Some business sellers find themselves in an unfavorable situation after the deal comes to a close. What did these business owners overlook during the selling process? How well did they get to know their buyers? Did they have qualified, experienced professionals help them with all aspects of the sale?
Being fully prepared and equipped with the necessary legal, financial and business expertise is critical to executing a successful sale.
The Right Buyer
To avoid potential blind spots when negotiating the terms of a sale, start by finding the right buyer.
- Initial offer price. The buyer with the highest initial offer price might not be the best option. Some buyers offer a higher price in the beginning to push other buyers out of the bidding process. However, some of these seemingly high rollers intend to lower the offer price once they enter the exclusivity period with the seller. It’s important to conduct background checks on potential buyers before making a choice.
- Buyer solvency. Can the buyer fund the deal? The buyer already could be heavily leveraged or plan to heavily leverage the company. The previous owner might be liable for unpaid debts if the business fails and the new company isn’t able to cover the debts. One solution is to obtain a “fairness opinion” from a professional valuation firm, which analyzes the transaction to determine if the deal is viable under the set terms.
- Key employees. Identify key employees and how much their knowledge contributes to the success of the business. Do they maintain key client relationships? Is it necessary for certain employees to be kept on board once ownership changes hands? One owner of a road building company found out the hard way that the buyer did not value preserving the business culture and maintaining long-term employees. The buyer’s business model was industry consolidation, which included squeezing out excess costs and quickly selling the restructured business at a higher value based on a higher cash flow. Within six months, several key employees were laid off.
Get to know a buyer to ensure it places the same value on employee retention. During management presentations, find out what they like about the company. Do they plan to “flip” the company and sell it to another buyer, or are they going to buy and hold? Determine if the buyer team is likeable based on behaviors during negotiations.
One way to encourage retention is for the buyer and seller to award stay-on bonuses to key employees. This helps ensure key employees promote the business during the sales process and have time to adjust to new ownership, as well as assures the buyer there will be no disruptions to operations from key employees jumping ship.
Tax Impact Talk with an advisor or tax accountant about the structure of the deal before starting price negotiations with the buyer. One commercial building contractor sold to a buyer that offered the higher price, only to find out at tax filing time that extra taxes were due for selling his S corporation within 10 years of converting it from a C corporation. This ultimately netted lower proceeds than selling to the buyer that offered a lower purchase price.