1. Contracts should be reviewed and updated to ensure they are conducive to a potential sale, including provisions for assignment, non-compete agreements, and customer contracts.
2. Financial records should be maintained in an organized and accurate manner, including P&L statements, balance sheets, tax returns, compliance with GAAP, detailed budgets, and knowledge of key financial metrics such as COGS, CACs, EBITDA, and profit margins.
3. Seek the assistance of a financial team to keep the books clean and organized, with a focus on the goal of selling the business. – Business owners should understand the valuation method that led to the sale price of their business before listing it for sale.
– Strategic buyers who can leverage the business for expansion may pay more for it.
– Working with a deal team can help maximize both the gross and net capture from the sale.
– It’s important to have a strong CPA partner and advanced planning team for strategic tax mitigation strategies.
– When selling a business, it’s important to include all key players in the acquisition process early and often, including an Investment Banker, M&A Advisor, or Business Broker with industry expertise. 1. It is important to find an attorney with substantial experience in M&A transactions, from due diligence to contract negotiations to closing deals.
2. Obtaining sound tax and financial advice before finalizing a deal is crucial, and having a CPA who can effectively respond to due diligence inquiries is important.
3. Planning ahead for how to invest the money from the sale, as well as for advanced estate planning and asset protection, is crucial for tax mitigation and future estate tax protection.
4. Having a business advisor or coach during the sale of a business can provide emotional support and help with tough decisions, especially if there are multiple co-owners with different positions on deal terms or strategic decisions. – The key executives need to be informed early on about the intention to sell and should be involved in the process, including the CFO.
– It is important to decide who else in the company should be informed about the sale, as well as to create a communication plan and schedule meetings for the next three months.
– The acquisition process involves six main components that need to be considered and planned out with the team, and it’s important to set expectations, avoid litigation, and be prepared to walk away if the deal isn’t as expected. – Before entering into a deal, it is important to thoroughly know the buyer, including their reputation and ability to complete the transaction.
– When negotiating the Letter of Intent (LOI) or Term Sheet, it is important to carefully review and understand all terms and potential risks before signing. It is advisable to involve an attorney to ensure that the terms meet your needs and expectations. The preferred purchase structure for most buyers is the acquisition of a company’s assets, rather than its stock, for liability and tax reasons. In some cases, an equity purchase may be advised, particularly if the business operates under contracts with anti-assignment language. The purchase agreement will outline the terms of the purchase, including the assets being purchased, liabilities being assumed, purchase price, payment schedule, representations and warranties, as well as holdbacks, earn-outs, indemnification obligations, and restrictive covenants.
Due diligence is a time-consuming process but essential for the seller to organize information in digital folders labeled with typical due diligence categories. Important information categories include financial statements, customer contracts, employment agreements, supplier contracts, equipment and inventory, intellectual property assets, leases, litigation, insurance, permits, and compliance. Access to these folders should be controlled, and confidential information should be redacted. It is also important to review records to avoid potential issues being pointed out by the prospective buyer. – Unless the buyer pays cash, they need to secure financing from a bank or other source.
– The closing process involves executing the final contract and ancillary documents, as well as planning for the flow of funds and payment of debts and transaction costs.
– After closing, the management teams and their advisors work on post-closing transition, including transferring employees, assets, and handling accounting and tax matters.
– It’s important to work with the acquisition team to reduce risk in the acquisition process, including protecting confidential information, assessing risks, and respecting mutual confidentiality obligations. – All owners of the seller should be on the same page before proceeding with the potential sale.
– The seller needs to determine the minimum acceptable sale price, taking into account various expenses that will reduce net proceeds.
– The seller should consider allowing a portion of the purchase price to be in the form of an earn out, dependent on maintaining a minimum amount of revenue from major contracts.
– Seller financing should be considered, with terms such as duration, interest rate, and payment schedule to be determined.
– The potential for the seller to stay on as an employee or contractor should be discussed, including duration and compensation.
– The seller needs to decide whether they will accept a portion of the purchase price in the form of illiquid stock, while still ensuring that they meet their financial goals at the closing.
– Consideration should be given to the acceptance of restrictive covenants, which may limit the seller’s ability to work in their industry after the sale. – The values that drive decisions in the mergers and acquisitions process include maximizing net proceeds to owners, relieving the stress of debt, protecting employees and customers, and protecting the brand legacy.
– Additionally, considerations such as getting a second bite at the apple with rollover equity in the buyer, and the desire for freedom from ongoing employment, also play a role in decision-making.
– Those looking for guidance on the sale or purchase of a business can contact the mergers and acquisitions team at Trenam Law for assistance in assessing readiness, preparation, and guidance throughout the process.
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