Let The Seller Beware

A relatively new client had been ‘snared’ by a call from an acquisitive industry peer. They covered a lot of valuation questions over the phone and though he’d never thought about selling, my client was ready to bail. I arrived for my regular afternoon session and the client said, “Let’s get him (buyer) on the phone and see if we can wrap this up.” Reluctantly I called.

We rehashed valuation of inventory, property lease, cash payment at closing, earn out incentives and a targeted closing date. All this in anticipation of a formal Letter of Intent to follow; and then, the deal went south! My client whispered, “Tell him I only want to work three days a week, ask him if I can keep my office for personal use, remind him I’ll still need a company car.” I stopped relaying the questions and told the buyer we would have to call him back.

I then chided my client that his ‘preferences’ should have been set forth in the beginning of the process, not speared in at the end. We sat for an hour as he generated his list of must haves—and there were many since I don’t think he was really interested in selling but worse, he thought he had a buyer that would give most anything to close the deal. We called back, worked through the list, each item provoking a “no” and after twenty minutes the buyer walked.

I won’t say the process of selling a business is easy, but I can say that it is far more complicated and stressful when the seller is less than fully prepared. Many buyers are represented by bankers or are, themselves, private equity firms. Both are highly experienced in focusing on detail; it’s what they do and they do it very well. As a seller, better to come to the table fully prepared than to be forced to catch up.

Start early, as much as eighteen months to two years ahead of a targeted transaction. Here is a list of a few of the many factors to consider, some specifically related to privately or closely held companies, all worth evaluating.

• What is necessary or best, a stock sale or an asset sale

• If a stock sale will some shares be earmarked for trust funds or relatives?

• If real estate is involved, whether ownership is retained or passed, has a Phase I environmental study been done in the past few years? It will be your ‘baseline.’

• Do you want to protect certain employees? Agreements can be drawn up which become effective only upon a change of control.

• Do you want to reward key employees? Consider your options early as most will require a written agreement—phantom stock, a percentage of the net transaction value, fixed amount ‘success fee’ etc.

  • What’s in it for you?
    • Your continued role and authority
    • Your compensation and perks
    • Your preference on remittance; stock swap, all cash, cash and a second bite of the apple…
  • Documents worth drafting (with the help of your accountant and attorney):
    • The history and evolution of the enterprise.
    • A list of ‘add backs,’ expenses that would not continue after a change of control.
    • A specimen purchase contract, expensive but worth the investment. It puts the burden on a buyer to try and work within your parameters instead of you working within his.

A buyer may not warm up to everything a seller proposes but the outcome is bound to be better than if those proposals are ‘dripped’ one or two at a time. A final caution, anyone involved in the process, whether an employee or advisor, should be bound by a Non-Discloser Agreement. One of the most unmanageable parts of this process is damage control when rumors fly with customers, suppliers and especially employees. It’s an exciting process and it can be fun, but once into it, the permutations will require long and serious deliberations.

Through it all…don’t forget to run the business!

Lesson learned.

Fred Engelfried: Fred Engelfried is Director/Chair of North Coast Holdings, Inc. and its subsidiary Lewis Tree Service, Inc. He has been a member of the board of directors of Lewis for over 20 years, and for 10 years prior to that worked with the company intermittently in various consulting capacities. He also is President of Market Sense Inc., a participative management firm that has served more than 100 regional clients over 35 years.
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