The global business market has seen an increase in M&A deals in recent years. According to the Mergers and Acquisitions Condition Index, in July 2016 middle market business sale and business acquisition deals increased for the second consecutive month. Another noted trend is a decrease in deal closures – often the result of lack of preparation, financing issues, or proper deal structure. Decrease in M&A Deal Closures.
To increase your chances of selling or buying your business, you need to become familiar with the following ten steps:
1. Prepare for the long haul. Whether a business sale or business acquisition is in your future, it’s important to understand that an M&A deal is not simple. You need to prepare for the contemplated sale or purchase of a business at least a couple of years in advance. A good business broker will be able to advise you with respect to business valuation, due diligence process, and deal structure. A typical mid-size deal may take between 6 to 12 months.
2. Data room musts. One of the most time consuming parts of the M&A preparation is constructing a complete and accurate online data room. Here, those interested in making a business purchase, view documents like patents, financial documents, contracts, etc.
3. Trusted advisors. A broker and commercial banker (for buyers) experienced in business sales and purchases in your particular industry is crucial. They assist with every step of the process from preparing your business for sale, documenting processes, addressing valuation issues, creating a data room, to finding prospective buyers.
4. Negotiation is key. Negotiate terms of engagement with the business broker. These documents favor the advisor, but many brokers will be willing to modify their agreements to reflect business owners’ legitimate concerns. Your lawyer may help you to negotiate these documents.
5. Complete records. During the business acquisition process, any incomplete contracts, bookkeeping issues, or legal issues cause delays. Time is the enemy of any business sale, so you need to address those issues even before listing your business for sale.
6. Letter of intent. Another negotiation point is the letter of intent, which summarize the deal terms. Although letters of intent are typically non-binding, a seller’s leverage is greatest prior to this being signed. An experienced business lawyer saves you time and money. See How to Find a Good Lawyer
7. Acquisition agreement. This is the most important document in the contemplated sale or purchase transaction. This document covers escrow, closing conditions, stock/assets issues, successor liabilities, and more. A reputable attorney is essential. Do not rely on advice of your business broker or CPA claiming that they can arrange a “fair” deal without an attorney because “they have done many of such deals.” Remember, a business broker makes money only if your deal is closed, so some of them just want to close the deal regardless of the consequences. You, the buyer or seller, will have to live with the risks and consequences of the poorly structured deal.
8. Taxes, don’t forget Uncle Sam. If not structured properly, a business sale can lead to ‘double taxation’ or significant tax liabilities for the sellers. Many deals fail to protect the seller when it comes to taxes resulting in thousands, sometimes millions of dollars paid out to the IRS. Remember, many business sales cause sellers to pay between 15-40% of the sale price in taxes. Tax liabilities are some of the most important factors in a transaction that are often overlooked.
9. Handing over the reins. Legal counsel is a must to ensure change of control is properly executed. Licensures, contracts, bulk sales, and leases are important details that have to be addressed in each transaction, yet often overlooked by inexperienced advisors.
10. Employees matter. Employees experience significant stress and uncertainty in any business sale or purchase. An experienced business broker or legal advisor should be able to guide you through this complicated process. Will employees be retained? Should you enter into employment contracts or give them raises? Will they receive payouts? Will the ‘golden parachute’ tax (Internal Revenue Code Section 280G) come into play? All these questions must be considered before the contemplated transaction as changes in employee relationships during the negotiation phase of the transaction will raise red flags and may further delay the business sale.
If you plan to sell or buy a business, this is your responsibility to retain a qualified business broker and experienced legal counsel to protect your interests and streamline the often daunting process.
This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is it a substitute for, a qualified legal advice. Your receipt of this article from Lexern Law Group, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this articles are those of the authors of the article and does not reflect the opinion of the LLG.