This is the third installment in our series on universal advice for sellers. These are the recommendations we find ourselves imparting repeatedly to the sellers with whom we work throughout the sale process. This advice is not only universal, it is timeless. While we don’t have a trove of words of wisdom ready to share with sellers at a moments’ notice, these encompass the recurring ideas and guidance that we have consistently shared with sellers over the years.
In Part 1 of this series, we shared the advice we offer to sellers in Phase 1 of the sale process, and in Part 2, we provided the recommendations we typically provide to sellers during Phases II-IV of the sale process. Here, we will share more universal advice for sellers that is applicable to Phases II-IV.
1. The management presentation is a good opportunity for the seller to interview the buyer as well as to present the company to the buyer. The management presentation is a two-way street — not only is the buyer there to gain a better understanding of the acquisition opportunity, they must also “sell” themselves to the seller. Why? In addition to the best price and terms, sellers want to know that buyers will preserve the legacy and values on which their business was built and that the buyer will take good care of the employees and make sure the company remains a great place to work post-sale. In addition, the seller must ensure that they and their management team can work with the buyer post-closing if they plan to remain with the company for a period of time after the sale. To that end, the management presentation is a “litmus test” to determine if there is a good fit between the seller and the prospective buyer, and that means both parties have to agree that they are well-suited to work together.
2. One of the investment bankers’ responsibilities is to make sure that the buyer shows up with the money. The role of the investment banker is often seen in the abstract by business owners — until that is, they do a deal with one. We often say, “if not the banker, who is going to do much of the work” when it comes to selling a company. One of the investment bankers’ key roles is vetting the “right” buyer, which includes making sure they are motivated, knowledgeable, and have the resources to consummate the deal. It is the third leg of this “three-legged stool” we are referring to here. Buyers must have sufficient financing to complete the transaction and have the resources post-closing to be able to implement the company’s business plan. As such, a significant part of the investment banker’s role is to ensure that the buyer has the resources, (cash on the balance sheet, in-place credit facilities, or the ability to arrange the capital) before executing a letter of intent with the buyer.
3. Neither the buyer nor the seller should make money on the working capital adjustment. The purchase price for a company assumes that there is an “appropriate” level of working capital in the company at closing to operate the company in the ordinary course post-closing. If the working capital is depleted prior to closing (intentionally or otherwise), then there is a real cost to the buyer to replenish working capital to an appropriate level. As such, a working capital adjustment is included in most transactions to assure the buyer that the company is being operated in the ordinary course during the course of the transaction through to the closing. The goal is for the parties to negotiate a representative working capital target based on the characteristics of the company’s working capital. Once the target has been set, any result will be neutral to both parties. Specifically, if closing working capital is lower than the target, the seller has the cash to pay back to the buyer. If closing working capital is higher than the target, the seller is delivering more value to the buyer and the buyer owes the seller the difference.
4. Buyers should offer a reference from every company that they have purchased and let the seller call any one of them. Just as a buyer does extensive due diligence when considering purchasing a company, so too should sellers consider doing “reverse diligence” on the buyer to confirm that they are everything that they say they are, and that their track record matches their claims. As such, sellers should request buyer references from recent and distant transactions so that they can confirm that the buyer is someone with whom they truly want to do a deal. The buyer should be willing to offer references from all of the sellers in which they have engaged, not just the ones who will provide the most glowing endorsements. Sellers should beware of buyers who appear to “cherry-pick” references and ensure that they are getting “the whole story” before moving forward with the transaction.
5. The investment banker can say things to the buyer that the seller cannot say if the seller is going to work for the buyer. If the owner is going to remain at the company for a period of time after the transaction closes, it is important that the relationship between the buyer and seller be preserved with diplomacy and decorum throughout the entirety of the transaction, as well as post-closing. However, the stakes are not as high for the investment banker; therefore, the investment banker can be more candid and honest with the buyer than the seller might be otherwise, or even convey terms or other wishes on the seller’s behalf that may be contentious or upsetting to the buyer that the seller cannot, or should not, say themselves.
We cannot attest to whether other business advisors would agree that our advice is similar to the recommendations they provide to their clients. However, we call our advice “universal advice” because these are the pearls of wisdom we have continuously found ourselves repeating to our clients throughout the years. As investment bankers, we consider it an integral part of our role to dispense thoughtful and useful advice to the sellers with whom we work — and occasionally serve as therapists, too (even if that is not necessarily part of the investment banker’s job description!).
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