Posted In: Business Transactions & Corporate Counseling
Business Blog Featuring Cascade Partners - Part 2: I Have Decided to Sell My Business, Now What?
on November 3, 2021
In this Business Blog mini-series, we will be featuring guests from Cascade Partners to answer important questions related to transactions, with topics ranging from M&A due diligence to contract negotiation.
Libby: Who should a business owner engage as a part of his/her sell team to market their business for sale and at what point in the process? I know as an attorney, I like to be involved as early in the process as possible in order to help ensure the record books are up to date, the company has the appropriate non-disclosure agreements ready to provide potential buyers and just generally assist in the sale process.
Jon: I agree that advisors should be introduced to the process as early as possible. Before starting any kind of formal sale process, I highly recommend that a business owner engages with a financial advisor who can prepare a plan which demonstrates the various financial scenarios that can result from a sale. These reports are extensive and take into account possible sale prices, taxes, investments, economic conditions, etc. The Company’s accountants should be made aware of a possible sale to ensure that the financial statements are current and will stand up under exam. Internal statements and cash-based accounting will not meet the requirement. Tax accountants can prepare an analysis of the impact on selling stock vs assets. Also, most of our deals now involve a sell-side quality of earnings report which is typically completed early in the sale process by an independent third-party accounting firm.
As an investment banker, I prefer being introduced to the opportunity as early as possible to help think through the critical issues that need to be addressed pre-sale, then engage fully when the time comes to launch the sale process. We are often consulted by potential sellers at the outset to help build the advisory team.
And last but not least, we strongly recommend that owners hire experienced M&A attorneys before launching the process. In addition to providing specifics around the documentation process (NDA, LOI, purchase agreement) that will be required, our experience has been that legal advisors can help eliminate potential pitfalls throughout the process and generally are better positioned to add value when involved from the beginning. It can be difficult for any advisor to parachute into a process mid-stream and get up the learning curve when many key deal points have already been negotiated.
Libby: At what point should a business owner include key employees in on the possibility of a sale and what suggestions do you have for ensuring the employees’ cooperation and continued engagement with the business? As part of the due diligence process, we are often in close contact with the CFO and COO/operations manager of the company. Those folks have knowledge that is often necessary to the buyer’s due diligence process. At some point the human resource professionals and other key employees also need to be engaged. Our clients have used different incentives to retain key individuals such as completion incentives, golden parachutes, and other retention incentives. What have you seen on your side of transactions regarding the timing and retention of key employees?
Jon: The due diligence process is rapidly evolving as a result of Covid, and the willingness of buyers to conduct more of their work remotely. Owners need to know that the due diligence process is exhaustive and will require a lot of time from them and their employees. The timing of when to bring people inside the owner’s circle is different for every deal. Generally, we recommend keeping the deal process team small at the beginning to reduce potential anxiety about the impact of a deal on the employees when so much is unknown. Prior to the signing of a letter of intent, the executive team along with the investment banker should be able to manage the information requests.
After a Letter of Intent (LOI) is executed and a buyer has been selected, then the likelihood of a deal is obviously much greater, and the diligence requests increase considerably. At this point, we typically recommend that the owners expand the internal deal team significantly to include the key department leaders and other employees that will be called upon to answer requests. It may even be best to make company-wide announcement as the rumor mill is probably running full speed by this point. Employees will want to know what is happening and how it impacts them so owners should provide as much clarity as possible to alleviate concerns. Open and clear communication is generally the best policy.
In terms of compensation, I agree that the owners should not overlook the fact that the selling process will increase stress significantly for some of their employees. Executives and/or managers who are actively involved in answering steady requests for information while also doing their day job (president, CFO) will not have enough time in each day. These employees may not have any equity, so they won’t benefit from a sale. They should be incentivized with the promise of cash bonuses paid at closing. The due diligence process can create deal fatigue and sometimes an unexpected bonus can help one push through to the finish line.
Employee retention post-closing requires open communication from both the buyer and seller. Oftentimes, the buyer will sit down with each employee to discuss their role going forward which is generally productive. Most employees appreciate the direct conversation whether or not they like their position going forward. Retention bonuses are generally offered by the acquiror as a way to encourage a seamless transition and are negotiated during the diligence process.
Libby: How long does it typically take to sell a company from start to closing? What issues can pop up that delay the completion of the sale from your experience?
Jon: The sale process can last 6-12 months subject to the size and scope of the process. With the increased emphasis on due diligence around cybersecurity, Covid-related issues, remote working arrangements and other factors, most transaction processes are running longer with an average of around nine months.
One critical element is that the owners/management must continue to run the business full-time on a normal course. Nothing slows down a deal quicker than a significant decline in performance. Hopefully, the owners have consulted with advisors ahead of time which should eliminate the possibility of a buyer finding the proverbial “skeleton in the closet” during diligence. An untimely discovery of an open financial, operational, or legal issue can lead to a delay, or even termination, if not resolved in a timely manner. Examples may include a significant amount of accounts receivable that are deemed uncollectible, significant employee turnover, or a past lawsuit. Company culture is also critical to a buyer and many transactions have failed due to culture clash. A company with poor culture will be exposed during the diligence process and should work to build a better work environment before going to market.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.