Blog Posts
Business
Skeletons in the Closet: The 5 Biggest Undiscovered Issues that Can Halt the Sale of a Business
You have an interested buyer and they have submitted an exciting letter of intent for the purchase of your business. What could possibly derail the sale? Well . . . the golden rule for a seller is that the business is not “sold” until the closing and the monies hit the account. Before receiving your monies and having the business sold, be aware of a number of issues that could cause problems. By the way, with proper advanced planning these issues can be alleviated/mitigated prior to going to the market. Proper documentation of owner relations. Nothing ices a sale transaction like equity owners not on the same page. Ownership disagreements on the terms of a sale will quickly sour any potential buyer. However, with a proper stockholders’ agreement or operating agreement, the sale of equity can be controlled and “dragged” along into a transaction. Locking up key employees. Too often key employees are not properly locked up. All buyers will compel sellers to lock up their key persons, making such requirement a condition to closing. Going to a key employee on the eve of a sale is a very bad place to be if you are the seller. Poor financials. One of the first intersections a buyer will have with your business is the review of your financial data. Too many sellers have a mess for their financials. A buyer cannot evaluate the value of your business if it cannot review financial statements that are prepared to standard. Wrong corporate form. Many buyers have corporate structures that are not friendly to investors to maximize gains. The form a seller operates their business during normal times (an S corporation for example) may not be the corporate form desired by an acquirer. Uncertain ownership of key assets. Too many sellers rely upon the assumption that they own the assets of their business. This rings especially true with technology and intellectual property. The time to learn that you do not own the source code to your software is not in the middle of your sale transaction. These are a few of the most common pitfalls that many sellers experience during the sales process. Many times a seller is not aware of these items until a buyer brings it up in diligence as part of a larger conversation regarding the path to closing. All M&A transactions spin on leverage. Sellers should be careful to give over leverage to a buyer by falling into one of the traps.
October 13, 2021
Business
Five Phases of a Deal from a Sell-Side Perspective: Letter of Intent
Congratulations, you’ve received a letter of intent (LOI) to sell your business. What is your next step? Do you sign it because the valuation seems fair and the letter states the terms are not binding? Or do you ask your advisors, especially your legal counsel, to fully review? If you picked option two, you are a very smart seller. The letter of intent is frequently the “highwater mark” for seller deal terms. If the seller does not negotiate material commercial points and legal points, the ability to do so later in the transaction becomes compromised. Yes, the LOI is typically non-binding on the parties. However, it is an expression of goodwill and credibility. As the transaction process gets deeper, it is hard to negotiate material changes to the terms unless the seller is committed to walking away. If closing (and money) is within reach, many sellers will roll over on key items due to deal fatigue, lack of understanding, or buyer pressure. For a seller, leverage is paramount to negotiate the best transaction terms possible. The seller has the most leverage at the LOI stage. In addition, it is always better for a seller to know that a deal will fail on day 1 than day 45 when much time, energy and costs have been incurred. Make certain to have your attorney review all letters of intent before signature! Anatomy of the Deal 5 Phases of a Deal from a SELL-SIDE PERSPECTIVE: The Players and Their Involvement Pre- Transaction Planning Phase Rule: Find and eliminate skeletons; create multiple options Phase I: Letter of Intent Phase Rule: Know what you want and get it in writing as the LOI may be your high water mark Phase II: Due Diligence Phase Rule: Disclosure is your friend Phase III: Contracts Phase Rule: Confirm Business terms and Phase IV: Closing Phase Rule: Time is your enemy Phase V: Post Closing Phase Rule: Remember to dot the I’s and cross the t’s to meet all conditions Post-Transaction Planning Phase Rule: Enjoy your new status in life; make sure you’ve considered life without the business Sell Side M&A: Three Rules of Thumb for the Transaction Rule #1: You haven’t sold your business until you’ve sold your business Rule #2: Get your money upfront (as soon and as much as possible) Rule #3: Reduce and eliminate your trailing liabilities
June 16, 2021
