The mergers and acquisitions market is showing signs of life. According to New York-based research firm Mergerstat, there were 8,137 transactions in 2003, compared to 7,338 in 2002, reversing a two-year downward trend. The total value of transactions was $510 billion, compared to $429 billion in 2002. The M&A industry record of 10,883 deals was broken in 2000. In the distribution and wholesale segment, there were more than twice as many transactions last year as occurred in 2001.

Several factors have contributed to this increased activity:

• Company finances have stabilized, and in many cases, have begun to improve slightly. Business owners have begun to look outward again.
• Many distributors are coming to the realization that their customer base is not growing, and in many cases, is shrinking due to the continuing flow of production offshore. There is continued pressure on distributors to offer vendor-managed inventory programs that require increased working capital. These conditions are causing sellers to reassess how long they will continue to own their companies and buyers to seek acquisitions so they can grow.
• Bank lenders are relaxing somewhat, allowing buyers to borrow more money to fund acquisitions.
• Pure financial buyers, known as private equity firms, have more than $75 billion in uncommitted capital that must be invested, often within a couple of years.

In short, there are buyers who want to buy and sellers who want to sell. Buyers want to acquire companies in order to gain new customers, kick-start their own sales growth and satisfy investors. Sellers are motivated by retirement, burnout, a lack of successors to take over the business, and financial distress.

The key question for everyone is this: At what price can a deal get done that satisfies both parties? In 2001 and 2002, it was clearly a buyer's market, with values plummeting and limited competition for deals. Many companies with poor financial performance were subject to the vagaries of the market. Bankruptcies and reorganizations were common. Outstanding companies were often all dressed up and unable to find a dance partner.

The past two years have given sellers time to adjust to the new pricing reality (lower than in the rah-rah '90s), and buyers are beginning to raise their offers as their confidence in the economy builds. With activity on the rise again, business owners will be barraged by phone and mail solicitations from buyers and investment bankers of all sorts. Competitors may call or write asking for meetings and wanting to enter into lock-ups or confidentiality agreements. Investment bankers may call offering advice on a sale, re-capitalization, merger or acquisition. What is an owner to do? The following example is based on a situation with which one firm is familiar.

Bill Smith owns a $150 million distribution business, W.R. Langer & Co., that distributes more than 3,000 different parts to manufacturers supplying automotive OEMs. Since its founding in 1933, Langer has developed a national presence, with three distribution centers and seven sales offices across the United States.

Smith is the grandson of Langer's founder. He started in the warehouse 35 years ago and worked his way up to president and sole owner, succeeding his father. He has two children, one an attorney, the other a doctor. No family members are involved in the business. Given the demands of the business, and the financial reinvestment requirements, Smith thinks it may be time to consider an exit.

He explains the situation like this:

"It's like I'm in Vegas. My business is like a pile of poker chips, worth millions of dollars. Every day that I continue to own Langer, I am moving the pile of chips across and letting it ride. Every day, I'm gambling."

Smith turns around and reaches into his credenza drawer, where he finds a 4-inch thick file containing letters from potential buyers and investment bankers.

"Where do I start? Are these buyers credible? Are these investment bankers legitimate?" he asks.

For 10 years, Langer's rival, Brown Services, has been trying to convince Langer to sell to Brown to create an industry powerhouse. But Smith asks, "Is it safe to let a competitor look under the hood? Are they serious or just fishing?"

Every entrepreneur has the do-it-yourself urge. Smith wonders if he should just pick up the phone and call his competitor. After all, it is the best fit and should result in the best price, right? But still, he has questions: "How much should I ask for my business? I could leave money on the table if I don't ask enough. I could scare off good buyers if I ask too much."

What should he do? What follows is a 10-step game plan:

Selling a busines is one of the most important decisions in a business owner's life. It is also, usually, the single largest transaction in one's life. Owners develop business skills specific to their function and industry. Owners are often experts in running their business, but attorneys, accountants and investment bankers are the experts of their respective fields—and all four parties are necessary components of a successful transaction.

The deal team is like a team in a hospital operating room, each performing an important function, different from, but related to, the others. The accountants are needed to ensure that the historical financial statements of the business are presented accurately and according to generally accepted accounting principles. The attorney is critical in advising the client on how best to document the transaction to ensure full receipt of proceeds and minimize the risk of a post-closing challenge by the buyer. Both accountants and attorneys are important for helping the investment banker craft a deal that minimizes the total taxes associated with a deal. Most important, great accountants and attorneys recognize that they are not investment bankers and that there is an important deal-making role to be fulfilled by the right investment banker.

There are many types and styles of investment bankers. Take time to interview several recommended by other business owners, attorneys, accountants or friends. Evaluate investment bankers based on the credentials of the dealmakers that will work your deal. Though the reputation of a firm is important, firms don't do deals, bankers do deals. Ask how many deals the banker is working on and how many deals he has closed recently. Don't fall for the bait-and-switch, in which the 'A' team bankers come out to pitch you and then the 'B' or 'C' team works on the deal.

Understand the process that will be undertaken by the investment banker. How will the buyer list be developed? What sort of marketing materials will be used? What approval mechanism is in place to ensure the client is satisfied with the buyers and the marketing materials? Who will be doing the negotiating for you?

When to sell is a function of business dynamics, personal life-style and financial need. A necessary component of this decision-making process is a business valuation. Make sure to use a qualified investment banker who has a finger on the pulse of the market. Remember, garbage in/garbage out, so make sure a thorough and rigorous analysis is performed.

There are many kinds of business valuations— estate planning, taxes, buy-sells, litigation, etc. The only one that matters in evaluating a sale is a true market-based valuation—the value at which a deal can be consummated today. A market-based valuation will take into account the amounts for which comparable public companies are valued, the prices paid for similar companies that were recently sold or acquired, and a discounted cash flow analysis. The rigor and analysis put forth by the investment banker and the resultant judgment or valuation reflect that banker's work ethic and approach.

Once a market-based valuation is accomplished, compare that value to your own expectations or desires. Be honest with yourself. Don't undertake a transaction unless the objective valuation meets or exceeds your value requirements. Doing otherwise is a waste of time and a potential risk to the business. Also, entertaining discussions with buyer prospects that write unsolicited letters is a waste of time. Most are just trolling for a bite and are looking for an unsuspecting seller who is not represented. They hope to avoid paying top dollar.

When the time is right to sell, do it right. Have a qualified, professional investment banker conduct a process. Transaction value (dollars received) is maximized by creating simultaneous interest in the target company by multiple parties in a process that presents the optimum future scenario for the business. Don't underestimate the value of the transaction process. It is critically important to the success of the deal. The sale process can be compared to professional deep sea fishing: you would rather go with the guide who is experienced and uses the right equipment, knows the right places and conditions, and uses the right bait. Otherwise, you risk spending a boring, expensive day getting seasick and sunburned. Selecting the best buyers, writing compelling marketing materials, presenting accurate and exciting financials, and negotiating tenaciously are some of the components that make or break deals.

Most business owners are so deeply entrenched in the day-to-day of their business or industry that they often don't have a broad enough perspective to appreciate the range of potential buyers. According to our research, there are more than 3,000 industrial distribution busi-nesses in the United States today, with more than $25 million in revenues. Some are public, some are private, and some are owned by private equity groups.

Buyer candidates must be screened by financial capability; can they afford the deal? Then one must consider the strategic fit. Are the product lines competing or complementary? Is the target in a part of the country the buyer needs to fill its national coverage? Does the target possess a customer or customers that the buyer has been trying to access? It is easy to look at Web sites and catalogues, but how is it possible to know the prospective buyer's strategy? Skilled investment bankers can elicit this information from buyers to use to their advantage.

The value of a business derives from a buyer's ability to achieve an appropriate rate of return, which is a direct function of the future sales and profits of the business post-sale. Take time to develop a thorough and well-thought-out five-year plan. Reconstruct the historical financials in order to show normalized profits, eliminating items such as excess owner compensation and perks, and one-time events such as extraordinary bad debts.

Consider synergies by asking important questions: Can the businesses of the buyer and seller be combined to realize operational synergies? Are there overlapping or redundant distribution centers? Can two human resources departments become one? Can complementary products be sold to one another's customer bases, thus increasing the revenues of both businesses?

Allow the investmant banker to create a liquid market for the company, approaching as many strategic buyers as competitively prudent. The more competition that can be created, the higher the purchase price.

In some rare instances, you may want to avoid certain competitors, but don't constrict the market too much. Competition fosters a higher selling price. Look for a banker who is going to access the executive suite of the buyer (the CEO, president, CFO, etc.). A banker must actively work to make the deal a priority for the buyer. Simply advertising the deal in the Wall Street Journal is inadequate to generate the interest, excitement and competition that will obtain the best results.

While the bankers are marketing the company, the owner should commit as much energy as possible to focusing on the operations of the business. Run the business as if you are going to continue to own it, but "put the pedal to the metal." Growing sales and profits during the marketing process creates the sizzle and leverage that a seller needs to accomplish a great deal.

Make sure that your deal team has a sophisticated attorney, accountant and investment banker. They can advise you about the subtleties of transactional structures and documentation that will net the highest proceeds after tax, and allow you to sleep at night once the transaction has closed. Should you sell assets, stock, or member interests? Is a 338(h)10 transaction going to decrease or increase taxes? Are there built-in gain taxes or alternative minimum taxes that need to be considered? Representations and warranties, indemnifications, caps, cushions, and baskets are all areas that need to be carefully navigated in order to conclude a successful transaction.

Timing is critical in transactions. Don't be so afraid to leave opportunities on the table for the buyer that you miss the exit opportunity altogether. In 1999, we valued an office furniture business at about $30 million. The husband/wife owners believed that with the addition of one new line they could double the value of the business in 18 months. They chose to wait. One year later, the business was all but gone, worth only liquidation value. In a separate situation, the owners of a business turned down an offer for $10 million, holding out for more. Six months later the company was laying off workers, and 18 months later it was acquired by a public company for practically nothing. The owners were lucky to get employment arrangements.

We once represented a distributor of building products. We and three other investment bankers valued the business at $40-$45 million. We received 12 preliminary offers. After allowing four visits, we concluded our process by accepting a $65 million bid for the company. Needless to say, the sellers are friends for life.

Always remember, deals are unnatural occurrences. They don't just happen. They must be created by two willing parties (the buyer and the seller) and a group of professional advisors.