Whether you have decided to sell your business or you are looking to buy one, this article offers a few tips and insights that may be helpful.
Tips for Sellers
- Find a Strategic Buyer: Most sellers want to maximize shareholder value, and that is often done by finding a strategic buyer. Your company may provide something the buyer can utilize to accelerate its growth or profitability. This missing piece might be technology, product or service offerings, economies of scale, key people, or territorial presence.
- Consider Letters of Intent: LOIs generally come in two forms — binding and non-binding. Even non-binding LOIs have binding provisions, such as confidentiality or a short exclusive negotiating period. A non-binding LOI will also usually set forth transaction terms such as price, structure, and assets sold, and the only thing a party can sue about is breach of the nondisclosure or exclusivity provisions. A binding LOI is a lengthier document which sets forth substantial detail about the terms of the transaction, always adds expense/time, and comes with a risk of litigation if the parties do not execute definitive agreements. Binding or not, LOIs invest parties psychologically in the transaction.
- Prepare the Company for Sale: With some exceptions, the best way to prepare a business for sale is to run it the way it has always been run, assuming it has been run successfully. Obvious exceptions might include dealing with problems the seller has delayed addressing, making sure the seller’s books are in good shape, and avoiding large purchases that may not have value to the buyer.
Tips for Buyers
- Do Your Due Diligence: The due diligence review is a collaborative effort between the buyer’s executive team, the buyer’s attorney, accounting professionals, the broker or investment banker, and others. In a stock transaction, due diligence is important because the buyer inherits the liabilities of the selling business. Even in an asset sale, due diligence is important, especially areas in which an asset buyer has potential successor liability for the seller’s obligations, including taxes, wage claims, environmental conditions, or unfunded qualified plan liabilities. The purchase agreement will have representations and warranties by the seller as to the business, its condition, and problems. Those representations and warranties will be tied to indemnification rights so that if a buyer is given misinformation, it will have recourse against the seller. The more exhaustive the due diligence, the less likely it is that there will be post-closing disputes.
- Recognize the Importance of Transaction Documents: In a typical asset sale, the most important document is an Asset Purchase Agreement (“APA”), which contains the essential terms of the transaction. From the buyer’s perspective, who or what is guaranteeing the representations and indemnity provisions in the APA is important. Are there key employees of the selling business who ensure the success of the business, or would it be a threat if they went to work for a competitor? If so, the buyer will want employment agreements and noncompetition agreements as conditions of closing the sale.
- Walking Away is OK: Usually, when a buyer discovers an unanticipated obstacle in the target business, or liabilities beyond those initially contemplated, the transaction proceeds. There may be a price adjustment or a revision to reallocate risk and reflect the revised understanding. However, as the buyer digs deep into the business, the buyer may discover a fatal flaw. In almost 40 years of practice, I have seen buyers acquire businesses they subsequently regret. However, I have never seen a buyer make a decision to walk away from a transaction, and later report that he or she let a good opportunity get away. It is better for a buyer to make no deal than to make a bad deal.