Challenges facing business owners attempting to sell their business without professional representation will be reviewed this month. Let’s get started by discussing:
A prospective buyer approaches a business owner with an offer seemingly too attractive to turn down. In almost all cases the prospective buyer knows the business owner. This “friendly” Buyer may be a competitor, supplier or an “old friend”. During lunch or dinner a verbal offer is made, subject of course to reviewing a few business details. Agreement reached and you shake hands.
This lone Buyer, despite his familiarity and good cheer (and perhaps even honest and good intentions) is nevertheless putting you at an automatic disadvantage. All too often in “friendly single buyer” circumstances terms, price and timing are controlled by the lone Buyer – because the Seller, lacking experience in these matters, neither understands the proper sequence of events nor wants to rock the boat as he believes (or, rather, he wants to believe) it is a very attractive offer. Initially the Seller receives a short list of items (business details) to be reviewed by the lone Buyer. The list usually includes: three or four years of financial statements; AR and AP Aging and Payroll information. After responding to the initial request, additional requests continue to be made broadening scope and detail: privilege marketing and sales details, lease information, equipment valuation, costing information and on and on. This tedious, disruptive process often continues for months with no letup. Sound familiar?
Important transaction documents are missing and steps are out of sequence.
Do not start Due Diligence without a signed Letter of Intent. Of course a Buyer may argue need for valuation material before presenting an offer. Fair enough and middle ground may be reached by providing only properly prepared valuation material beforehand. Negotiate a Letter of Intent. after providing valuation material. Remember you thought you shook hands on an offer. The Letter of Intent confirms that offer in writing.
1. Confidentiality Agreement. Prior to releasing any information to a prospective Buyer, (including the fact you are considering the sale of the Company), a signed Confidentiality Agreement must be in place. How important is this? Ask yourself: what are the possible damages if customers, vendors, employees or banks discovered that you may be selling your company? Therein is the need for a Confidentiality Agreement. If you are representing yourself ask your attorney to draw up the Confidentiality Agreement. Don’t rely on cut and paste or cheap advice from friends for this important document.
2. Letter of Intent. A Letter of Intent is a negotiated , signed document stating the intent of the Buyer and Seller to enter into an acquisition agreement (Purchase and Sale Agreement) subject to the terms and conditions described. Many important particulars of the proposed transaction are included: Asset or Stock Sale; Price; Terms; Contingencies; Due Diligence Period; Transition Period; Non-Compete; Closing Date; Closing Agent are some of the important items included in Letter of Intent.
Absent a Letter of Intent the Seller has nothing more than conversation. Verbal offers have no legal merit.
3. Due Diligence. Due Diligence. Due Diligence allows parties to comfortably check financial statements, business practices, contingent liabilities, property condition, equipment, inventory and a host of elements that make up an operating company. Buyers are also expected to check similar items. This sentence is worded to remind Sellers of their responsibility to perform Due Diligence on Buyers. Due Diligence need not be disruptive or unending. After acceptance of a LOI, provide a master list of items to be submitted for Due Diligence. And check off the items as you process the information. During Due Diligence it is not unusual to discover items that may impact value. Make a list of the items that impact value and handle them at the end of Due Diligence rather then one at a time as discovered.
During Due Diligence protect privilege information being released. Do not provide names of employees, clients or vendors. Assign proxies or numbers. For example:
Sales by Client for 2006
| Client | Sales | % |
|---|---|---|
| c1001 | $300,000 | 5.0 |
| c1002 | $150,000 | 2.5 |
Accounts Payable Aging Report
| Vendor | Current | 30 | 60 | 90 | Total |
|---|---|---|---|---|---|
| v1001 | $5,000 | $2,000 | 0 | 0 | $7,000 |
| v1002 | $3,500 | 0 | 0 | 0 | $3,500 |
Employees
| Title | Tenure (yrs) | Salary / Hrly | Commission |
|---|---|---|---|
| Sales Manager | 10.4 | $140,000 | 1.8% |
| Salesman 1 | 5.5 | $87,000 | 4.2% |
| Salesman 2 | 4.5 | $62,000 | 4.2% |
| Salesman 3 | 3.8 | $60,000 | 4.0% |
In this way you are providing valuation information while protecting confidentiality of your clients, vendors and employees. And one final bit of advice, avoid identifying the Company within provided material. You just never know who may accidentally view the information.
As children we learned that things gain value in direct relationship to interest. In other words, interest creates value. Increase interest and you increase value. A lone Buyer not competing with others often pays less than full market value for the business. Our experience over the years has demonstrated it is not unusual for competing offers to vary by 20% and sometimes reach 50%. If fact this occurs so often that we offer a 20% discount to our client if the lone Buyer they are dealing with at the time actually purchases the business. We have never paid the discount because the lone Buyer usually has no intention of competing with others for the business.
How does one create competition without revealing confidential information?
This dilemma facing every owner who ever sold a company. The Do-It-Yourselfer increases risk of being discovered by customers, vendors, employees and worst of all his competition. Be assured if your competition discovers that you are selling, your customers, vendors and key employees will be informed in short order and the consequences may be swift and quite damaging.
I remember well the financial damage done by a single phone call made by a family member to the competition. That phone call cost the company millions of dollars.
So you are back to square one with the lone Buyer who seldom pays full value. But that is okay. The Letter of Intent negotiated with the Buyer seems fair. Doesn’t it? And besides you do have a business to run. And therein is the rub. The time and attention required to sell a business is naturally disruptive and intensive — and no doubt more so when it is sold by the Do-It-Yourselfer.
There is another way. Retain a professional, experienced, and long-respected merger and acquisition firm that discreetly represent owners of privately held companies. Let’s get acquainted.
At the first meeting you will receive a non-disclosure agreement allowing you to comfortably discuss your objectives and goals in confidence. The meeting may be at our offices or your business. After reviewing four years’ financial statements and asking business-related questions, we will discuss the reality and timetable of achieving your expectations during a second meeting. Our fee structure will be explained and a contract will be provided for your review and approval.
