Sellers typically focus only on the price that they believe that they will receive in the sale. Surprisingly, for example, professional wealth advisors are rarely asked by sellers to do an analysis of what the entrepreneur will need to maintain his or her lifestyle after the sale of the goose that had till then been laying the golden eggs that had been supporting the seller. Knowledgeable and experienced lawyers, accountants, investment bankers and wealth advisors who focus on M&A, however, will best guide business owners before, during and after the sale process.
Even before an entrepreneur puts his or her business in play for a potential sale, they should focus on operations. Sophisticated buyers are keenly sensitized to quality of earnings; just how profitable and sustainable is the revenue that the business generates and where are the risks. For example, quality of assets (such as inventory and receivables), sufficiency of working capital, internal controls, management capabilities, realistic CapEx requirements and customer concentration and relationships are all highly scrutinized by potential acquirors. Lawyers, accountants and investment bankers that are retained by a selling entrepreneur prior to the commencement of the sale process can kick the tires and help address problem areas.
An entrepreneur inexperienced in the world of M&A who, for example, negotiates his own a letter of intent establishing the terms and conditions around a sale of his business has already been caught in a spider’s web.
The letter of intent often creates the parameters for the sale process, from the purchase price, through the structure of the transaction itself (with all its inherent tax ramifications), to the due diligence process (with its own set of dangers in impacting relationships with employees, customers and suppliers) and how long the seller will refrain from “shopping the business” during the negotiation process. A seller has already stepped in a minefield if he or she without advice of any M&A professionals, signs a letter of intent and then presents it to his or her lawyer and says “get the deal closed.”
It is also crucial for selling entrepreneurs to understand the impact of all the sale documentation; these agreements can affect not only preservation of the purchase price itself, but profoundly impact the life of the seller after the sale. This is especially true for a seller who sells his or her business to a private equity firm. Often he or she will not only continue to work for the buyer after the sale, but also will become a business partner of the private equity firm as a result of the seller buying back an ownership interest in the purchaser as part of the purchase price structure.
The terms of the employment agreement and shareholders agreement can be crucial to the seller’s future. It is also best for the seller to at least have exposure to the issues in the acquisition agreements that relate to purchase price adjustments, representations and warranties, indemnification obligations including caps, baskets and survival periods all of which can significantly impact the sanctity of the purchase price.
The myriad issues beyond the purchase price itself that arise before, during and after a sale that a savvy selling entrepreneur should be aware of will be the subject of a breakfast meeting hosted by the ACG New York Long Island Division at the Hofstra University Club on Tuesday, November 17, 2015 at 8:00 a.m.