“Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.” – Sigmund Freud
We often recommend to owners that they build a business with the intent that it will last forever. In other words, the owner should not take shortcuts while running their company, and always do what is best for the company with the long run in mind. In addition, we advise owners to run their company so that it can be sold on a moment’s notice — even if selling is not under consideration in the near term or at all. Running a company in this manner encourages owners to adhere to best practices, which means that every aspect of the company strives to perform at its peak. By following best practices, the owner will, in theory, have all of their proverbial ducks in a row, giving them the flexibility to orchestrate a sale that will not only potentially fetch them the highest price, but help them achieve their key objectives for selling their company when that time comes.
However, the reality is, owners often do not follow this advice. So when it comes time to prepare their company for sale, or when going through diligence in a sale process, owners may unearth issues about their company about which they were not aware — issues that may cost them money and/or time to fix, or even items that may cause a company to be unsalable, or unsalable at a price/terms that meet the owner’s objectives. We call these revelations “unintended consequences” of a sale, and, as noted above, uncovering them prior to or during a sale process can have serious ramifications for the owner. For sure, whatever the unintended consequences, if the owner is committed to selling their company, they will have to “face the music” and fix or address these issues. It can be painful, even costly, but at the end of the day, dealing with unintended consequences is a necessary evil for the owner who discovers an aspect of their business that requires repair.
It is important to note that, oftentimes, owners are unaware of these unintended consequences prior to their discovery — hence “unintended” consequences. The sale process brings unwanted attention to issues that, once known, must be addressed. Addressing these issues could result in the owner incurring professional fees to fix a compliance matter, paying taxes to the Internal Revenue Service or state/local tax authorities, remediating environmental matters, or paying fines to the state and/or federal EPA, for example. Uncovering one of the many unintended consequences is simply a “heads up” to the owner that something needs to be fixed – and must be fixed whether or not a transaction is consummated. While this may not be bad in and of itself, the consequences of ignoring the issue could be even more costly to the owner both as it relates to the transaction as well as knowledge that a known issue has not been addressed by the owner.
These pitfalls are one of the many reasons why we continually advocate for owners to consider preparing their company for sale well in advance — at least 3 to 4 months to several years — prior to considering a transaction. Since there are quite a few unintended consequences that can surface and create headaches for the owner, it is prudent for owners to leave themselves a healthy window of time, when possible, to deal with these issues versus hastily trying to remedy them in the midst of a sale, when running the company and the sale process simultaneously is double duty in and of itself.
Here are some of the “unintended consequences” of a sale an owner may encounter:
- Accounting and tax issues could be unearthed that call into question the company’s true quality of earnings and its compliance with local, state and Federal income tax laws.
- The owner could discover fraudulent activity within the company; for example, a bookkeeper systematically siphoning money from the business, which calls into question the integrity of the company’s controls and systems.
- Customer and vendor contracts may not be as “iron clad” as believed, which puts at risk expected future sales on one hand and the supply or preferential pricing from a vendor on the other hand.
- The owner uncovers an environmental issue during a routine Phase I assessment that they must address, whether or not they are in the process of doing a deal.
- An intellectual property infringement could be uncovered (think Peloton).
- The owner could learn that their employee retirement plans are not in compliance, resulting in costly professional fees to bring them back into compliance.
Of course, this is not meant to be a comprehensive list as there are many other potential unintended consequences. At the end of the day, however, there are circumstances, situations and challenges that may arise as an owner prepares for and/or enters into the early stages of a company sale. They may impact the price and terms of the deal, or even derail a transaction altogether. For these reasons, owners are encouraged to take steps well in advance of a transaction to head off unintended consequences.
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