we all need to be flexible, plan for multiple business contingencies and reinvent our business practices to deliver more client value. Many of you are headlong into thinking strategically about your business opportunities over the next three to five years. However, a number of you are well beyond this point in life and you are not prepared to commit the time, energy, emotion and capital required to reinvent your business.

Consequently, a number of you are beginning to contemplate a merger or sale of your business. If so, who should you consider as potential candidates?

Firms that possess these characteristics: synergistic or complementary domain expertise; carrier relationships (preferably not duplicative); compatible technological capabilities; new sales channels or markets; compatible management style, business model, structure and corporate culture; shared vision for the future of the business.


Where to start

One place to start the process is with firms that you already know, whether they might be friendly competitors or businesses that may have some synergies with your own practice.

Do you market complementary product sets? Do you serve different markets? Does each team possess expertise in a different business discipline? And do your strengths and weaknesses complement each other? Having the same weaknesses could be a formula for disaster.

Perhaps the partnering firm has a desirable proprietary technology that would improve efficiencies or facilitate the opening of a new sales channel. Or it could be that both firms do not have much management bench strength, yet, the combined entity might be quite strong and multi-faceted with great domain expertise.

Are the business models, marketing strategies, compensation plans, producer contracts and corporate cultures compatible? Perhaps equally important is when they are not compatible, what will be done about it?

You need to also realistically consider what your business is worth as a starting point for any discussions with third parties.

Having an independent appraisal done is essential, particularly if you have not been previously involved in many business transactions.

The simplified graphic in the Elements of Market Value chart (right) will assist you in considering the elements that comprise asset value.

The starting point is Adjusted Net Cash Flow, including "put-backs" for personal preference items. Another element is your client retention and the value of your renewal business. High growth firms are awarded a "premium" in terms of their valuation. You should be thinking double-digit compounded growth if you expect to command a premium to market value in any merger discussions.

And finally there is the Enterprise Value that takes into consideration certain intangibles like your brand, goodwill, strategic competitive advantages, proprietary products or technologies, and other critical differentiators.

Recognize that there is the potential for a "valuation gap." What you think your business is worth needs to be realistic and defensible. And the same is true for any potential merger candidates and the expectations they bring as to the perceived value of their business.


Transaction process

Your transaction might be a merger rather than a sale, in which case, are both businesses valued equally prior to the intended transaction?

Each business will have its own strengths and weaknesses and business metrics that will affect valuation, but will the two entities come together as relative equals? Sometimes this is a hard concept for business owners to embrace, particularly after being a founding entrepreneur for a number of years.

Or, is one business absorbing the other? This would generally be the case in a sale. Set aside the financial terms for the moment, since the transaction could be all stock with no money exchanging hands.

Going forward, what will be the business model? Will the new entity be a partnership? A corporation? Some variation or hybrid structure? These are fairly fundamental issues that need to be decided sooner rather than later, since each principal will have certain expectations, and those may evolve as the discussions mature.

This may be a good time to consult with a business adviser who can provide you with good objective counsel.

High on everyone's list of questions in any potential transaction is: What is the price or value given to my business? But, the more important question is: What are the terms?

This latter viewpoint applies equally in a sale or a merger. In a merger, the businesses should be valued on a relative basis, for the most part, using a consistent approach. That is, a comparable formula or valuation methodology should be applied to both businesses. Undoubtedly as part of the overall valuation process certain pluses and minuses will be assigned to each business.

It is likely that some value will be ascribed to some intangibles. These include growth potential, management strength and expected longevity, and existing competitive advantages.

This is where the art of valuing a business is so critical. Ultimately, the adjusted value of each entity as a percentage of the value of the merged entity will determine the ownership percentages of each of the principals in the new larger enterprise. That's why this process is so important.


Making the deal

In addition, another consideration in discussing a sale or merger is the deal structure itself.

Will this be an all-stock transaction? Will any cash or other valuable consideration be part of the deal for one party or one entire management team? Will any financing be required? If so, will it be debt financing? Or will an equity partner be simultaneously pursued?

Clearly, if an additional equity partner is pursued, the transaction is more complicated. If debt financing is more likely, will it be arranged by one entity and become part of their contribution to the merged business? This will certainly have a bearing on the relative ownership percentages going forward.

The Typical Sale or Merger Steps chart (top right) breaks down the process of: preparing your business for a potential merger; sourcing potential merger candidates; negotiating the terms; and developing a post-transaction integration plan. Failure to address this latter point is the leading reason that mergers ultimately unravel.

The chart entitled Sale or Merger Campaign Timeline should frame your expectations about the time involved (p. 18). This provides a realistic approximation of the elapsed time involved in a typical transaction. Can it happen more quickly? Sure. But this requires a deliberate, measured approach and there are other third parties involved as well. Consequently, manage your expectations about how long it will likely take.

Consider how often you sell your home and how long that process typically takes from start to finish. Now put that in context given that your business is likely your largest asset.


Personnel management

And let's not forget the people side of this matter. Are there financial incentives for key managers to make the post-transaction entity successful? Will staff positions/head counts be eliminated? Severance implications? Be candid and real.

What will be the impact on client/customer retention? On employee retention? Particularly when considering all the personnel issues remember Murphy's Law - what can go wrong, will go wrong. Have a plan for dealing with the problems and then work the plan.

If everything works out, the business will thrive and all parties will derive financial, psychic and personal benefits. But what if, despite all the good intentions and well thought-out plans, the transaction is a failure? How do you unravel the deal?

At that point, everyone may be looking for the exit, but there are no marked doors to be found. So, giving some thought to how to deal with a clear lack of success is just as prudent. Trying to be logical when emotions are not involved can often save considerable heartache later on. So expect the best, and plan for the worst, and the likelihood is that reality will be somewhere in between.



Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at jkwicien@daymarkadvisors.com.



Typical Sale Or Merger Steps

1. Develop or refine your growth strategy

2. Explore short-term operational improvements

3. Set deal value and structure targets

4. Reach consensus on target search criteria

5. Compose "book" and powerpoint presentation

6. Search and conduct preliminary due diligence on sale or merger candidates

7. Determine combination synergies (deal premium potential)

8. Conference calls and introductory meetings

9. Negotiate terms

10. Review definitive agreements

11. Develop post-transaction integration plan

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