Avoiding the Top 7 Landmines in M&A

If you’re a baby boomer and you’re a business owner, chances are you’re starting to think about selling your business. So many unknowns surround the sale process, but one thing is for certain–you will want to be confident about whatever decision you make.  Confidence starts with knowledge of the sale process and an understanding of how costly shortcuts can be. You only have one chance to sell your business and there are no do-overs. What follows is a brief summary to help you learn–and avoid–the top seven landmines we see in Mergers and Acquisitions (M&A) transactions.

Landmine #1 – Not appreciating the state of the Mergers and Acquisitions market.

The M&A cycle has large ups and large downs. This is out of your control. However, understanding the market allows you to be proactive and take the best course of action. Currently, the market is hot and buyers are overpaying for desired targets.  The M&A market won’t stay like this forever and the time to sell may very likely be now.

Landmine #2 – Not Understanding Business Valuations

Could a mother or father put a price tag on a child? For the owner, selling their business almost seems like a similar struggle. Owners have poured their blood, sweat and tears into building and running their company; making it difficult for them to be objective.  A Business Valuation, even a short form valuation, will help the owner get a true understanding of what value a buyer would attribute to the business.

Landmine # 3 – Not Understanding Net Value

Much time is spent negotiating the purchase price, but what should really matter to a seller is how much money they will put in their pocket at the end of the transaction.  The net value should always be computed on the front end. To avoid disappointment, you need to keep in mind how different the sales price can be from the net value. Just some examples of items that needed to be deducted from the sales price are as follows:

  • Transaction expenses (including broker, lawyer and accountant)
  • Equipment financing
  • Lines of credit
  • Working capital
  • Taxes (including depreciation and recapture)
  • Escrow
  • Seller Note

Landmine #4 – Not Understanding Risk Allocation

Warranties and representations are the promises the seller makes to the buyer as to the condition of the business. They tend to make up the bulk of the long purchase agreement that will be signed between the parties.   Common examples include:

  • Ownership of Intellectual Property
  • Proper Classification of Employees
  • Binding Contracts
  • Environmental Condition of Property

Another important aspect of risk allocation is indemnification.  Sellers must pay attention and heavily negotiate how much post-closing risk they will bear.  The seller and the buyer must negotiate complicated matters such as a cap on post-closing liability, how long representations and warranties will continue after closing, and if a deductible applies to minor claims that arise following closing.

Landmine #5 – Not Planning Ahead

The value of proactive planning cannot be overstated.  Identifying and fixing a problem before a buyer discovers it will have very real positive impact upon the value the buyer will pay and the amount of post-closing risk a seller will bear.  If you plan to sell your business in three years, the time to start planning is now.  (Somewhat) simple steps you can take to increase value include:

  • Increase EBITDA
  • Reduce working capital
  • Lock in key employees
  • Reduce long-term contractual obligations/buy-outs
  • Eliminate risks found in due diligence
  • Clean up financials
  • Ensure contacts are binding and assignable

Landmine #6 – Short cutting the process.

It is also essential to let an experienced advisor guide you through the sale process. Short-cutting the process can lead to leaving money on the table or blowing up the entire deal.

Landmine #7 – The Wrong Players

Understanding the nuances of the M&A world takes years of learning.  Buyers can identify an educated and committed Seller by the team they assemble around them.  Do not leave the sale of your most important and valuable asset to a general practitioner.  Having an experienced M&A attorney will translate into improved economic consequences, less risk, and a smooth closing.  A buyer’s counsel will spot an inexperienced advisor a mile away. And, they’ll negotiate accordingly.

If you are thinking of buying or selling a business, it’s important to be proactive. Advanced planning now will mean the difference between achieving your business goals or missing the opportunity. To learn more, you can email info@epiphanylaw.com or call us at 920-996-000.

 

About the Author – Kathryn M. Blom is an attorney with Epiphany Law. Her practice focuses on complex business law, contracts, exit planning, securities, mergers and acquisitions. She advises her clients on how to identify effective solutions and achieve their business goals.