1) Leave or Stay?
You need to consider whether you want to leave the company entirely, stay in the same role or a new role post-closing. And if you leave, how quickly do you want to transition out of the business: 3 months, one year, two or maybe three? Oftentimes, an owner will be offered a higher Purchase Price the longer that they are willing to remain after closing, but it really is down to each individuals’ circumstances as to how long you want to stay.
A large part of this decision should also depend on the new owners or equity partners and the degree to which they share the same vision for the future of your company, their track record and the results of background checks on them. You should go to great lengths to make sure you pick the right buyer (for every factor other than purchase price and strategic fit) prior to signing a LOI and committing to a deal.
2) Key Employees – Leverage at Closing
A significant asset of your company is the key employees who are willing to remain under new ownership. The sooner you want to exit the business, the more leverage key employees have to renegotiate their future compensation, the consideration they’ll receive from new owners and other terms of their future employment.
If this is not given due consideration early in the process, it can be a shock if key employees attempt to use that leverage against you or the buyer leading up to closing, with the potential to kill a deal and sour future relations if you were to call the deal off. If not managed carefully, it can lead to a dangerous stand-off, which could stand to damage every party to the deal, and potentially cause the deal to be called off altogether.
3) Purchase Price Becomes Less Important As The Deal Progresses
Purchase Price when selling your company is undoubtedly important, but you can overcome that hurdle with your preferred buyer fairly early in the process. So long as the buyer doesn’t play any tricks and try to “re-trade” after signing a Letter of Intent, it is likely to be every other aspect of the deal, structure and contemporaneous agreements that become increasingly important to you.
4) Due Diligence and Closing Feels like the Buyer Doesn’t Trust You
If you are fortunate enough to get as far as due diligence, you will already have executed a Letter of Intent that lays out the final deal structure. Given what it took to get this far, it may feel like you’re only a step or two away from the finish line. The hard part is that you are now going to be challenged in due diligence to deliver data and information to support any claims that have been made, in addition to the most exhaustive and detailed examination of your business that you can probably imagine.
During this process, it is normal to feel some resentment towards the buyer, as you have trusted them enough to agree to sell to them and they’re now putting you under the microscope. There aren’t really any words that can help to prepare you for this, except to say that it happens in most every deal and is a part of the process that you have to go through. It is one of those critical times that it helps to have an experienced and trusted advisor to answer your questions and concerns, while also representing your best interests and keeping the deal on track.
5) Getting through Reps and Warranties
As part of the purchase agreement, you are going to have to sign representations and warranties, along with countless schedules detailing information that has been disclosed to the buyer. Again, this can go back to the point above about due diligence. You want to be careful and considerate that you offer full disclosure and manage your schedules, reps and warranties to best protect you from potential claw backs and post-closing adjustments after the deal has closed.
6) Structuring the Sale
How will the deal be structured? Asset or stock sale? Cash at closing, stock, earn out, warrants, options, or a combination? Every seller, buyer and individual deal is unique and there are innumerable reasons for choosing the final deal structure. It is rare that a deal ends up being the same structure as predicted at the outset and it will likely depend on input from a business, tax, financial and legal perspective to come up with the right structure. There is typically one right answer and it should be carefully considered how to come up with that right answer. One point to note when considering the right structure is to make sure that you don’t contaminate the deal before you even get to closing (see the next point below.)
7) Protect Your Business from Unregistered Advisors
In order to comply with federal and state securities laws, when you sell your company‘s stock or enter into any transaction that has securities components, you need to ensure that you only use an advisor who is properly licensed to represent you and your business. Licensing for M&A advisors/investment bankers refers to registration with a state and federal registered securities broker dealer, a member of FINRA/SiPC. Your advisor needs to have passed at least one of several securities and investment banking examinations.
What happens if you hire an unlicensed advisor to sell your company? In a deal determined to involve securities, your advisor is operating illegally and you, your company and your advisor have all violated securities laws. Hiring an unlicensed intermediary to effect any securities transaction subjects the issuer to possible civil and criminal penalties. Worse still, it also results in a voidable transaction that gives the buyer or investor the right of rescission, effectively granting a put right to the investor or purchaser. If the acquisition doesn’t go well, they have the legal right to come back to you in a few years and ask for their money back.
Even if you were to hire an unlicensed advisor to represent you in an asset sale, you still need to comply with securities laws and your advisor needs to be properly licensed if the final deal includes a seller note, the sale of membership interest in an LLC, stock, options, warrants, or any other security, including many debt issuances.
One way to check for the correct and active credentials is to look at an advisor’s website or marketing materials. By regulation, if you are a licensed investment banking agent or securities representative, you are required to disclose that fact in any marketing materials, including a website. Most often, you will find this disclosure in the footer of a document, or at the bottom of a website – look for a notice that clearly states by whom securities or securities- related services are offered. This disclaimer will typically be accompanied by the term “member FINRA/SiPC.”