Selling your California business to a Private Equity Group

In mid-March 2020, I had the great pleasure of assisting the owner of a California manufacturing business in successfully selling his business.

The business was located in Silicon Valley. Three days before the sale closing, the six Bay Area counties were closed due to the COVID-19 pandemic. We therefore thought the buyers might change their minds. They might not close the sale.

This business is exceptionally successful in its niche. It has consistently enjoyed an annual EBITDA of over $1 million. As a result, there has been huge buyer interest not only from within the USA but also from potential buyers in Europe, the Middle East, and Asia, including China and India.

The Buyer was a Private Equity Group

The buyer of this business was a highly experienced Private Equity group (PEG). Due to their extensive experience and an internal and external team of professionals, it was a challenging task. However, we accomplished our goals because of their attention to detail and focus on speed.

Internal advisors and external advisors

Their internal team consisted of two members who handled most of the face-to-face work, but they had CPAs, attorneys, and a committee to drive the details that were important to them.

Their external team consisted of two divisions from Price Waterhouse Coopers (PwC). One team was from their Accounting Division. The second team was from their Tax Division. They also utilized a law firm in downtown New York. Additionally, they engaged their business intermediary.

Time kills deals

One of the advantages of this buyer was that they were able to work through all the aspects of buying the business very quickly.

Because I was able to assist the seller in creating a comprehensive marketing package, we were well-prepared for the sale. I also used a cloud-based tool to store and share critical documents. These included leases, tax returns, and disclosure statements. Additionally, a list of fixtures, furniture, and equipment was included as part of the sale. We were ready to go. Once both parties had quickly negotiated and exchanged a Letter of Intent, the process moved quickly.

It took approximately five weeks to close the sale of the business once the Letter of Intent (LOI) was signed and the seller received the money in his bank account.

To close the sale of the business so quickly required the seller’s attorney (who was terrific), the external bookkeeper for the seller, and me working unusual hours and being in a reactive mode due to the numerous questions from the teams assisting the buyer.

Negotiating the sale of your business to a Private Equity Group

There were many moving pieces in the sale of this business. Here are several key factors that were necessary to navigate to finish with a successful sale of this business.

1. During the sale of this business, approximately 82 buyer inquiries were received: 43% were from individual buyers, while 57% came from US-based PEGs or similar entities. Some buyers were challenging to work with, particularly one PEG that insisted on changing a minor point in the NDA without a valid reason, which raised concerns about their understanding of California’s business complexities.
2. Another buyer, working with an Investment Banker, submitted a Letter of Intent (LOI) that required a three-month exclusivity period for the seller. However, when the seller requested Proof of Funds, the Investment Banker stated they were still sourcing cash. Consequently, a different buyer, who provided a solid LOI with proof of funds, was accepted after five weeks of due diligence.
3. All buyers required third-party financing, primarily SBA loans, but an SBA lender prequalified none. To facilitate smoother negotiations and improve chances of closing the sale, I conduct SBA lender reviews for businesses I assist. This helps buyers position themselves better in the market and encourages sellers to negotiate favorably with them.

Not all Private Equity buyers are equal.

If you own a business in California and are willing to sell the business to a PEG, the following may help make your transaction successful.

1. When engaging with a PEG considering a business acquisition in California, ask early why they are willing to invest here, as many out-of-state PEGs view the state as having excessive regulations. Request references to gauge their experience, noting that a lack of a website may indicate they are new to the process. Observe if they ask relevant questions; a lack of transaction experience can lead to confusion and repeated inquiries.
2. Assess the PEG’s track record with similarly sized companies to ensure alignment with your business goals. Understand what the PEG wants from the acquisition; they often aim to retain current management, which may conflict with your desire to exit quickly. Address this early on, as prolonged negotiations over management roles can lead to significant misunderstandings, as seen in a recent case where a seller and PEG spent a year negotiating before realizing their timelines didn’t match.

As the seller, how long are you willing to stay after closing?

If you are selling the business and are willing to stay for a period of one to three years, ensure it’s clear. Specify the role the seller will play. For example, does it include assistance with strategic planning, recruitment of the management team, and business development? Does it also include negotiations for add-on acquisitions? Additionally, does it encompass other areas of business development? If so, what financial benefit flows to you from helping manage all these moving pieces?

Finally, and most importantly, you and the PEG should genuinely like and respect each other. You may spend a lot of time together or, more importantly, have to make stressful and challenging business decisions. Before the seller closes the sale of the business to a PEG, they want to tell themselves, ‘This is going to be a ball, and I’m looking forward to doing this.’ Hopefully, when the seller makes a final exit from running the business, this will be the case.

Are you ready to value and sell your business?

Is this now your time to value and sell your business? If it is, make sure you do it properly.

Valuing a business for sale requires an accurate analysis of the financial statements to justify the price. This is not only critical for the seller, but also for the buyer. Just as importantly, it is critical for any third-party finance company. This is because they help finance the purchase of the business.

Click this link for more information about accurately valuing a business.

Selling a Business in California

The steps to successfully sell a business are many. This link provides a one-page summary of the twenty-four steps to sell a business.

For more details, please click this link for a comprehensive explanation of the steps involved in selling a business.

If you still have questions,  please don’t hesitate to contact Andrew Rogerson or call me Toll-Free at (844) 414-9700 or email me at support@rogersonbusinessservices.com.