The Ultimate Guide To Help Exit an Aerospace and Defense Company

What Is the Role of M&A Brokers in Selling an Aerospace Defense Company?

M&A Advisors play a critical role in supporting you with selling your California Aerospace and Defense company. They'll help you develop an M&A exit strategy, which includes a professional business valuation. The valuation will show you the current value of your business and identify areas for how you can increase your business' value before you sell it.

By keeping up on M&A trends, M&A Brokers understand the lower middle market companies for sale and middle-market businesses for sale as they pertain to the aerospace and defense sector. They'll be your trusted guide and biggest cheerleader, wanting to help you secure the best terms for your business as if they were the business owner.

Qualifying Potential Buyers

Acquisition-oriented companies are popular among the various California businesses for sale. To make your business attractive for acquisition buyers, you should have a strong sales performance within a niche sector. Businesses seeking growth through acquisition don't always try to buy out large companies; often, they target smaller companies that they see have the potential to become larger competitors in the future.

Buyers come in a range of forms. They include:

• Competitors
• Employees
• Individual investors
• Private equity groups
• Family offices
• Investors (strategic, synergistic, or corporate)

Generally speaking, investors tend to be the group of individuals who have acquisition programs. While it's important to share honest information about your company, you mustn't divulge too many details. Otherwise, your competitors could use that information against you if they end up not purchasing your company.

Because of how difficult it is to balance sharing enough information with sharing too much information, you should hire an M&A Advisor. Your M&A Broker will work beside you to vet potential buyers, saving you time by identifying people who are serious about making an offer. They'll help you negotiate the best deal for your company, which is especially useful when you're working with a larger acquisition-oriented company.

Phases that M&A Advisors Manage

By hiring an M&A Advisor in California, they'll have a deep understanding of the market and the local area where you live.  For example, M&A Intermediaries in California will have excellent knowledge of businesses for sale in southern California, the Central Valley of California, the Bay Area of California, and other geographies with Defense and Aerospace businesses.

Middle-market M&A Advisors and lower middle M&A Intermediaries will save you time and secure a high selling price for your business by handling the following tasks.

Exit Plan

An exit plan is a document that details the strategy you'll use to execute listing your aerospace defense company for sale. Knowing how to prepare an exit strategy takes time. However, your M&A broker will do the heavy work for you, presenting you with the plan and reviewing it to ensure you're comfortable with their strategy.

Business Valuation

A business valuation's primary goal is to secure a high value for your business. It's possible to perform a business valuation on your own. However, it won't be taken seriously by prospective buyers. For this reason, you should hire an M&A advisor to conduct your business valuation.

Marketing

Your M&A Advisor will prepare all marketing material and networking to promote your Aerospace and Defense business and deal origination. Lower and middle-market M&A Brokers have connections and know the best marketing methods to use based on the types of buyers you want to target.

Buyer List

An M&A Advisor will save you loads of time by preparing a set buyer list before putting your business up for sale. That way, you can work with your advisor to determine which individuals or companies you'd like to target to secure the highest value when selling your business.

Deal Origination & Outreach Program

During the deal origination phase, your M&A Broker will market the deal you've developed, targeting the individuals you agreed upon in the buyer list. By your M&A Broker contacting vetted buyers to generate interest, you'll likely reduce the amount of time your business stays on the market.

Distribute Content

In conjunction with the outreach program, your M&A Advisor will use social selling and targeting to distribute content about your company. Their goal is to present you with the highest quantity of excellent sales offers possible. 

Evaluation

During the evaluation phase, your M&A Advisor will evaluate offers and conduct a market offer analysis.  They will then present you with the best offers so that you can choose with whom you'd like to move forward.

Negotiation

Once you've chosen the prospective buyer you'd like to move forward with, your lower middle market M&A Advisor will negotiate the terms of the tentative sale. Part of the negotiation includes setting a timeframe for buyer due diligence.

Letter of Intent (LOI)

A letter of intent is an initial, non-binding agreement between the seller and prospective buyer detailing the tentative business deal. The LOI establishes what the deal entails if the buyer wants to purchase the company after performing due diligence.

Due Diligence

During this process, buyers will ask for the following:

• Income statements

• Records of accounts receivable and payable 

• Balance sheets and tax returns from the last 3 to 5 years, including business activity statements

• Profit and loss records from the last 2 to 3 years

• Reconciled accounts cash deposit and payment records

• Utility accounts

• Bank loans and lines or letters of credit

• Minutes of director and management meetings

• Audit work paper files, if you have them

• A document explaining why you want to sell your business and your business' reputation from your point of view

• Lower middle-market private equity details about your employees, trading partners, customers, etc.

• Stock

• Details about your equipment, vehicles, fixtures, etc., including whether they have their appropriate licenses and if they're in good condition

• Intellectual assets of your business, including patents, trademarks, and intellectual property

• Contracts you currently have with clients and staff

• Partnership agreements

• Lease arrangements

• Details about your company's automated financial systems

• Credit and historical search information as it relates to your business

• The business' value so the prospective buyer can decide if the asking price is fair

Warning Signs for the Buyer

When you're preparing to sell your aerospace defense business, it's important that you remain honest throughout the process. Your M&A broker will ensure you have everything in order and documents ready so that you appear as professional as possible for potential buyers.

Below are some items that prospective buyers will look out for during the due diligence process:

1. Reluctance to disclose important information such as why you want to sell your business, financial statements, licenses, permits, and staff contracts.
2. Refusal to agree to a trial period or to give enough time to conduct due diligence. Thirty days is the standard amount of time for due diligence.
3. Avoidance of introducing the prospective buyer to their suppliers, landlord, or real estate agent.
4. Current involvement in legal proceedings.
5. Eagerness to close the deal quickly.
6. Questionable credit record and history.
   

Negotiating the Buy-Sell Agreement

A buy-sell agreement is a document that business owners typically establish before they sell their company. It's an essential document if you have one or more business partners; it details how you'll handle your business in a disruptive situation, such as a partner's death, bankruptcy, or divorce. 

Buy-sell agreements look different for each company, but regardless, the following sections will help you better understand how they work and things to watch out for.

Negotiating the Definitive Purchase Agreement

Offering middle-market businesses for sale involves several steps. The M&A Advisor works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it completely represents the legal wishes of each party. 

A good M&A Definitive Agreement is the lynchpin of a good transaction. Both seller and buyer exchange a large amount of information from different sources.  This is often over many months of conversations.  These exchanges are then condensed, with their individual interests, as best as possible into the Purchase Agreement. 

Items a typical Definitive Purchase Agreement may include:

1. Treatment of Shares, Options, and any other Securities; if appropriate to the transaction
2. Representations and Warranties
3. Covenants
4. Solicitation (“No Shop” clause)
5. Financing
6. Termination Fee (or “Break-Up Fee”)
7. Indemnification
8. Material Adverse Change (MAC) and Material Adverse Effect (MAE) Clauses
9. Closing Conditions

The Definitive Purchase Agreement can have potential pitfalls, so your M&A Advisor needs to keep the communication open with the Buyer and their Deal Team as well as the Seller and their Deal Team.

The M&A Definitive Purchase Agreement also needs to include details about tax obligations and consequences, especially if shareholders are involved.

Avoiding Pitfalls if you have a Buy-Sell Agreement

What if the seller is two or more individuals?

Many businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not have any interest in selling the business at all or may want something specific most buyers will not be willing to agree. If this is the case, hopefully there is a Buy-Sell Agreement in place as this will outline what each shareholder needs to do.  A few years previously I had a transaction with 9 shareholders.  One shareholder with a minority interest initially refused to sell.  Eventually they changed their mind but it was stressful while this played out.

If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, the pressure to decide the future direction of the business may be challenging.  This article provides additional information for an owner or shareholder with how to avoid buy-sell agreement pitfalls. To help their clients, M&A Advisors should understand the importance of assumption of liability, so their buyers and sellers know who is responsible for any lingering claims. 

The agreement also needs to have information about indemnity clauses regarding operations. For Defense and Aerospace Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement. 

Buy-sell agreements can be confusing, so it is helpful to learn how to understand buy-sell agreements and how a buy-sell agreement can save a business.

Buy-Sell Agreement Benefits

Anyone who has one or more business partners should have a buy-sell agreement. It will lay down the rules for how much money or expertise business partners will contribute to the business or what will happen if a new business partner joins. A buy-sell agreement also offers insurable risk if, for example, one of your business partners passes away.

The Legal Intricacies of Buying and Selling a Business in California

Before you sell your aerospace defense company in California, it's important that you work with an M&A broker to understand California state requirements. For example, you might have to hold certain licenses. You'll also likely need an escrow, which will protect you and the buyer. 

Taxes are inevitable when selling your business. Your M&A broker will help show you approximately how much California state tax you'll have to pay before selling your aerospace defense company.

Finalizing the Deal

Once you've negotiated the buy-sell agreement and terms of selling your California aerospace defense company, your M&A broker will support you with a buy-sell business contract. They'll close the deal, finalize the business bill of sale, and ensure that all paperwork is in order. 

They'll also help facilitate your business' transition, ensuring that everything runs smoothly while being a liaison between you and the new owner of your company.

Are you curious about what kinds of items go into finalizing the deal? Take a look at our Business Transition Checklist.

One of the biggest mistakes people make when trying to sell their aerospace defense company in California is trying to do so on their own. If you do so, the chances are high that you'll receive a lower value for your business than if you had hired an M&A broker.

There are other mistakes people make when selling their business; we'll cover six of them here. Your M&A advisor will help you identify these issues and discuss a plan for improving them before you put your business up for sale.

1. Dependency: If you rely on a single customer, employee, or vendor to keep your business afloat, it'll scare off potential buyers. 
2. No Growth Plans: Buyers want to see that there are opportunities to grow your aerospace defense company. You don't have to execute them yourself, but you should be able to show where there's potential growth.
3. Minimal Cash Flow: Little to no cash flow will scare off buyers. You can increase your cash flow by accelerating accounts receivable or extending accounts payable.
4. One Time Revenue: Buyers prefer to see recurring revenue, such as subscription-based models. 
5. Commoditized Business: Such businesses force prices lower and thus create fewer profits because of high competition. You should try to turn your commoditized business into more of a niche before selling to maximize your company's value.
6. Owner Dependent Business: No potential buyer wants to see that its success depends solely on the owner. Your business needs to run smoothly without you in order for you to receive the best value when you sell it.
   

Problems with Growth Through Acquisition

While selling a business can seem more straightforward when it involves a prospective buyer looking for growth through mergers and acquisitions, such situations are prone to problems. 

Miscalculations can be abundant, including a lack of due diligence that leads to less than ideal matchmaking. Employees and managers who remain with the company may be wary of the new management's motivations and strategies. That can cause confrontation and distrust.

Clients may also be less willing to agree to new contracts until they observe the new ownership and gain confidence that they want to continue working with the company.

In order to minimize the risks of conflict with lower middle market mergers and acquisitions, your M&A broker will ensure there are prior agreements written into the contract and perform an astute analysis of risk factors.

Selling an Aerospace Defense Company Q&A

Now, we'll cover a few lingering questions you might have about selling your business.

I Want to Sell My Business, but Where Do I Start?

Ideally, you should start preparing to sell your business a couple of years before you intend to make the transition. By hiring a lower middle-market M&A business broker, they can perform a business valuation and offer suggestions for how you can increase your business' value before you put it on the market.

I Want to Sell My Business, but If I Sell My Business, How Much Tax Will I Pay?

How much tax you pay after selling your business will depend on the type of sale and which state you live in. Your M&A broker will run through different selling scenarios with you, explaining their tax implications.

What Are the Documents Needed to Sell a Business?

There are many documents you'll need to prepare and fill out before and during the sales process. To get you started, take a look at our Business Transition Checklist.

How Do I Sell My Business Privately?

Although it's possible to sell your business privately, especially if you have someone that reached directly out to you about purchasing your business, experts don't recommend it. To ensure you get the best value for your business and that all paperwork is in order, you should hire an M&A broker.

How Do You Sell Your Business to a Competitor?

Many people want to know how to sell a business quickly, and one of the most common ways is by selling to a competitor since they typically have a strong interest. However, you need to be careful not to reveal sensitive information that they could use against you if they don't follow through with purchasing your company. You should hire an M&A advisor since these advisors know what information is safe to share.

Can You Sell an Aerospace Defense Company Online?

It's possible to sell an aerospace defense company online, but it's ideal to use an M&A broker to work through the sale. A genuinely interested buyer who is a good fit for your business will need to see many documents during the due diligence process, so selling your business online does not equate to a quick sale.