken out from negotiations. Business owners get stressed, frustrated, and more likely to start missing other issues that could easily have been avoided.
The advantage almost always goes to the buyer. “The danger I see is that the buyer typically knows what he’s doing,” Varnathos says. “Because they’ve likely done this before.”
And just as you’re in place to close the deal, information gets leaked. Word is on the street that you’re selling and it’s open season for competitors speculating why.
And what makes it worse, Varnathos says, is that this often occurs after companies already have released confidential information to potential buyers who now, based on that talk on the street, might be in a better position to negotiate to their own advantage. And the best way to avoid that, Varnathos says, is simply to be prepared.