Sounds like a set-up for a punch line, but the serious answer is that it takes a lot of parties to make a deal happen. What may seem like a simple process actually involves many people, each with his or her own priorities and agendas, and who all want to win for themselves and their stakeholders.
The seller’s side may include:
- The business owner(s)
- The business owner(s)’ spouse(s) and/or family
- The M&A Advisor
- The seller’s attorney
- The sellers CPA
- Sometimes key employees and their own advisors are involved
The buyer’s side may include:
- The buyer(s)
- The buyer(s)’ spouse(s) and/or family
- Their M&A advisor
- Their attorney
- Their CPA
- A due diligence team
- A valuation firm
- A real estate appraiser (if applicable)
- Funding source(s)
- Funding source(s)’ advisors
- Insurance companies
As you can see, in addition to a lot of money at stake within the transaction, there is also significant money that flows to compensate for the time of all the advisors. Emotions can run high, but the advisors should serve as buffers and keep any relationships from becoming adversarial. With each side spending tens of thousands whether or not a transaction happens, closing a deal is the desired outcome and in everyone’s interest.
Early negotiations begin when the buyer and seller begin to learn about each other from documents, conference calls and then face-to-face meetings. These communications usually involve just a small group of people. If the conversations lead to preparing a Letter of Intent (LOI), more advisors become involved in negotiating the LOI. Price and terms are the big negotiation items – the total amount of the sale, how much cash at closing, seller notes and terms, earn-outs, working capital amounts, assets and liabilities included or excluded, and employment agreement terms.
Once the LOI is agreed upon and executed, due diligence begins. The buyer’s investigating team seeks to confirm information that has been given to them and looks for inaccuracies and hidden gems or opportunities that haven’t been presented. They will want to confirm revenues and expenses and may explore customer and supplier details, inventory aging and costing, fixed asset life and value, competitive analyses, and more. Once due diligence is complete, the LOI could be renegotiated based on findings.
The next step is the purchase agreement. Usually, the buyer’s attorney writes the initial draft and the seller’s side will respond back with changes. Both sides will want protections, including defining representations and warranties, indemnifications, materiality provisions, purchase price allocation, conditions to closing, post-closing purchase price adjustments, survival time to assert claims, carve-outs, types of damages, and much, much more.
Negotiating the allocation of the purchase price will have different tax ramifications for each side. The seller will want to minimize their taxes, get capital gains tax treatment and have larger amounts allocated to goodwill. The buyer will want to allocate larger amounts to equipment, vehicles, other fixed assets and consulting agreements, so there’s much negotiation to be done between the advisors on both sides.
The greater your M&A knowledge, the greater your power and the more successful your transaction will be. An M&A firm and M&A attorney on your side who have the knowledge and experience from dealing with numerous acquisitions will generate much better price, terms and management of risk. Contact us for advice on any aspect of the selling process at 913.648.0185 or email firstname.lastname@example.org.