Selling Your Business in a Merger & Acquisition Transaction - Part 5

By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

In mergers & acquisitions transactions there are three main sources of financing a business purchase: the buyer’s own capital, third-party (outside financing from banks, etc.) financing and seller financing. It is common for a business sale transaction to have financing provided from all three sources.

Any merger & acquisition seller should carefully qualify potential M&A buyers based on their bankability. An M&A buyer’s financial strength will determine your ability to sell your company whether or not seller financing will be part of the purchase price.

Third-party financing sources (banks, insurance companies, private equity groups, investors and the U.S. Small Business Administration) will review and critique both the business and the M&A buyer. Financing from third-parties is not guaranteed even if the M&A buyer is strong, especially in today’s environment. The Five Cs of Credit - Character, Capacity, Conditions, Capital and Collateral - will strongly influence whether third-party financing is feasible. Character has to do with the M&A buyer’s reputation in the industry and community, as well as credit history. Capacity has to do with how much debt the financial institution thinks the company can handle following a merger & acquisition transaction; a financial institution will evaluate this before committing to lending. Conditions have to do with the current economic conditions as well as an opinion of how the company would react to any issues on the horizon that could negatively impact it. Capital has to do with how well capitalized the company would be following its sale in a merger & acquisition transaction. Even though cash flow is almost always the primary source of repayment for a loan, Collateral has to do with which kinds of assets (and their value) are pledged as repayment sources for a loan should cash flow become an issue. Additionally, financial institutions will evaluate the attractiveness and feasibility of a business acquisition loan based on the availability and historical predictability of cash flow.

So assuming that the M&A buyer’s capital and third-party financing can only cover a portion of the purchase price, where does this leave you? I can think of only three alternatives to mergers & acquisitions transactions: you keep your company, you close your company or you provide enough of your own financing to this particular M&A buyer so that the buyer can purchase your company. Either alternative may be the right one depending on your individual circumstances and market conditions. If a business owner wants to sell his or her company in a merger & acquisition transaction, keeping the company oftentimes may be a better alternative at the time than selling it in a bad deal. How do you know you’re making a bad mergers and acquisitions deal? One way is to use the Five Cs above to determine if the potential M&A buyer you are talking with really is qualified. By this I mean that you should ask who has more risk here, you or the M&A buyer? If it is you, in my opinion, it’s without question a bad mergers & acquisitions deal for you unless your company is failing miserably in which case all bets are off other than getting away with as much as you can under the circumstances. I’m not a believer in going down with the ship.

In most circumstances, during the mergers & acquisitions sales process, selling a company requires a lot of patience. Planning the sale of a company is a major undertaking that should be approached carefully and systematically to maximize the potential reward. Quick sales of companies are often done on the cheap. However, sometimes a mergers & acquisitions opportunity is too good to refuse and must be acted on immediately lest it disappear. If the deal of a lifetime doesn’t show up at your door unexpectedly, the process of selling your company has many stages and it is very easy to become frustrated and overwhelmed with the time and energy it takes. There is a substantial danger that the distraction of dealing with potential M&A buyers and providing due diligence information will draw the owner away from running the business, in which case performance and profitability will probably deteriorate. Letting others help you throughout the mergers & acquisitions sales process can help prevent this if they are the right parties and you’re willing to put your trust in them.

In Selling Your Business in a merger & acquisition Transaction –Part 4 we covered due diligence requirements. Gathering due diligence information is a massive undertaking and not something I would advise a business owner to try without help. If a business owner has been prudent, a mergers & acquisitions due diligence package will have been prepared before you meet with potential M&A buyers. Having someone help you with this isn’t essential, but it is close to being essential because of the size of the task. It is also an impossible undertaking if the business owner is not the keeper of the information, and in most cases the business owner isn’t. So who does an owner turn to? For legal information, you should consider using your mergers & acquisitions attorney. For financial information, you should consider using your controller/CFO and/or outside accountant. This may cost some money, but what is the biggest cost? Losing the mergers & acquisitions deal? Being distracted? Or incurring an expense?

There is other help you will need to get a mergers & acquisitions transaction done. Working with a competent mergers & acquisitions attorney who has significant acquisition experience is crucial. Acquisition transactions are very complex. Legal fees can get out of control if a one-sided, unbalanced set of documents is proposed by either party. Usually an M&A buyer’s attorney will generate the first draft of all documents. If these are too one-sided, they may alienate the seller, delay the mergers & acquisitions process or even kill the deal. Those same dangers are present if the seller’s attorney provides unreasonable feedback to these documents due to lack of experience, or you give instructions such as “make sure there is nothing in this deal that can hurt me.” If this is the direction given, your mergers & acquisitions attorney will be obligated to point out every possibility of a problem that could negatively affect you. This will be expensive, probably overkill, and the end result will probably be an merger & acquisition agreement no one can live with. merger and acquisition documents need to be reasonable for both parties if an M&A transaction is going to get done.

Sometimes during merger and acquisition negotiations an attorney will feel the need to justify his or her fees by trying to improve the deal on the client’s behalf. If you are satisfied with the terms of your M&A deal, it isn’t your attorney’s job to change them. You should make this clear to your attorney from the outset.

Good mergers & acquisitions attorneys with experience in business sales usually require fewer hours to complete an M&A transaction. Inexperienced and less competent attorneys usually become an obstacle to a successful M&A transaction. Inexperienced attorneys often see their role as being the devil’s advocate and frequently end up killing a deal whereas a competent attorney wants simply to get the M&A deal closed so the client can get on with his or her life. Almost any attorney can draw up or review a simple contract, but a mergers & acquisitions transaction specialist has vastly different experience and perspectives. When hiring an M&A transaction attorney, it is very easy to be penny wise and pound foolish. Make sure that you select your mergers & acquisitions attorney based on the specific skill he or she possesses.

I’ve seen merger & acquisition statistics that state that four out of five businesses on the market are for sale by the owner. I’ve  also seen merger & acquisition statistics that state that four out of five businesses aren’t sold in a reasonable timeframe. I don’t think that this is a coincidence. Selling your company in an M&A transaction will in all likelihood be the biggest financial transaction of your lifetime. If you choose to do this by yourself, you incur the significant risk of not completing a favorable merger & acquisition transaction. As we said in Part 3 of this series, “We all know the old saying about how only a fool…” and “No matter how tough you think you are, you can’t do this alone.” merger and acquisition advisors, i.e. brokers or investment bankers, earn their pay by providing value to a seller by handling the merger & acquisition process more M&A Dealsprofessionally and with more objectivity than a seller normally would be able to. merger and acquisition advisors typically work in specific segments or strata of the marketplace. Choose one who fits with the business you are trying to sell and, as with any other professional, choose your mergers and acquisitions advisor based on his or her professionalism and integrity as well as the level of comfort you feel with him or her.

This concludes this series of articles. I hope you’ve found them to be helpful and informative. Please let me know if there are other exit planning or merger and acquisition topics that you’d like us to write about.

Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at

Copyright 2010 Jack Lyons. All Rights Reserved.