37 Steps in Selling a Business – Stage 3 of 4: Deal Making
10 Steps in the 3rd Stage of Selling a Business
Whether you are trying to sell your business by yourself, or you hire a professional to guide you through the process, there are four major stages of selling a business: Planning, Searching, Deal Making, and Closing. Here are the steps in the 3rd stage – Deal Making:
Answer Buyer Questions: One of the major reasons for hiring an M&A Advisor or Business Broker is to allow the business owner/seller to continue to operate the business without interruptions related to the sale of the business. To accomplish this objective, a professional advisor/broker will do two things: (i) prepare comprehensive marketing documents which address most of the questions that buyers might have about a potential acquisition, and (ii) address those questions not answered in the documents with minimal required effort by the seller. The professional advisor/broker [aka “Intermediary”] will either answer the unanticipated buyer question directly, or request a response from the seller via email – to be addressed by the seller when time permits. In both cases, the intermediary will put the question and response in a FAQ section of the marketing documents.
Conference Call: At some time in the deal-making process, a conference call may be warranted to address those questions that require a give-and-take conversation to fully address the nuances of the issue. The intermediary has to make a decision that the buyer is a serious buyer before scheduling such an interruption of the seller’s schedule. Many times buyers want to have a conference call and/or in-person meeting at the beginning of the process. But that would be a mistake, because there may be many buyers who may want to talk to the seller at the start of the process, and scheduling them all would take too much time from the seller’s primary responsibility – actually running the business. And, the seller will initially get excited about talking to potential buyers and will demonstrate his passion for the business during the call. But after three or four calls, the passion will fade, the seller will start to resent the interruption with another dead-end buyer, and he will no longer demonstrate his passion – an important element in the ultimate sale of the business.
Initial Buyer/Seller Meeting: The reasons for and against a conference call are even more pronounced with a buyer/seller meeting. These meetings are often the deciding factor in the ultimate sale of the business, and take much more time to set up than a conference call, so they have to be handled properly by the intermediary. Again, the intermediary has to decide if this buyer is serious enough to warrant this significant investment of time by the seller. Questions about where to hold the meeting must be carefully addressed. Should the meeting be held at the office of the seller or intermediary, or at a neutral site? And, it’s important to know how long to schedule the meeting, and the types of questions to expect from the buyer – so the seller can be prepared to make the meeting most productive.
Site Visit: As with a buyer/seller meeting, the site visit is extremely important, and is often the last step in the process before the buyer makes a decision to make an offer for the business. And, as with the buyer/seller meeting, a number of logistical issues have to be addressed. One of the most important issues is protecting the confidentiality of the meeting. Sellers are often concerned that employees and/or customers will find out about a pending sale of the company. Rumors that the business is for sale can be spread quickly, with potentially harmful effects to the seller’s company. That said, if all parties are informed by the intermediary about how to conduct themselves at a site visit, the risk of a breach of confidentially can be minimized. And, because buyers should have already signed a confidentiality/non-disclosure agreement, buyers are aware of the consequences to them of such a breach. And, since it is probably not unusual for the business owner to conduct site visits for prospective clients, insurance agents, bankers, etc. – just having a meeting should not raise undue interest from the employees.
Determine Buyer Interest: Throughout the deal making process a professional intermediary is always looking for real signs of buyer interest, while also assessing the likelihood of an interested party being able to actually close the deal. The quality of the buyer’s questions reveals the level of the buyer’s experience in acquisition transactions and his interest level in this particular transaction. And, since most acquisition transactions in the micro and lower-middle market require outside financing, it is incumbent upon the intermediary to assess the prospective buyer’s likelihood to pass through the gauntlet of underwriting criteria. The buyer must have: (i) operating experience that would indicate the ability to profitably operate the newly acquired business, and (ii) sufficient financial resources for the required down payment, with funds left over for unforeseen negative events.
Present Deal Template: Once an operationally and financially qualified buyer has expressed interest in acquiring the company, the intermediary will often provide a template document that contains all the points usually covered in a successful offer. In the deal making protocol, excluding important details or including too many details in an offer usually results in a failed transaction. Excluding important details in the offer usually results in the unraveling of the deal at any time – right up to the closing date, because of different, unresolvable expectations regarding issues that should have been addressed early in the process. And, including too many details in the offer can bog down the agreement process trying to resolve minor issues – causing one or both parties to lose sight of the big picture – and the deal is dead at the beginning. The right balance of addressing significant issues gets both parties in agreement on the big issues – and they can move toward the closing process. As the closing process proceeds, and trust between the buyer and seller develops, the resolution of the minor issues usually proceeds more smoothly.
Initial Buyer Offer: The initial offer can be either a 1 to 2 page Term Sheet or a 2 to 4 page Letter of Intent. The typical Term Sheet is usually submitted by the buyer to make sure that both parties agree to two or three major points – purchase price, cash at closing, closing date, area of non-competition after closing, etc. Instead of a Term Sheet, the buyer can submit a more detailed Letter of Intent . The LOI contains some additional topics and/or more comprehensive descriptions for existing topics, such as more details regarding the non-compete agreement, details of an employment agreement, timing of due diligence and exclusivity period, inclusion of contingencies which need to be met for the buyer to close the deal, etc.
Negotiation of LOI: Invariably there are differences regarding the price and terms of an offer to purchase a business. No matter the asking price, buyers always seem to want the seller to lower his price before they accept the deal. If they don’t get “a deal” on the price, they often feel they paid too much. Or the seller believes he’s laid the groundwork for high profitable growth for the first few years after the new buyer takes over, and he wants some consideration for his work. Or the seller believes there are some intangibles that make his business unique and thus wants a higher price than comparables on the market. In any case, this stage of the deal often requires creativity by an experienced intermediary – or the deal is dead.
Deal Structuring to “bridge the divide”: There’s a popular saying in the M&A field: “Every deal dies three times before it closes.” It’s no surprise that these deals are so difficult to stay together until closing – the seller wants to sell the business for the highest price he can get, for all cash at closing; and the buyer wants the buy the business at the lowest price he can pay, and with as little cash as possible at closing. And the seller wants to shortest non-complete agreement with the smallest geographic area, the longest employment agreement at the highest compensation, etc. – all designed to minimize the risk that he will lose anything after closing. And, the buyer takes just the opposite position on these issues – also to minimize his risk that his investment will be jeopardized after closing. So, after the price and basic terms are agreed to, the parties take positions to minimize their risks. And, if not for the creative structuring of deals to bridge the “divide” of those perceived risks, most deals never close.
Some basic deal structures to mitigate risks after closing are:
- Covenant Not to Compete: Prevents seller from setting up a competing business;
- Employment Agreement: Ties seller to the business to get buyer acclimated to the business and to transfer loyalty of employees and customers/clients;
- Consulting Agreement: Ties seller to the business to help it grow and to avoid pitfalls;
- Earn-Out: Rewards seller with portion of future earnings if seller continues to participate in the business;
- Transfer of A/R and Inventory w/ offset to seller note: Reduces risk of uncollectible accounts receivable and obsolete inventory;
- Working Capital adjustment: Ties purchase price to W/C transferred at closing, to insure buyer receives normal level for the operation of the business;
- Seller Financing: Gives assurance to buyer that seller is confident in future of the business; and
- Equity in NewCo: Incentivizes seller to stay engaged in the future of the company.
Letter of Intent: The final letter of intent must be signed by both buyer and seller before the deal can proceed to the closing process. And all the dates agreed to for due diligence, finalizing the asset purchase agreement, the exclusivity period, etc., are based upon the date of the last signature.
The LOI doesn’t usually contain any legally binding sections [except for the confidentiality clauses], and doesn’t require an attorney to draft. However, many buyers and sellers want their attorneys involved to protect their interests [although their involvement slows down the process and requires additional cost], especially on large complex transactions.
And, most importantly, the LOI becomes the framework for the creation of the closing documents, including the Asset Purchase Agreement, Covenant Not to Compete, Employment Agreements, etc. So, if the parties agreed to something specific in the LOI, there should be little disagreement if it is included in the closing documents.
To see each of the other three stages, click:
Planning – the first 9 Steps
Searching – the next 9 Steps
Closing – the last 9 steps
If you’re interested in receiving a one-page PDF summary of all 37 steps in the 4 stages of selling a business, email Tom MacPherson and paste “Sequence of Steps in Selling a Business” in the Subject line.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.