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Orange County acquisitions expert offers some tips to business owners.
By Jan Norman - The Orange County Register

If you're a business owner toying with the idea of selling your company, the news is good and bad.

Good: It's a seller's market for businesses right now, says Coby Sonenshine, president of client services for RSM EquiCo, a Costa Mesa mergers and acquisition firm.

Bad: Only about half the owners who actively try to sell their companies make a deal. And that's among companies worth $5 million or more, in which RSM EquiCo specializes.

Smaller businesses are even tougher to sell, but the owners can learn from EquiCo's experience in grooming mid-market companies for acquisition. EquiCo even managed to sell itself to H&R Block three years ago, a stunt Sonenshine doesn't recommend to most business owners, but more about that later.

We asked Sonenshine to dispel some of the myths associated with the sale of a business.

Myth: Once I decide to sell, the process will go quickly.
"The average client who knows coming in that he wants to sell still takes an average of 18 months to get the deal completed," Sonenshine says. "We encourage them to do their homework and be prepared."

At the least, many companies need to prepare different financial statements for the past three to five years to show their true profitability. For example, businesses that are structured to minimize taxes may include owner's expenses that a buyer won't have, such as Angels' baseball tickets for client entertainment or car leases.

Then the seller needs to examine industry trends that might bolster financial performance in the future and suggest ways the company will grow with more capital, new product lines or new distribution channels, Sonenshine says. Any of those can help increase the selling price.

One recent RSM EquiCo client spent more than four years diversifying the company's customer base and growing sales to improve the price. Those improvements boosted the valuation from $11 million to $45 million, Sonenshine says.

Myth: The transaction will be mostly for cash.
"The owner seldom receives 100 percent cash for the sale of a business," Sonenshine says. "The more cash the seller wants up front, the less the value of the deal."

Most buyers want continuity of management and insist that the seller stick around for a few years, he says. They may offer a portion of the price contingent on company performance after the sale.

Private equity funds are becoming more active in buying companies and may only want to buy a portion of the business, he adds. That arrangement might be ideal for the owner seeking some liquidity as he plans his exit strategy years ahead.

Myth: The owner should be directly involved in negotiating to sell the business.
EquiCo's sale of itself is a case of "Kids, don't try this at home." Sonenshine says. "We try to keep the seller's eye on the ball of the ongoing work of the business ... so it's still worth the selling price at the close of the transaction."

Professional buyers who acquire businesses all the time will sometimes try to distract the seller to drag down the company's performance and sales price, he says.

Myth: In a seller's market, the seller gets the asking price.
"The market value isn't always what the seller thinks it is," Sonenshine says. "We look at a discount of cash flow or sales of comparable companies, but there's not as much information about business sales as there is on home sales."

Myth: Employees or competitors are the most likely buyers of a business.
"Many business owners make the mistake of not casting their net wide enough" for a buyer, Sonenshine says. Other potential buyers might be foreign investors, private equity funds or large public companies seeking a new distribution channel or a beachhead in a new industry."

Foreign buyers are coming to North America because the economy in their own countries is not healthy or friendly to business," he explains. Eleven percent of buyers of Orange County companies from January 2004 to March 2005 have been foreign entities.

Ten percent of the buyers of Orange County companies during that period were investors and private equity funds.

The funds that have been sitting on the sidelines since the Internet bust in 2000 now have $165 billion ready to invest, he adds. Many of them are looking at smaller deals because those might have less competition and higher growth potential than large companies.

"Small and mid-market companies have a wider array of options now."

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