Seller's Market
Even as the M
Published May 2005
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COMMENT ON THIS ARTICLELesley Berglund wasn't planning to sell her business. The co-founder and CEO of the Winetasting Network in Napa, Calif., was just looking for a strategic investor, someone who could help the $10 million business -- which sells wine to consumers via catalogs, membership clubs, and an online store -- capture a bigger share of the $22 billion U.S. wine market. But when Berglund began calling potential investors last July, she found herself inundated with purchase offers. "I called an investment banker to explore my options," she says.
It was the right call. Berglund soon found herself swept up in the hottest M&A market since the dot-com boom. In 2004, about 10,000 U.S. companies changed hands -- a 15% increase from the previous year -- almost half of them businesses with less than $100 million in annual revenue, according to FactSet Mergerstat, a Santa Monica, Calif., research firm. And the market is expected to gather more steam in 2005. What's driving all the activity? For the first time in years, acquisitive companies have cash on hand to fund purchases, and low interest rates make financing affordable. Meanwhile, with company valuations on the rise, business owners are increasingly willing to entertain suitors. Finally, managers on both sides are changing their focus from near-term cost-cutting to long-term growth, says David Lobel, managing partner at the New York City private equity firm Sentinel Capital Partners. "People are optimistic about the future again," he says.
Selling a company, of course, has always been an arduous process -- and that's more true than ever in the current M&A market. The main reason for the change is the Sarbanes-Oxley Act of 2002, which established stricter corporate-governance standards. Though the standards apply only to publicly traded companies, many acquirers nonetheless are demanding that their purchases have strict controls in place -- such as an outside board of directors and clear accounting procedures, including at least three years of financials that have been reviewed or audited by an accounting firm. A business may still attract publicly held suitors without taking such measures, but it will be at a disadvantage at the negotiating table. Getting a company in shape to sell "can't be done overnight," Lobel says. "But it can be done." Many firms enlist temporary CFOs to help get their financials into shape.
Berglund, for her part, had always had an outside board of directors. She also maintained meticulous financial records and kept detailed minutes at board meetings. Over the course of five months, she entertained offers from 13 potential buyers, many of whom toured her company's facilities, met with her staff, and pored over her financials. In fact, Berglund was so busy that she handed off day-to-day operations to her executives. "Thank goodness I have a strong CFO and head of retail," she says.
Berglund also enlisted outside help, hiring Bill Hambrecht, of San Francisco investment bank W.R. Hambrecht and the Winetasting Network's lead investor. Hambrecht guided her through the entire sale, from compiling a list of attractive buyers to negotiating the final terms of the deal. Enlisting an investment banker can be a smart move, especially for deals of $10 million or more. But with demand for their services on the rise, such assistance is getting pricier; Berglund paid Hambrecht $450,000, or 5% of her company's sale price. Simpler deals can also be handled less expensively by a business broker and an M&A attorney.
Of course, even though the market is gaining strength and valuations are rising, buyers are as likely as ever to drive a hard bargain. "This is different from the go-go days," warns Ned Minor, a business lawyer at Minor & Brown in Denver. At the same time, sellers are becoming more realistic when negotiating a price. In early 2001, Jonathan Lieberman came close to selling Focalex, the Boston-based Internet advertising and marketing company he founded with his brother, Seth, in 1998. Then the buyer's board cut the offer in half just before the deal was about to close. Insulted, Lieberman backed out. It's a move he came to regret last fall, when he sold his company to Intermix Media, a publicly traded marketing company in Los Angeles, for $4.3 million in cash and stock -- less than his first suitor's reduced offer. "Now I realize that was generous," he says. "Those were heady days. Our expectations have certainly been reduced."
Selling a company may get even tougher in the next couple of years. Experts expect the current M&A boom to last a while, but a huge number of baby boomers are on the verge of retirement; one out of every two company owners plan to sell their businesses during the next 10 years, according to a recent survey by PricewaterhouseCoopers. That could result in a glut of companies on the market, driving down valuations and giving new leverage to buyers.
