This is the fifth installment of a series discussing potential pitfalls affecting the intended sale by JR and Sue Ellen Pawlenty of their business Pawlenty Energy. Recently Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; Successfully Selling Your Business: 4 Tips – No Matter the Buyer and Selling Your Business: Why Accurate Financials are Important. This month we discuss the Top 5 Critical Deal Points and Recommendations.
Get to the Offer Stage Quickly by Term Sheet or Letter of Intent. Before signing any written understanding, JR and Sue Ellen should consult a trusted representative to assist them in preparing a well drafted non-binding Letter of Intent, which is critical to setting goals and expectations for a clearly understood, viable offer that represents a good probability of closing.
- Payment Terms – Price and Timing. Unless you are paid in cash in full at closing, there’s more than setting price. Expect to negotiate both time and money – deferred and/or contingent payments such as earn-outs, seller notes and stock all depend upon whether your buyer is strategic or financial. Taking a modest down-payment with a note secured only by your company assets and giving the buyer control over your company’s operations, for example, is a recipe for probable disappointment, if not certain disaster.
- Reps and Warranties. These are essential statements of fact made by the buyer and seller to each other about various aspects of the transaction, typically including finances, customers, taxes, contracts, ownership, legal issues, intellectual property and more. While both pledge their statements to be true, difficulty of proof and ability to collect realistically impact any agreed upon remedy. Making sure that the statements (promises) you make are clear and accurate is critical.
- Indemnification. If a representation or warranty of either you or the buyer is incorrect, the transaction documents address who is responsible and how damages are determined; attorney’s fees are frequently assessed against the loser. Careful attention to contract language addressing both the promises made and the scope of liability imposed for misstatements is crucial.
- Transition. Expect the buyer to require your continuing participation to transition the sale. Delaying negotiation of your role and compensation risks an undesirable commitment of time at an almost certainly reduced compensation.
- Employees. What assurances does the buyer require about key employees? What is the buyer’s plan for both key and support employees post-closing? Will the buyer retain them with the same compensation and benefits? Be careful when you tell your team. Wait for a solid plan and a solid buyer so you can answer– what does this mean to them?
Tilting the Scales in Your Favor
Beyond the deal points there are some lessons learned that are worth knowing, particularly if this is your first “rodeo”:
- Your first “buyer” likely won’t.
- Run your business as if you were going to own it forever – it improves your negotiation position.
- Due diligence is a two-way street. Check out your buyer’s ability to perform.
- Run a litigation check on your prospective buyer.