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Their employees had
all gone home an hour ago. There was no one to overhear our
conversation. Yet Bonnie and Richard insisted that we all speak
softly. Clearly they were nervous talking to me. I'm used to that.
They had built their mail order company from a kitchen table operation
to the dominant company in its niche, and now they were talking about
selling that company. Of course they were nervous. After all, this
company was their pride and joy, their legacy, and a very major part
of their married life for over 20 years. hey knew that I was going to
ask to see financial statement and other hard and cold records that
couldn't possibly communicate the story of their company. After
admonishing me to talk softly they began with a declaration, almost a
confession, I hear often from sellers of companies small and large,
"We've never actually sold a business before". I responded that
neither have 99% of business owners, and that's why someone like me
can be helpful.
The more I
communicated that I understood how their business represented more to
them than the summary of its financials statements, the less nervous
they became . They had questions like:
- Are mail order
companies salable (which I understood meant is our company salable)?
- How much is our
company worth?
- How can we find
the right buyer and still keep the sale confidential?
- Is this the right
time to sell our company?
Bonnie and Richard
are real people (though I've changed their names) and the questions
they asked me are typical of the kinds of question that I hear all the
time from sellers and prospective sellers of mail order businesses.
Let's take the questions one at a time and answer them in terms of
mail order businesses in general.
Are mail order
companies salable?
In a word, YES. Mail
order companies, especially those that are strong in their niches, are
very much in demand right now. Buyers particularly like companies that
have identifiable and repeat customers. This
defines most mail order companies
Some more
sophisticated and well heeled buyers believe the internet is currently
offering a unique and time limited opportunity for mail order. Adding
web expertise to mail order companies that enjoy an established
customer base and brand name in a niche can lead to very rapid growth
if it is done soon. Curiously in fact, mail order companies that have
not yet fully exploited their internet potential are often more
attractive than those that have a major presence on the web with
sophisticated e-commerce capabilities. Buyers reason that with enough
expertise and enough dollars, they can take advantage of this
opportunity and reap profits in the future.
Industry buyers,
those already in mail order business, are looking to increase their
customer base and their market clout by buying competitors and related
companies. Ideally, a company can acquire another company and cross
sell to one-another's customer base. For example, a mail order
company selling seeds to home gardeners would likely find a gardening
tool company a very attractive acquisition candidate. Its seed
customers can logically be expected to be buyers of gardening tools
and many of the gardening tool company's customers are certain to be
seed buyers.
How much is my
company worth?
Well, the easy answer
to this is "It's worth what a buyer will pay for it". However, there
is some financial logic to valuation. I'll over-simplify the logic of
valuation and I'll again over-simplify by pretending all buyers fall
into one of two groups:
Financial Buyers
Financial buyers are
looking for a return on their investment (ROI). Now for most
investments like stocks or bonds, CD's, and savings accounts,
calculating one's ROI is simple. A CD or savings accounts tells you
right upfront if your return is 2%, 3%, or whatever it is. Stocks are
riskier in that no ROI is promised; investors have to make their own
projections. They can make their own judgments about potential and
about potential risk, and invest as much or as little as they see
fit. Someone may decide that IBM, or Microsoft is a good investment
at say a return rate of 10% and buy it if they think it will return
that threshold amount.
With privately held
small businesses the logic is the same but the calculation is
reversed. That is, one knows what the dollar return has been
historically, and from that they can calculate the principle—the
amount to be invested, which is then the value of the company. Let's
say that a mail order company is earning a relatively consistent
$100,000 per year. The investor must then decide what an appropriate
return on investment is for that company given the perceived risk and
other factors and from that, calculate the principle (the company's
financial value). Suppose a prospective buyer decides that a 20%
return on investment is appropriate given the risk involved for this
mythical company. It is then a simple matter of determining the
principle amount that a $100,000 per year return justifies:
100,000= 20% of X
X= 100,000/.20
X= $500,000
Now I'm glossing over
some important issues here like assets owned, expenses that would be
income to a buyer (called addbacks), etc. Suffice it to say that an
important component of my work involves recasting financial
statements. Your accountant's job is to create statements that show
as little income as is legally possible to lower your tax bill. Mine
is to undo a lot of what that accountant has done and create a
statement that demonstrates the full income picture and the potential
for business selling purposes. This doesn't involve misrepresentation
or breaking the law. It involves recasting and adding back to profit
expenses that are legally taken but are not essential to running your
business.
Industry Buyers
Industry buyers,
often called "strategic buyers", look at ROI too, but do so a bit
differently. They look at what the income would be under their
ownership. They endeavor to make 2+2=5 so to speak. So if the
mythical business above is earning $100,000 they might reason that
under their ownership by combining say, fulfillment operations,
achieving better volume discounts, etc., their bottom line might
increase to $150,000 from the 100,000 that it' generating under its
stand-alone cost structure.
If you're concluding
that an industry buyer then would pay more for your mail order
company, you are figuring correctly. Consider the fact that an
industry buyer, while he may not know your particular operation or
even your product, he will understand the basics of the industry, will
know what he is looking for, and will be far less likely to waste your
time kicking tires. This isn't always the case, but in general a
smaller mail order company is worth more to an industry buyer who can
achieve synergies and cost savings than to a pure financial buyer.
How do you find
prospects for my company and how do you approach them while
maintaining confidentiality?
Perhaps the real
question is "who can we get interested in your company and how can we
do so?" As I've pointed out right along, other mail order companies,
particularly those with similar or complimentary products are great
target buyers. However, don't discount financial buyers. There are
currently lots of people with lots of dollars looking to get into the
mail order business.
We start by putting
together a comprehensive selling memorandum, typically about 50 pages
in length, detailing the company and the opportunity it offers a
prospective buyer. This selling memorandum also states the asking
price and the rationale behind that price and outlines the terms and
proposed structure of the sale.
We typically assemble
a list of likely target buyers from our databases of prospective
buyers who have contacted us and been screened by us, and from other
sources. These buyers are contacted discretely with enough details to
entice them, but not enough to enable them to identify the company for
sale. For example, we might ask a prospective buyer; "Would you be
interested in a niche specialty foods company in the Midwest with
sales in the 2 to 3 million dollar range"? We would not initially ask
"Would you be interested in a mail order candy company based in
Palatine, IL with annual sale of 1.6 mil"?
Before sharing any
detailed information, we insist that a prospective seller signs an
agreement of non-disclosure, and provide evidence of financial
capability. In a lot of instances, we also provide the seller with
the name of the interested buyer to make sure the seller is wiling to
talk with that prospect.
Is this a good
time to sell?
Deciding that your
company will be worth more or less a year 2 years or 5 years in the
future is like predicting the stock market. You just can't know what
the environment will be at that time in the future. What I can say is
that the environment now for selling mail order companies is very
good, partly because of the perceived opportunity the internet offers
to aggressive, computer savvy buyers, partly because people are
disenchanted with other investment performance lately (like the stock
market), and partly because interest rates are at historic lows so
borrowing to buy is cheaper than it is likely to be in the future.
And as for Bonnie and Richard
I started this
article talking about Bonnie and Richard, a married couple who
nervously retained my company to sell theirs. What happened with
them? Within a month of the company being offered for sale, they
received two solid offers. The one they
chose was very near full asking price. An emotional but otherwise
uneventful, closing took place six weeks later. Richard promptly
bought himself a new Lexus and the two of them headed off to the
mountains for a well deserved two month
vacation where only their grandchildren have an open invitation to
visit.
Gary Schine is vice president of Merfeld & Schine, Inc. a
mergers and acquisitions firm specializing is direct marketing
companies. He has been brokering and valuing businesses for over 15
years and has authored two popular books on the subject. If you would
like to sell your company he can be reached at
schine@mergers-acquisitions.com
Related Book:
How to Start a Mail
Order Business |
