Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
business builder exit strategies
by Terri Krivosha
WHAT ARE THE STEPS a seller should take to find a buyer for the business?
• First, the owner must review the pros and cons to decide if the time is right to sell. A third-party adviser such as a lawyer or accountant is very helpful at this stage.
• Next, focus on the most important goals for the sale. For example, is the owner most concerned about receiving cash at closing, willing to finance the transaction, adamant that there not be future liability risk, or concerned about transitions for employees?
• Be prepared that the sale process may take longer than originally anticipated — potentially one to two years.
• Determine who should assist. Accountants and lawyers are helpful resources. Consider whether current professionals will need assistance by others who practice in the mergers and acquisition area.
• Determine whether to seek an appraisal. Businesses are valued using many methods. If based on revenue or earnings, often a multiplier will be applied and the multiplier will vary from business to business. A valuation can also assist in gauging competing bids.
• Review business operations and records through the eyes of a potential buyer. Make the records easy to review and access.
• Consider providing retention agreements if key employees may leave prior to the closing of a transaction. These agreements promise a monetary reward upon closing if the employee remains with the company.
If the owner is concerned about providing employees with a place to work after the sale, then change-of- control agreements can be used. These agreements provide a payment only after a sale has been closed and if the buyer terminates the employee. However, a buyer may reduce the purchase price offered by the amount to be paid pursuant to change-of-control agreements.
• A buyer will ask to review information about the business including financial statements for the last 3-5 years as well as aging of accounts receivable.
• The buyer will ask if the business is dependent on one or more customers or suppliers, and will ask questions about the company’s work force and the benefits the company provides to employees. The buyer will want to meet with key employees and customers.
Types of buyers
Who are potential buyers of a business? A financial buyer is a buyer who is not interested in hands-on operation of the business, but sees an opportunity to buy the business and sell it for a profit.
A strategic buyer is a buyer who has a current business that synergistically fits with the business.
A business partner, family member or key employee are also possibilities.
Depending on the market and the industry, each of these buyers may be willing to pay more or less for the business and will have different interests in the management team.
A financial buyer will probably keep the management team intact. A strategic buyer may want to fold the business into its own. Sometimes, a purchase by employees will yield the lowest purchase price.
A seller generally wants to sell stock for two reasons: 1) so that the buyer accepts both assets and assumes liabilities; and 2) the tax treatment may be more favorable. A buyer will want to buy assets so that it does not assume liabilities.
After a buyer has received preliminary information it may offer a letter of intent. If there are several parties interested in the company, an investment banker or broker can be helpful in assisting with an auction process.
A letter of intent defines the transaction structure, provides the conditions required to sign the definitive agreement, specifies what expenses each party will pay, and provides a “standstill agreement” where the seller agrees not to negotiate with any other party for a period of time (often 90 to 120 days) during which time the buyer investigates the business.
The letter of intent will also have language that it is not binding but shows each party’s “good faith intentions.” The letter may specify that certain provisions will be binding, such as the provisions regarding standstill and expenses.
The definitive documents are presented after the letter of intent is signed and will consist of a purchase agreement, and may include an employment, consulting or transitional services agreement.
Dispute resolution
The purchase agreement will describe the purchase price and contain representations and warranties the seller makes to the buyer. These are statements of fact about the business, that when qualified with the seller’s “disclosure schedules” form the basis for the transaction.
If the representations and warranties, as so qualified, turn out to be untrue, the buyer usually has an indemnification right with respect to the damages incurred because of the misrepresentation. The buyer will have to assert the amount of its damage, there is usually a dispute resolution mechanism and if the buyer prevails, it receives a refund of part of its purchase price.
The seller’s representations and warranties will survive for a specified period of time, usually one or two years. If the buyer discovers the untruth during the time of survival it can make the indemnification claim.
Due diligence may proceed simultaneously with preparation of the documents. Often, the definitive agreements will be signed and the transaction closed at the same time. The “closing” of the transaction is the date on which title to the business passes from seller to buyer.
When should a seller tell employees about a contemplated sale? If told too soon, the seller runs the risk of employees leaving the business. If the transaction is not disclosed, however, it is difficult for a buyer to perform its due diligence.
Often a seller may disclose the possibility of a sale to a small group of trusted employees who can help assemble information the buyer may want to see. If these are valued employees whom the buyer will want to retain, this is the point when retention bonuses may be negotiated to pay the employees for the period of uncertainty.
Selling a business can be a perfect culmination to years devoted to building it. However, a seller should proceed only when emotionally and mentally ready and with the right team.
[contact] Terri Krivosha is chair of the business and securities group of the Maslon Law Firm in Minneapolis: 612.672.8340; te************@****on.com; www.maslon.com
