By John Zayac

If you own a company, you most likely will want to sell the business someday.

Very few business owners wish to hold on to their enterprises for their entire lives, wheezing to the finish line. Most entrepreneurs would prefer to exit a winner – sell their company for a premium price -- and either move on to their next venture, or retire in splendor.

After three years of the doldrums, the mergers and acquisitions market has begun to pick up. Nationwide, more than 1,500 mergers and acquisitions were announced in the first ten weeks of ’04, the highest since 2000.

At our firm, we are seeing an unprecedented level of buyer interest in middle market companies ($2 million to $100 million in revenue). Currently, we are helping an entrepreneur sell his company, with more than 70 prospective buyers in the hunt.

Why has the M&A market heated up? Overall, economic optimism is on the rise. The stock market is up, and interest rates remain low, boosting confidence in the future. Banks today are offering more credit to potential acquirers.

In addition, private equity groups – those pools of investors who are responsible for at least half of all acquisitions in the middle market – are sitting on investment dollars that they have to deploy, soon.

Most private equity groups more or less went "missing in action" during the lean years of 2001, 2002 and 2003. In many cases they are bound by contracts that require them to invest all of their capital within five year’s time, or seven year’s time, etc.

In other words, they’re sitting on a "time bomb" of private equity investment capital. Private equity groups will deploy much of this capital to acquire middle market companies during the next two years.

The changing attitudes of entrepreneurs also fuel the rise in M&A. Many business owners find themselves more willing to sell. In a post-9/11 world, once-ambitious entrepreneurs are re-assessing their priorities and finding that family, friends and hobbies have become more important in their lives.

Others are discovering that they would like to run a company in brand new industry, perhaps one that they find more philanthropic or rewarding. Many of the entrepreneurs who have wanted to sell since 9/11 also had to sit out through the dry years. Today, entrepreneurs are lining up to sell.

Yet, buyers are much more cautious now.

Many acquirers and investors got burned during the M&A frenzy of the 1990s. They paid too much for companies that looked like china shops on the outside, only to discover – after buying the company – that a bull lurked in back room.

In the 1990s, the phrase "due diligence" became part of the investors’ and acquirers’ lexicons, because so few exercised it, and because so many have suffered from that failure.

Today, every acquirer will engage in a careful vetting of a company before purchase.

This is why any entrepreneur who wants to sell – either in the short term or in the long term – must prepare. These are just a few thoughts on how to prepare for and execute the sale of your business to the very best buyer for the very best price.

This means no more putting extraneous things -- such as boats, country club memberships -- under company ownership, no matter what the tax advantages. One day, you will have to explain to a possible buyer why your profits were really higher than those reported on your tax return.

Buyers look for a company that will succeed when the founder has retired. They will think twice about an acquisition after they discover that the company’s continued success hinges on one personality. Acquirers will look for competent managers who can carry on the founders’ legacy after the founders are long gone.

Buyers hate the risk that key employees might quit the day after an acquisition, form their own company, and compete against them. Now is the time to begin requiring that all employees sign contracts with agreements not to compete directly against the company for one year, or even two years, after leaving.

It might have made sense to be a 'C' corporation when you founded the business. But C corporations are often taxed very highly after an acquisition.

Diversify your customer base

Just as a company can appear too reliant on one person, it can depend too much on one customer.

If employees, customers, suppliers and creditors find out that you are seriously pursuing a sale before you’re ready to announce it, they can make life difficult for you in various ways. Employees may leave, suppliers may increase their rates, and bankers may change loan terms.

This means asking all potential buyers to answer questions about their background, who they represent, and how much capital they have to spend. Better yet, make all potential buyers fill out a question sheet before they may speak to you. When you go to sell, you will attract seemingly interested buyers who are not viable or serious acquirers of your company. Sometimes these people are competitors or agents of competitors who simply want to find out details about your business and gauge the market.

This report, often call the "book" on your company, should be delivered only to serious qualified potential buyers.

Get the word out far and wide that you’re looking to sell, but do so through methods that maintain confidentiality, for example, by placing a carefully worded advertisement in the Wall Street Journal or a trade publication in your industry.

After you have cast a wide net, invite a handful of the very best buyers to submit bids for the purchase of your company. Supply and demand economics teaches us that prices will rise when several genuine buyers want a product and are willing to bid for it.

There are professional M&A advisors who help middle market companies get the best price in a sale, providing a similar service that Wall Street investment banks often provide for larger companies that go to sell. Pre-qualify your M&A advisor. Make sure that this person or this firm represents only sellers, and has a solid track record of brokering sales on behalf of sellers only.

Your M&A advisor should have extensive contacts among buyers’ representatives and have the expertise to bring dozens of potential acquirers to your company’s doorstep, so that you may pick the very best to bid on your company.

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