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As most of you are aware, there are basically two ways to sell a company. The first way involves selling the company to a single purchaser, whether it's an individual or an organization. This is known as a Merger or Acquisition. This is by far the most common way businesses are sold and there is a reason, because it's the least expensive way…for most.
However, for companies that have a real shot at becoming a much larger organization with a fresh breath of new management and an influx of additional capital, the seemingly less expensive route of Merger or Acquisition is actually the most expensive. If your company has real potential to become much larger, you should consider the second way of selling the company and that involves selling it to the masses.
Selling the company to the masses can be done one of two ways. The owners simply raise capital to hire a replacement management team and employ additional capital if needed, simultaneously selling out their ownership interests. Ownership interests can be slowly liquidated through Regulation D or a Regulation A private placement or very quickly by taking the company "public." Taking a company public can involve an Initial Public Offering through a SEC registered investment bank NASD Member Broker dealer. It also can be done as a simple listing on the Over-The-Counter Bulletin Board (OTCBB) "In-house" with the proper guidance. It can be done through a reverse merger into a public shell. It really doesn't matter how large the company is now, but how large it can become with an in flux of new capital and management team members.
By taking the company public, you can receive a much greater price for the ownership interests of the company. Generally speaking, by taking your company public you can command 4 to 5 times the private market value simply because you will create liquidity for the shares-ownership. In addition, you can liquidate your position over time thereby benefiting from a tax planning perspective. You'd be surprised how small many publicly companies are.
Traditionally, when you are ready to sell your company you enlist a business brokerage firm to list it for sale like you would if you were selling real estate. Once it sells, if ever, they get paid their commission and you get the net amount. Business brokerage firms serve a valuable purpose. They are very good at knowing the geographical, economic and industrial environments that your company competes in and can be a true partner in getting the job done. But the selling transaction will most likely be with a single purchaser and could take an unbearable amount of time.
The single purchaser transaction always involves a "Valuation Gap" problem. That valuation gap widens when you are seeking to sell to professional buyers, such as; Private Equity Groups. These are great organizations to sell to because they will provide you with cash - in relative quick fashion. They may offer for you to stay on for a few years. The only downside is that they are seeking to pay less for more. Not in a brutal fashion, but their jobs are to make sure that their investors receive as much value per purchase transaction as possible.
The real good news is they are currently flush with cash. It's called "Capital Overhang." There's so much of it they are starting to be less resistant to lengthy negotiations - (they'll acquiesce to your demands a bit more than they otherwise would.) And they are starting to lower their standards from 15 to 25 million in annual sales to 7 to 12 million.
But the bottom line is that these professional buyers may give you relief from the possible burden of running a company day to day, as time goes by, but you may get substantially less than what its potentially worth by taking it public.
Typically, a business will sell at a "Multiple" of net earnings plus the appraised value of any real estate and real property. Generally, executive compensation may need to be re-captured to re-calculate net earnings. If an owner is receiving $700,000 out of a company that has net earning of $1,000,000, then it's obvious that the owner is personally receiving as much as possible to lessen taxes and or for other investment purposes. An additional $500,000 could easily be re-captured to increase the net earnings figure. Obviously, the higher the net earnings, calculated on a per share basis or not, the more valuable the company.
The next important thing is the multiple of earnings. Typically, privately held companies will sell at 3 to 5 times net earnings plus the appraised value of any real estate and real property. 3 to 5 would be the multiple in this case, also known as the "Price Earnings (PE) Ratio."
There is an unlimited way to determine the price earnings ratio in a private market, but only one way in a public market. The public market will determine the PE ratio through basic supply and demand, so you don't have to be concerned about setting an arbitrary PE Ratio.
Of course one should always try to improve the PE Ratio, before the sale. The higher the revenue growth-rate the higher the PE Ratio, the higher the sale price. The only way to increase a PE Ratio is to increase the growth rate of revenues, now and into the future. Yes, you can use pro forma financial projections to conservatively estimate the annual revenue growth rate, with or without additional management and or additional capital. However, illustrations of growth rates using GAAP compliant pro forma financial projections with an influx of new management team members and additional capital is a very positive catalyst to determine the PE Ratio, which becomes an added advantage to ultimately increasing the sale price.
You can use the same process with the Financial Architect® System to accomplish the goal of either selling your company to the masses privately or publicly. Generally, most owners simply hire Commonwealth Capital Advisors to "Shepherd" their company through the process. See Capital Raising Services or call us at (231) 526-7292.