From the National Post – Thursday, November 16, 2006 By: Carrie Tait

For private business owners, the idea of a private-equity outfit knocking on your door can be an unsettling experience. After all, private-equity types are often labeled as vultures and depicted as hard-nosed, money-hungry investors wearing mean-looking black suits. Yes, private-equity investors are savvy, sophisticated investors who know their way around a balance sheet. To make the process of selling a private business as pleasant — and safe — as possible, private business owners need to know what to expect and how to navigate through a deal process. The Financial Post surveyed a slate of experts, asking them about how private business owners should prep themselves when the so-called vultures come knocking.

Get ready
Being ready to show off your business to potential buyers doesn’t mean sweeping the shop floor hours before potential buyers arrive. It means getting ready three to five years in advance, says Jason Sparaga, president of Spara Capital Partners Inc.

“Prepare, prepare, prepare for the transaction and the process,” he says.

This means looking at the tax ramifications, upgrading your financial reporting in preparation for proper due diligence and perhaps even going through a proper audit. When potential buyers dig into the books, they must be in order or the buyer will walk away.

“A lot of deals fall apart after the letter of intent because due diligence doesn’t hold up,” he says.

The process
With the books in order and the timing right, the actual process can begin. Be patient: “These things can take months, even years,” Mr. Sparaga said.

First, enlist help. Many private business owners enlist specialists for guidance through the process. In some cases, this could be a broker — someone who helps find an appropriate buyer.

“You may not have the contacts necessary to tap into private-equity buyers,” said Randall Pratt, a partner at Osler, Hoskin & Harcourt LLP.

Some advisors do more than serve as brokers. Intermediaries or mergers-and-acquisition advisors, for example, tend to be more involved in the process and are able to provide more advice.

Vendors also need to have price expectations in line with what the market is willing to pay. Again, advisors can help.

After finding an advisor, vendors need to find a buyer.

“In terms of pitching yourself, you need to pitch to the funds that will be interested in a transaction of your size,” Mr. Pratt said.

There are hundreds of private-equity funds and there’s no point in calling Henry Kravis of Kohlberg Kravis Roberts & Co. fame if your business is nowhere near his stratosphere of interest.

As part of the pitch, you’ll need a narrative description of your business, including the future opportunities that your business holds. A “teaser” of your financial information is also necessary, Mr. Pratt said.

The financial teaser will help potential buyers decide if they want to do further due diligence — the point where things start to get serious.

Potential buyers who present serious interest and terms that suit you now need to see inside a data room where they can comb through the books. Interviews with management will also be in order.

Brokers and intermediaries Beware.

While you may need an advisor, there are pitfalls here, too.

There have been cases where brokers have taken advantage of unsophisticated business owners, charging expensive fees.

This can make getting a transaction done difficult because too much of the value is going to the broker and the private-equity player is not prepared to pay the price for the business and then pay the broker on top of it.

While experts still say brokers and intermediaries should be involved, there are other ways to gain knowledge about how to do a deal. For example, vendors might be able to pick up tips and make contacts at groups such as the Young Presidents’ Organization and the Association for Corporate Growth, Mr. Pratt said.

Management and succession
If you aren’t planning on sticking around after you sell your business, make sure there’s someone around who knows how to run your shop. Because private-equity firms rarely run the businesses they own themselves, they will want to know that they are leaving it in good hands.

“The financial buyer puts a lot of weight into people they are investing in,” said Howard Johnson, president of Veracap Corporate Finance Ltd., which works as an advisor on behalf of sellers.

If the owner of the business is the one who has been the primary force behind the company, the buyers will want to see if there are any members of the management team who can grow into the chief executive role.

According to Mr. Pratt, private-equity firms have one question here: “Do we have the confidence these people can do the job?”

Auctions
On the surface, having different private-equity buyers battle over your company sounds like a great idea. Auctions can indeed generate a higher price for your company, but there are dangers lurking here, too.

“Depending on how big the business is and the size of the prize, being involved in an auction process is expensive for a private-equity buyer,” Mr. Pratt said. “If it doesn’t look like a good enough opportunity and indications show there are already a bunch of participants in the auction, they may just decide to take a pass and not become involved.”

As a result, you might be shutting out a firm that would be a good buyer for your company.

That’s why sellers need to be cautious when an auction situation emerges.

“It’s a bit of a double-edged sword,” Mr. Pratt said.

Pick your buyer carefully
It seems obvious: Pick the buyer who offers the best price. But again, this can be troublesome.

Don’t be too quick to shun lower preliminary offers early in the process.
“Some buyers have a better reputation for actually closing deals,” Mr. Pratt said. Your advisor should help differentiate between private-equity firms that are better at sticking around to the end of the buying process.

Sellers may also have moral and sentimental concerns that need to be addressed. Which buyer will be best for the community you live in and the people you employ?

Again, different buyers have different reputations — and intentions — for what happens after the business is in their hands.

“Finding the right partner is key — and the right buyer is not always the one with the biggest cheque,” Mr. Johnson said.

If you retain an interest in your company, picking the right buyer becomes even more important. Private-equity firms are always looking at how they will make money in the future, and that often means pushing companies in their portfolio out on to the public markets. Mr. Johnson notes that a private business owner can make just as much money on the second transaction as on the first, even when left owning a sliver of the company.

Timing
It’s always hard for entrepreneurs to know when to sell their businesses. The prospects might be better tomorrow. Five more years of growth might fetch an even higher price.

But liquidity in the market is key. Right now, private-equity firms around the world are awash in cash and raising even more money by the minute.

Now might be an ideal time.

“It’s a sellers’ market now,” Mr. Sparaga said.