How To Buy And Sell Businesses
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How To Buy And Sell Businesses
With large buyouts, private equity funds typically charge investors a fee of about 1.5% to 2% of assets under management, plus, subject to achieving a minimum rate of return for investors, 20% of all fund profits. Fund profits are mostly realized via capital gains on the sale of portfolio businesses.
Furthermore, because private equity firms buy only to sell, they are not seduced by the often alluring possibility of finding ways to share costs, capabilities, or customers among their businesses. Their management is lean and focused, and avoids the waste of time and money that corporate centers, when responsible for a number of loosely related businesses and wishing to justify their retention in the portfolio, often incur in a vain quest for synergy.
Finally, the relatively rapid turnover of businesses required by the limited life of a fund means that private equity firms gain know-how fast. Permira, one of the largest and most successful European private equity funds, made more than 30 substantial acquisitions and more than 20 disposals of independent businesses from 2001 to 2006. Few public companies develop this depth of experience in buying, transforming, and selling.
As private equity has gone from strength to strength, public companies have shifted their attention away from value-creation acquisitions of the sort private equity makes. They have concentrated instead on synergistic acquisitions. Conglomerates that buy unrelated businesses with potential for significant performance improvement, as ITT and Hanson did, have fallen out of fashion. As a result, private equity firms have faced few rivals for acquisitions in their sweet spot. Given the success of private equity, it is time for public companies to consider whether they might compete more directly in this space.
We see two options. The first is to adopt the buy-to-sell model. The second is to take a more flexible approach to the ownership of businesses, in which a willingness to hold on to an acquisition for the long term is balanced by a commitment to sell as soon as corporate management feels that it can no longer add further value.
To realize the benefits of flexible ownership for its investors, though, GE would need to be vigilant about the risk of keeping businesses after corporate management could no longer contribute any substantial value. GE is famous for the concept of cutting the bottom 10% of managers every year. To ensure aggressive investment management, the company could, perhaps with less controversy, initiate a requirement to sell every year the 10% of businesses with the least potential to add value.
GE would of course have to pay corporate capital gains taxes on frequent business disposals. We would argue that the tax constraints that discriminate against U.S. public companies in favor of private equity funds and private companies should be eliminated. Nevertheless, even in the current U.S. tax environment, there are ways for public companies to lighten this burden. For example, spinoffs, in which the owners of the parent company receive equity stakes in a newly independent entity, are not subject to the same constraints; after a spinoff, individual shareholders can sell stock in the new enterprise with no corporate capital gains tax payable.
Can you spot and correctly value businesses with improvement opportunities For every deal a private equity firm closes, it may proactively screen dozens of potential targets. Many firms devote more capacity to this than to anything else. Private equity managers come from investment banking or strategy consulting, and often have line business experience as well. They use their extensive networks of business and financial connections, including potential bidding partners, to find new deals. Their skill at predicting cash flows makes it possible for them to work with high leverage but acceptable risk. A public company adopting a buy-to-sell strategy in at least part of its business portfolio needs to assess its capabilities in these areas and, if they are lacking, determine whether they could be acquired or developed.
Note, however, that whereas some private equity firms have operating partners who focus on business performance improvement, most do not have strength and depth in operating management. This could be a trump card for a public company adopting a buy-to-sell strategy and competing with the private equity players.
Both public companies and investment funds manage portfolios of equity investments, but they have very different approaches to deciding which businesses belong in them and why. Public companies can learn something from considering the broad array of common equity investment strategies available.
Flexible ownership seems preferableto a strict buy-to-sell strategy in principle because it allows you to make decisions based on up-to-date assessments of what would create the most value. But a flexible ownership strategy always holds the risk of complacency and the temptation to keep businesses too long: A stable corporate portfolio, after all, requires less work. What is more, a strategy of flexible ownership is difficult to communicate with clarity to investors and even your own managers, and may leave them feeling unsure of what the company will do next.
Our expectation is that financial companies are likely to choose a buy-to-sell approach that, with faster churn of the portfolio businesses, depends more on financing and investment expertise than on operating skills. Industrial and service companies are more likely to favor flexible ownership. Companies with a strong anchor shareholder who controls a high percentage of the stock, we believe, may find it easier to communicate a flexible ownership strategy than companies with a broad shareholder base.
When a business owner unexpectedly passes away, selling the business or their interest in the business can become complex. Selling a business interest is not like selling most types of property; it presents a unique set of challenges, including identifying a suitable buyer.
Other applicationsBoth types of buy-sell agreements have their own advantages. Whether entity purchase or cross-purchase is more appropriate depends on the structure of the underlying business. Buy-sell agreements can also be used if a business owner were to become disabled and is no longer able to run the business.
Purchasing or selling a business, or buying or selling all of its assets, is a major event in the life of both the buyer and seller. The purchase of an existing business has the advantage of giving the buyer a client base, established operations, and existing good will, which could take a new business years to achieve, if ever. However, it is important that the parties receive what they negotiate for. The seller must receive the purchase price it negotiated, which is especially important if there is to be an extended payment plan over time, and the buyer must ensure that it receives the business in the condition it believes it to be. Our New Jersey business attorneys have many years of experience representing both buyers and sellers in all types of business transactions.
Purchases and sales come in many different forms, such as the purchase of an entire business, the purchase of the bulk or a part of a business's assets, a sale of some or all of a corporation's stock, franchise purchases, the merger of two companies, joint ventures, partnerships, a sale with seller financing, and the sale of a business with the seller's continued involvement (such as an employee, consultant or minority owner). The variations are many.
The contract may be the most important piece of the transaction. A written contract is an absolute necessity. It will set out all the terms of the deal, and the rights and responsibility of the buyer and seller. Negotiating the contract, while often difficult, is the most vital part of the entire transaction. It is important that you have an experienced business attorney on your side to negotiate the contract and ensure its written terms protect you, and that you get what you bargained for in the deal.
The contract will set the purchase price and how it will be paid, what due diligence is provided, which party will be responsible for the seller's liabilities, escrow for tax liabilities or environmental contingencies, confidentiality provisions, contingencies to be completed and remedies for failure to meet the contingencies, and events allowing for cancellation of the transaction. It will provide for financing contingencies. The contract will set out the remedies if one side fails to fulfill its obligations, such as reversion of ownership, retention of the security deposit, arbitration, and the breaching party being responsible for the other side's costs. It will provide for escrows for financial liabilities or environmental cleanup. It also provides for collateral for the purchase price if it is to be paid over time.
A clear, well-written contract will avoid disputes, because business owners and sellers are in business of running their companies and making a profit, not spending their time in litigation. Our business attorneys' litigation experience helps us draft contacts to avoid the many pitfalls we have seen.
Our New Jersey business transaction attorneys are experienced in representing buyers and sellers in the purchase and sale of businesses or their assets. To find out how we can help, e-mail us or call (973) 890-0004.
Online businesses and marketplaces are fast becoming the most preferred shopping method for many consumers.1 Meanwhile, we've probably heard reports of people losing money to online scams or customers claiming they never received their packages.2
For this reason, it's essential to take necessary precautions before buying and selling on Alibaba.com. This article goes through everything you need to know about buying and selling on Alibaba.com, including tips to protect yourself.
Alibaba.com is one of the largest B2B marketplaces made for buyers and sellers to do business together. For 20 years now, Alibaba.com has helped millions of sellers expand their brands and do business globally. 59ce067264