This is the second installment of our series on advice we find ourselves imparting to owners time and again before and during a sale process. In Part 1, we shared advice we often relay to owners during Phase I of the sale process. While we don’t have a ready-made list of words of wisdom that we keep in our back pocket, we do discover that we have shared these thoughts on a pretty consistent basis with owners throughout the years as the sale process proceeds through Phases II-IV.
1. Do not use all available add backs to determine the normalized operating results/keep “dry powder” since something will go against you — Add backs are expenses that are unique to the seller and expenses that will not be included in the company’s cost structure and cash flow after the transaction closes. The add backs might include above market owner’s compensation, personal expenses, and charitable giving, for example. One-time expenses, such as a large unusual bad debt expense, might also be a legitimate add back. Inevitably, the buyer’s accounting firm during accounting diligence will identify something that reduces the normalized EBITDA proposed by the seller. It is just for these instances that we advise owners to hold some add backs in reserve so that the seller has something to counteract the buyer’s view of the quality of earnings.
2. It only takes one buyer — Owners often try to convince themselves that they have identified the best buyer and may feel let down if a transaction does not materialize with that buyer. Owners may also feel let down if they “only” receive two or three serious offers to acquire their company. With this said though, it only takes one serious, motivated, knowledgeable, and financed buyer to close the transaction!
3. Signing the Letter of Intent (“LOI”) is the high watermark of the transaction; deal terms do not typically get better — Deals do not typically improve for the owner after they sign an LOI. There are a variety of unforeseen issues that could arise — including diligence issues or company performance issues due to internal and/or external events. Generally, LOIs are signed with the best of intentions, but there are often events that could arise that may result in the buyer proposing a change in the terms of the transaction.
4. You cannot over-disclose — While it is important for owners to present their companies in the best light, they must also be careful not to create an incomplete or false perception about their company by failing to disclose important facts about their company. Generally, nothing good can come from failing to disclose important facts about the company during the legal, accounting, employee, benefits, etc. diligence review. Allowing the buyer to “discover” certain facts can rattle the buyer’s trust and cause the buyer to wonder what other key facts about the company were not disclosed. In fact, once the buyer discovers undisclosed facts, they look harder for the next “undisclosed fact.” If in doubt, disclose, disclose, disclose.
5. Close when you are ready to close; don’t wait for a convenient time — We often say, timing is not a seller’s friend. In fact, timing is more often than not a seller’s foe. While closing at a month-, quarter-, or year-end for example, may be convenient and enable the seller and buyer to close the transaction at a natural point in time, only bad things can happen while the buyer and seller “wait” to close the deal. Put simply, it is better to close when the deal is done rather than when it is convenient.
6. It’s not about the issue; it’s about how the issue is handled and disclosed — Complex issues that could potentially derail a deal, e.g., environmental, accounting, customer, employee, etc. issues, inevitably arise during the course of a sale process. It is how the seller handles and communicates those issues to the buyer that often makes the difference between a successful deal and deal that turns sideways for a period of time or even becomes a busted deal. Sellers who handle issues — no matter how big or small — with directness and complete transparency will come out ahead.
7. Sometimes the seller does not know the deal that they want until they see it — Corollary — it is the investment banker’s job to provide the seller with options/different “looks.” Is a strategic buyer the right way to go? Maybe a Private Equity Group (PEG) would be better suited as a buyer candidate. What type of PEG (there are many subtle and not so subtle permutations) is the best buyer for the owner’s company? Does the owner want to be an employee or continue to own a portion of the company post closing? Ongoing ownership is available in many different forms based on the buyer. The list of transaction permutations goes on and on. Investment bankers can help owners who are uncertain about the kind of deal they want or who are not aware of the vast array of available opportunities by casting a wide buyer net to help owners identify the right kind of buyer to meet their objectives.
One of the investment banker’s many jobs is to dispense thoughtful and useful advice to business owners and occasionally serve as therapists, too. At the very least, the banker’s goal is to help sellers think through every aspect of a transaction in order to maximize the likelihood of achieving a successful closing that meets their objectives. In a future post, we will highlight additional advice that we often provide to owners in Phases II-IV of the sale process.
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