Last year Fred Zirkle found himself in a bind that's become all too common for company owners. His nine-year-old Salt Lake City mergers-and-acquisitions advisory business, Zirkle & Co. (now known as Industry Pro), had a number of growth opportunities but limited capital-raising potential. "At first we were constrained because we looked like a dot-com. Financing prospects tightened for everyone, and we knew that we had to be inventive in our search for money," he says. Zirkle's "ultimate game plan" for his 19-person company was to become, as he puts its, "not just a regional or a national firm but a global M&A business." That would be costly, since his strategy depended in part on the development of a state-of-the-art international database that would help link his company to domestic and foreign corporations and other deal makers. "To raise funds -- and help keep us focused -- it made sense to shed ourselves of services that initially were a strong complement to our core business but then began to look more like distractions," says Zirkle.
In challenging economic times, growth-oriented entrepreneurs can't rely on the same-old same-old when it comes to the capital markets. "There's no margin for error these days, and there aren't many easy answers if you're searching for financing," says Jack Schmitt, a partner and chairman of the corporate department of Patterson, Belknap, Webb & Tyler, a New York City law firm. "I'm seeing a lot of companies taking a look at their noncore business lines -- and then trying to figure out where those lines could fit as a core business for someone else," Schmitt says.
Partial-company sales are part of a larger trend that's unfolding in the business community as the nation's economic problems spread. "Companies are revising their business plans, looking for ways to conserve cash, and, yes, some are also exploring their options when it comes to accessing capital through assets that might have value that could be unlocked through a sale," says George Shaw, a corporate-finance partner in the Boston office of accounting firm Grant Thornton LLP.
Shaw is currently working with one company, a manufacturer, that has suffered from the tightening restrictions in the banking community. "The company has two major business lines, so it's considering selling one or the other of them in order to raise cash and help reduce its borrowing needs. But the issue that this company is facing -- and which is a problem for many owners who are considering a partial sale -- is, Do you try to sell the line that would be most valuable and generate the most interest among buyers, or do you hold on to the line that you think has got the best potential for you moving forward, whichever one that is, and then hope you'll be able to sell the other one? It might not be an easy decision to make, especially when a lender may be breathing down your neck," Shaw says.
In Zirkle's case the decision was fairly simple because the part of his company that he was looking to sell -- its online listings of buyers and sellers, known as BizQuest.com -- was clearly a secondary priority to his business. "But it had strong selling points all the same," Zirkle emphasizes, "since it had a recognizable brand name, significant market share, and a very good customer list. We figured out early on that it would be an attractive purchase for a company in a related business line that could benefit from a heavily trafficked Internet site."
Indeed, buyer value is paramount when it comes to successfully carrying out this capital-raising strategy. "Whenever you sell off a piece of the company, it's got to be a valuable one, or else it is just not going to happen," says Thomas Bonadio, the managing partner of Bonadio & Co. LLP, an accounting firm based in Pittsford, N.Y. "Potential buyers look at these deals very, very carefully, because there's always going to be the suspicion, if this is as good as it looks, why isn't the company keeping it for itself?"
The best way to assure prospective buyers of a sale's worth is to be prepared, with top-quality financial reports that would be, ideally, certified by an auditor and date back two to three years. "I'm working with a company right now," says Catherine Bienert, CEO of Bottom Line Management, an Atlanta-based business brokerage, "which is both a manufacturer and a distributor, and the owner is telling me that he would like to sell either of these lines, or maybe even both of them. He's never kept separate accounting records of each business, so I've suggested to him that he needs to start doing this immediately."
But that's only the beginning. "He's also got to do the best analysis he can of the assets and expenses that belong to each of the business lines. He's fortunate," Bienert notes, "because he's got key employees in each of the two divisions, and the major assets break down pretty well too, with most of the heavy equipment belonging to manufacturing and most of the inventory to the distribution business. But they share administrative expenses, so he's never going to be able to get to a completely perfect, separate accounting." She adds, "In a situation like this, your goal must be to help a potential buyer evaluate the sales prospect as a separate business operation."
That's not always easy, and it's seldom quick, which is why George Shaw often warns clients against partial sales when time pressures are fierce: "If you're in a situation in which you're burning through cash, or your bank tells you that it's going to shut you down in 30 days, you just don't have the time to evaluate which assets are most marketable and prepare separate financial reports for them, and then pursue possible buyers. That's especially true if your company has multiple assets, any of which might be worth selling, so that you might have to work your way down a few different paths in order to explore all possible sale opportunities."
But if the clock isn't working against you, Jack Schmitt points out, the current economic environment is fairly hospitable to deals like these (so long as they're priced reasonably in a market that is dominated by strategic rather than financial investors). "It's one of the anomalies of a down market that when strategic buyers can no longer easily grow earnings, they need to buy them in order to meet their business goals and keep their investors happy," says Schmitt. "That's why these sales can really work very nicely if they're targeted toward a buyer who can achieve that sometimes overused term, synergy."
If you're interested in pursuing a partial sale of your company, you'll probably need the help of two types of financial advisers: an accountant to develop the best set of separate financial reports you can generate and a business-sale intermediary, whether that means a broker, an investment banker, or a corporate-finance professional. Even though Fred Zirkle is in the M&A business himself, he hired his own independent adviser. "Like any other business owner," he says, "I felt that I was too personally involved to be able to navigate the complexities. I didn't want a buyer to feel constrained about asking me tough questions because he would hurt my feelings."
His sale proceeded quickly and, less than a year later, Zirkle remains convinced that it was the best move he could have made. "We've set up a global research service that tracks deals in 60 industries and established relationships with leading mergers-and-acquisitions firms around the world. We couldn't have launched that multimillion- dollar effort if we'd only been able to rely upon our corporate credit line and internal-cash-flow capabilities," he says. "It's ironic, but we needed to turn the company upside down and sell off part of it in order to begin to realize our growth potential."
Jill Andresky Fraser is Inc. 's finance editor.
Don't try this on the Internet
The bad news for any business owner considering a partial sale: it is one capital-raising strategy that can't be enhanced by using the Internet. That's because partial sales are often complicated by inadequate financial reports, buyer suspicions, and other potential deal breakers. They just don't lend themselves to the cookie-cutter, list-'em-and-hope-for-the-best approach that's offered by most business-for-sale Web sites.
Although there's an obvious need for one, there's no single comprehensive Web site worth visiting if you're trying to develop a shortlist of mergers-and-acquisitions professionals or business brokers who might be qualified to handle partial sales or other somewhat quirky deals. And if you do a more general keyword search under "mergers-and-acquisitions firms" or "business brokers," you may be buried alive by your search results. You're better off asking your accountant or lawyer for referrals.
Finally, if you're just beginning to investigate partial sales, consider consulting a valuation specialist. Again, your professional advisers can probably steer you in the right direction. But if you're searching for local leads, here's where the Internet can help. Visit www.appraisers.org, the Web site of the American Society of Appraisers. Then narrow your search to your city or town, and you'll be shown the names of local member business-valuation experts.
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