Selling Your Electronics Business: A 6-Step Guide, Part 1

Estimated reading time: 6 minutes

Introduction

Whether dealing with the sale of an entire electronics company or a corporate division, achieving the best possible terms and net present proceeds should be your primary concern. Selling a business is often the most important decision a company owner will face and can occur at various stages of a business career for different reasons. The process is time consuming and if the seller is not diligent and organized, it can have a negative effect on a company’s ongoing profitability and growth prospects. Nevertheless, selling a business at the appropriate moment to the correct buyer can unlock significant value that will reward years of hard work. 

This two-part guide is intended to highlight areas of special concern to you as an owner, acquaint you with the process of selling your business, and demonstrate the value a qualified and experienced investment banker can add in meeting your financial and personal objectives. 

The Sale Process

The sale process can be characterized as having six separate phases, which can be regarded as steps to selling your business: 

1. Organization/Objective Analysis: In this phase the owners, management and/or the board of directors (1) put together a project team, including an investment banker, an attorney, accountants and internal management personnel; (2) educate the team about the business to be sold; (3) establish goals with respect to the sale; (4) identify a list of prospective purchasers; and (5) decide on a sale strategy. 

2. Valuation/Pricing Analysis: The investment banker will help to determine likely market values for the business utilizing several valuation techniques that are relevant to the specific situation, including (1) comparable company analysis; (2) precedent transaction analysis; (3) discounted cash flow analysis; (4) leveraged buyout analysis; and if necessary (5) a liquidation analysis.  The value of the business will be influenced by a variety of factors including financial performance, industry dynamics, competitive position, technological developments, M&A and debt capital markets environment and market timing. 

3. Marketing and Approaching Potential Buyers: In this phase, the project team works closely to prepare an offering memorandum that describes the business as it is presently being conducted, as well as its potential for expansion. Potential buyers are approached and asked if they would be interested in acquiring the business. If they express interest, a confidentiality agreement is forwarded for their signature, prior to distributing the descriptive selling memorandum. 

4.  Due Diligence Phase: In this phase, buyers are permitted access to the management and facilities of the business.  Typically, management of the business makes a presentation describing the business and significant additional data concerning the company is made available to prospective buyers.

5. Negotiations: In this phase, a buyer or buyers are selected for detailed negotiations regarding a purchase agreement.  

6. Definitive Agreement and Closing: The negotiations lead to the signing of the definitive purchase agreement.  The closing of the sale takes place soon thereafter.   

Organization/Objectives Analysis

Once the decision to sell has been made, the owner/management must select a team of internal people and external advisors to work on the project. The principal outside advisor is a competent investment banker. There are several reasons to hire an investment banker. One is to access the contacts and market knowledge that an investment bank has. Another is that the investment banker should be able to significantly reduce the amount of disruption caused to the business and permit management to continue to focus most of its time on running the business rather than running the sale process. Third, an intermediary provides major advantages during negotiations. The investment bank can insulate its client from the misunderstandings and ill will that often occur, and put forth proposals and ideas in negotiations that do not necessarily have to be accepted by the client. Finally, an investment bank can usually complete the transaction very quickly. Also, a competent attorney, either from inside the company or outside counsel, should also be added to the team early in the process. 

The initial task for the investment bankers is to familiarize themselves with the business.  They will conduct extensive, up-front due diligence to maximize their understanding of the business and the owner’s personal goals and objectives. One of the first items for the team to plan is how communications with employees and customers are to be handled. The decisions regarding such communications should coincide with the desire for confidentiality in the sale process.  

The objectives analysis and discussion should also serve as a forum for the owners of the business to outline any other objectives they have in the sale (e.g., putting their employees in a good corporate home, making sure that the firm’s employees are retained, or making sure that management gets a piece of the equity in the company). 

The client and his investment banker will also compile a list of buyers for the business. This list will include all the parties known to be interested in businesses similar to the one being sold.  The banker will make sure to include on this list the organizations that have contacted the company in the past about the business and the competitors and other companies that may have an interest in acquiring the business. Generally, the list will have three categories of buyers: domestic strategic buyers, foreign strategic buyers and private equity firms, potentially including current management. It is typical for the list to be categorized according to some subjective measure of probability of interest (e.g., “A” list buyers versus “B” list buyers). 

Once the list has been completed, the investment banker will recommend a selling strategy based on the objectives for the transaction. This strategy deals with whom to contact, when and how to contact them and the process for moving forward with them in the event they are interested. 

Valuation/Pricing Analysis

After due diligence has been gathered and corporate and personal objectives have been defined, the investment banker will prepare a valuation analysis.  

The investment banker will help to determine likely market values for the business utilizing several relevant, valuation techniques, including 1) comparable company analysis; 2) precedent transaction analysis; 3) discounted cash flow analysis; 4) leveraged buyout analysis; and if necessary 5) a liquidation analysis. The value of the business will be influenced by a variety of factors including financial performance, industry dynamics, competitive position, technological developments, M&A and debt capital markets environment and market timing. This analysis should also include the estimated tax aspects of the anticipated transaction, so that the after-tax proceeds can be forecast. This valuation analysis serves as a basis for establishing realistic expectations in the sale, including expectations regarding the type of acceptable consideration.  

If an owner has unrealistic expectations in a sale, they should be confronted now. Otherwise, there’s the risk of putting the organization through a tremendous strain for nothing. An unsuccessful sale can also potentially create an image in the marketplace that the business is damaged goods that couldn’t be sold, and affect the value of the business in a future sale. 

Owners, management, boards decide to sell businesses various reasons, including strategic considerations, cash flow crises, lack of family participation, etc. The reason for a sale is important because it may directly impact the chosen process used to sell the business. For example, if a looming cash flow crisis requires a sale, the company may not have the time to conduct a two-stage auction process. It may be limited to a quick sale to the most likely strategic buyer.  

In Part 2, we will continue examining the selling process, from marketing and approaching potential buyers, through due diligence, negotiating, and closing. 

Raymond Carpenter is the managing member of Gulf & Pacific Group, LLC. He can be reached by clicking here.