Key Considerations for Your M&A Transaction
Article originally published by Valley Business Front in Issue 168, September 2022: Valley Business FRONT, Issue 168, September 2022.
“A term sheet can be a relatively simple, non-binding description of the deal… [It] can set mutual expectations and help avoid disagreements.”
When considering a transaction to buy or sell a business, there are a number of issues to think about. The following considerations can help you maximize value, limit risk, and make your transaction run smoother:
1. Define your objective.
Whether you are buying or selling, you first need to determine what the objectives of your transaction are going to be. Do you want a controlling interest? Is this an opportunity to bring in minority investors and expand the business? Do you want to stay involved with the business after the transaction, or is it time to ride off into the sunset? Defining the objective of your transaction will help you determine how to get started.
2. Build the right team around you.
Based on your objectives, and the size and complexity of your transaction, you will need different advisors to help guide you through the process.
Investment Banker. Investment bankers can help buyers locate new acquisitions or help sellers determine the value of a business and to cast a broad net for potential buyers. Investment bankers can also stay involved throughout the process to help you negotiate the deal and work through various requests from the other party.
Lawyer. Finding the right legal counsel is necessary regardless of the size of your transaction. Experienced legal counsel will guide you through the transaction with advice concerning the structure, risks or obligations, as well as, prepare, negotiate, and revise the documents that will be required to close your transaction. Your legal counsel should work closely with any other advisors working on your behalf, and the other counterparty’s lawyers and advisors to facilitate a transaction that achieves your objectives.
Accountant and Financial Advisor. You will want to make sure that your CPA or other accounting or financial advisors who have historically helped you are involved in the transaction. If necessary, you may need the advice of specialists with experience in transactions. These advisors, working with your lawyers, can provide advice on the financial land tax implications that may not be obvious when you first think about the structure of the transaction.
3. Find the right counterparty.
Unless your objective is to sell the business and walk away, there is a good chance you will be working with the other party in the transaction for some period of time after the transaction is done. Particularly when selling your business to a private equity group, the buyer will probably want key management to stay involved in the business, at least for a period of time, and for the seller to invest or rollover money into the business after closing. Although the purchase price is an important factor, you should think about who you, and possibly your employees, are going to be in business with after the transaction closes.
4. Prepare a Term Sheet.
A term sheet can be a relatively simple, non-binding description of the deal terms. When done correctly and upfront, term sheets can set mutual expectations and help avoid disagreements that may derail a transaction.
5. Ask about insurance.
Existing insurance policies and specialized transaction related insurance products are available to buyers and sellers to help mitigate risks. Many significant t transactions now include representations and warranties insurance to shift potential liabilities of the seller to the insurance company. Ask your advisors about all available types of insurance.
6. Decide who will be “under the tent” for the transaction.
Getting to closing can often take several months. During that time, you should be careful as to what you reveal about the transaction. Buyers are interested in the business for its potential, but without current disruption. If too many people find out about the deal while it’s still in the negotiation phase, that could create disruption within the business, which could negatively impact your negotiating position.
7. Will others receive compensation?
Buyers and sellers may want to reward certain employees who either (or both) provide support throughout the transaction (in addition to performing their normal day-to-day job) or who have dedicated their time and efforts to the business in a way that has made selling the business a possibility. If planned carefully, there are ways to structure these payments in a tax efficient manner.
8. Stay Involved!
Any lengthy transaction will involve some sort of “deal fatigue” on the part of the principals of the buyer and seller. It is extremely important, however, to say engaged with the team that you have created and be responsive regarding the decisions and information they will need from you.