Important Considerations when Buying and Selling a Company
By Jack Lyons
President, Lyons Solutions LLC
Companies are bought and sold every day, making the event look commonplace to the casual observer. However, these transactions are rarely simple. For each party, the buy-sell decision creates risks that must be addressed.
For the seller, the perception of a risk is likely tied to the many years of hard work put into building the company, and building the company has usually been filled with its own risk/reward decisions.
For the buyer, the purchase of an up-and-running business means growth and change that may impact the current portfolio of business. At the outset, the buyer may not be entirely clear about how to successfully grow the acquired business and may be concerned about the way the new company will blend with current entities.
In order to create an ideal transaction, each party must prepare carefully with the goal of “covering all the bases” and looking at the potential deal from a variety of angles.
In getting ready for an initial meeting it’s important for both parties to have the following points in mind:
- The first meeting is really to determine if both parties have an interest in having further discussions. Sellers don’t normally bare their souls at the first meeting.
- The seller will have to consider how to best present the overview of the company’s structure and performance. The initial presentation must clearly outline key value drivers. The presentation should provide just the right amount of detail – enough to enable the buyer to decide whether the acquisition is attractive enough to proceed.
- The buyer must come to the initial meeting having considered how to introduce him/herself and how much information to share regarding his/her current operations. The buyer’s job at this meeting is to be friendly, reasonable and interested.
- The buyer must be prepared to listen carefully during the meeting in order to get a good sense of who the seller is and what the seller’s company has to offer.
- The buyer should plan to have a lead person (principal) and a back-up person at the first meeting so that the seller can be in contact with someone knowledgeable if the lead person on the buyer’s team is unreachable. There may be follow-up questions to be discussed.
- By the close of the initial meeting both the seller and the buyer should be sure that all the questions necessary for deciding whether to take the next step forward have been sufficiently answered.
- Each party should save all detailed questions for subsequent meetings. It’s best to build chemistry first and let the tough stuff come later.
- If the buyer determines that s/he really doesn’t want to buy the company, exit the discussions as quickly and as gracefully as possible so that everybody’s time isn’t wasted.
- The initial meeting sets the stage for getting a contract negotiated that works for both the buyer and the seller.
Structuring an Offer to Buy
It is important for the buyer to know the seller’s financial, personal and business goals for entertaining a sale. Is the seller a downside risk-hedger or a promoter or someplace in between? Knowing the answer to this question is likely to help the buyer evaluate what the seller’s wishes and expectations for the shape of the deal might be.
- If the seller is a downside risk-hedger, he or she primarily wants one thing from the deal- the maximum amount of dollars at closing. It’s a waste of time to focus on earn-outs, stock in the new or parent company, or installment payments. In this situation, the buyer needs to decide how much cash can be delivered at closing, then offer it and see how the seller responds.
- If the seller is a promoter type, he or she will tend to be more open to a variety of deal structures and look at the deal from all angles. Cash won’t be the only criteria that will be considered. Earn-outs, stock, bonuses and even personal fringes could help seal the deal.
- In our experience, most people will fall between these two extremes, so the buyer needs to have a feel for the motivations of the seller and an initial idea of how to make a deal happen.
Offers to buy companies have two components: the deal financial package and the post-close management financial package.
- The deal financial package must address how much money is being offered, in what form, over what time frame and with what contingencies. Sellers need to understand the absolute minimum and maximum amounts of purchase price compensation to be received on both a pre-tax and after-tax basis, and must also weigh the possibilities of collecting future payments.
- The management financial package may be closely tied to the financial package if the principal selling stockholder(s) is/are also the principal manager(s) of the company. The salary, bonuses, degree of autonomy, fringes and growth opportunities available to stockholder(s) and/or the professional management team will require discussion.
The offer needs to be conveyed as clearly and as elegantly as possible to reach an agreement.
In order to make the negotiation process go smoothly, as a buyer you need to seriously consider the following:
- Buying a company is not only a function of what the seller has done in the past, but also of what you both may be able to do in the future. If you try to negotiate a rock-bottom bargain, the deal may not go through or if it does go through, there is a strong possibility that you’ll have such a disgruntled seller that you’ll wish you hadn’t tried to go with a bargain basement mindset.
- Do what you can to allay the seller’s fears about what it’s going to be like to work for you after the deal is done.
- If you believe that the seller has overlooked something in the offer that you know will have to be addressed before closing, raise the question right away and try to solve it, if possible. It’s not worth the risk of a seller discovering a serious problem at the time of the closing and then have a transaction fall apart as a result.
- Before serious due diligence investigation begins, reach agreement on price, major term points and other deal points. Codify them in writing. Convey to the seller that the closing of the transaction is subject to satisfactory completion of due diligence and any contingencies to closing. Also, make sure to communicate to the seller what elements of the due diligence investigation will be particularly important to you, the buyer, so that the seller can deliver it to you on a timely basis.
In order to make the sale of your business go smoothly as a seller you need to seriously consider the following:
- First and foremost you must be clear as to whether you are a serious seller. What are the compelling reasons that support your decision to sell? What deal financial package structuring alternatives would you be willing to consider? Get professional advice early so that you don’t overprice or underprice your company. It’s critically important that you understand what the after-tax proceeds will be based on various price and transaction structure scenarios.
- Know how to best protect your interests during the sale process and negotiate the very best transaction for your company.
- Know how to communicate the company’s past and future story to a potential buyer. This needs to be done concisely, both in writing and in discussion. Determine ahead of time what the company’s key value drivers are and how they should be communicated. It’s always a balance between how little and how much information to reveal in the early stages.
- If there is anything negative going on in your company, be sure to communicate it up-front. Late disclosure of problems can only create mistrust between you and your buyer and may cause the buyer to re-price the transaction.
- Watch and listen, not only to what the buyer says, but what the buyer does. Does the principal continue to communicate and show interest? Substantive negotiation should be in the hands of principals, not subordinates.
- Determine in advance what important questions you want to ask the buyer. Asking the right questions will help you to determine if the buyer has the financial capability to complete the transaction and if there is a good cultural match. If the buyer is a public company, be sure to review its SEC filings and any research reports available (in advance if possible).
- Be totally comfortable with the buyer before agreeing to an offer.
- Make sure you have experienced advisors and that you use them early and effectively.
Use of Outside Advisors
It is impossible to sell a company by yourself. None of us has that experience. I’ve always advised my clients to use the best advisors possible. If you’re a seller, your advisors need to be as good as the buyer’s advisors. If they are not, you lose. Each advisor has a role, but don’t forget that you are the primary decision maker. Don’t delegate that responsibility to anyone else. Given that, what are the possible roles and uses for your lawyer, accountant and financial advisors?
- The lawyer’s responsibility is to protect your legal interests; to negotiate certain legal points such as the extent and scope of warranties and representations; to make sure the transaction is legal; to act as an advisor on timing, notice to shareholders, and taxes; to act as a technician in the drafting of the purchase agreement, employment contracts, leases and bills of sales; and to provide a legal opinion. Corporate counsel often plays a strong and effective role in reviewing and providing due diligence materials. The lawyer’s job is not to try to renegotiate the financial aspects of the deal. If a renegotiation becomes necessary due to a change of company performance, the principal negotiators will need to re-engage and find a common ground.
- The accountant’s role may vary substantially. Together with the attorney, the accountant is an advisor on tax matters, accounting treatment of the transaction, addressing the tax and accounting policies of the other company, and acting as an advisor in obtaining tax rulings. Smart sellers and buyers use their accountants extensively in the financial due diligence process.
- The financial advisor’s role is to quarterback the transaction to a successful close. That begins prior to the decision to either sell or buy and ends when the transaction is complete. It involves strategy and preparation, research and buyer list generation, buyer contact and follow-up, negotiation, problem solving, due diligence and closing of the transaction. Your financial advisor will lead the negotiation of all the transaction business deal points.
The advice given in this article can give you a perspective for establishing optimal conditions for a successful business sale or purchase. In summary, buying or selling a company is not a cookie-cutter process and there is no one right way to do it. Each transaction is different and there is no such thing as a perfect transaction. The outcome of the negotiation is largely dependent on your willingness to look at the deal from a variety of angles, to deal with surprises, and to accommodate changes. Proceed with care! Once the transaction is completed, you’ve already used your one chance to get it right.
If you're thinking about selling your business or are a serious buyer and would like to discuss your situation and options confidentially, contact Jack Lyons at (941) 497-4700.
© Copyright 2014 Jack Lyons. All Rights Reserved.