M&A Explained Series (Part 4 of 5 part series)

This is the fourth article in a five-part series about how putting the right team in place helps supercharge the M&A process, providing both sellers and buyers maximum value.

When it comes to finding fit with a potential buyer, every business owner needs to listen to Steven Cox (founder of TakeLessons.com) talk about his exit journey.

“It’s beneficial to exit with someone that has an internal thesis you fit into rather than trying to convince someone you are a fit,” Cox said. “Our buyer had already made a decision that this sort of space was something they wanted to be in.”

Cox developed TakeLessons.com as a marketplace for people to find online music lessons, pairing teachers with students. Microsoft, the company who ultimately bought TakeLessons.com had made a significant internal commitment to finding and building niche marketplaces. In fact, early in the company's journey their lead investor called back to say, “we’ve been looking for you” shortly after an initial pitch.

However, long-term fit is only one of several factors that business owners need to consider beyond final sale price. How will current employees' figure into future plans? What business assets are truly for sale and what things will the owner take off the books and keep for themselves? Should the company’s real estate assets be part of the sale or should they be sold separately, or even turned into a rental business?

This article highlights many of these highly important, but often overlooked aspects of terms that need to be identified in this phase of a sales process:

Key Employees Deserve a Clearly Defined Future

One of Steven Cox’s most strongly held values is to share incredible experiences with incredible people. His team helped his company attain a level of excellence that increased the financial value of the company when it came time to sell. Cox, like many founders, wanted to make sure these people were taken care of post-sale, both in terms of their financial stake and their role with the new organization.

Taking care of team members is an important element in the negotiation stage. Agreements with key people need to be clearly articulated so everyone knows where they stand in terms of overall compensation and future role. Cox went as far as hiring an employment lawyer to negotiate the employment agreements for key team members as part of the acquisition.

Employment agreements for key employees are an essential part of the data room, discussed in article three. Business owners need to work with their investment banking Dream Team well in advance to create clear-cut financial and employment agreements for key people so there is no ambiguity with the buyer.

Bottom line for your key people: Make sure financial incentives and new roles are clearly established and well-understood by the purchaser before finalizing a sale.

Owners: Know What You Want and Make Sure You Ask

If you don’t ask, the answer will always be no. This is an important tenet for any owner in the process of selling their business. Many owners tend to underestimate the finality of selling - that makes it incredibly important to know EXACTLY what you want and ASK FOR IT during the negotiation phase. Too many owners get caught up in the final sale price (yes, this is critically important), but overlook many small details that they come to regret post-sale.

Helping identify ALL the important elements that should be on the table during final negotiation is another area where a top-flight investment banking team can play a critical role.

How Much Money Will I Need To Maintain My Current Lifestyle?

As simple as it seems, many business owners underestimate how much money they will need to maintain their current lifestyle. Often times, they have blended their business and personal finances for years, even decades. For example, we've seen owners get tripped up when talking about their expectations on what assets come home with them post-sale. The truck used for deliveries and weekend camping trips? It’s booked as a company car, but the ”owner” may expect that it remains with them after the sale is completed. What about the brand new tv hanging in the company’s conference room? It was purchased with company funds, but the owner fully expects to install it in their new home after all the paperwork is signed.

Many of these perks give owners an overinflated sense of how much money it takes to maintain a certain lifestyle. Once they sell the business, the cars, trips and meals will come straight out of their pocket with no place to count them as business expenses.

Prior to putting the business up for sale, you should work with your M&A team to ensure these types of assets are taken off the books. But, just as important, the buyer should start including tax and wealth advisory experts into the conversation. Too many times we hear from owners that successfully negotiated every point of the sale, only to realize later that they had miscalculated how much money they would actually need in retirement. That's why this step is so critical for a maximized exit – one, an experienced iBanker can provide the buyer with an accurate assessment of the business value early in the process. Two, it gives a much clearer picture of the business owner’s financial situation and a better vantage point to negotiate for enough money to maintain their current lifestyle.

Bottom line: To ensure success, make sure to build out your personal M&A team to include the very best iBanker, attorney, tax, and wealth advisory professionals early in the process.

Clearly Articulate the Owner’s Role in the Post-Sale World

Business owners don’t always sell because they are ready to retire. They might be looking for a growth partner to enable them to take chips off the table now but stay engaged and motivated for a larger earn-out over time.

Another factor owners often underestimate - the emotional toll of working for someone else. Will the current owner stay in a leadership role and retain some decision-making authority? Will they now report to a CEO assigned by the acquiring company?

How this role is defined can make or break the business owner’s personal satisfaction post-sale. Having a perspective of your ideal future and asking critical questions early are tantamount to a successful post-transaction reality. This is where the M&A experts on your team can help drive the negotiation, select the ideal partner, and help create the ideal exit that align with your goals.

Bottom line when it comes to future employment: Clearly articulate the role you’d like to play moving forward and make sure it is well-understood by the purchasing entity’s leadership team.

What Exactly Are We Selling?

It also is important to negotiate specifically what parts of an organization are being sold or purchased. Real estate is an example of an asset that might be better sold separately as part of a sale-leaseback vs. including it in the sale of the business.

Especially for companies in manufacturing, or where an office building exists in a prime location, it’s extremely important for the business owner to retain experts that can educate and inform in the area of real estate. Once the analysis is complete, the iBanking team can create a plan for either selling or renting the existing facilities back to the buyer. Often, the seller can generate more income by creating a separate entity for the real estate.

Bottom line for assets like real estate: Knowing how the seller wants to handle these assets prior to the negotiation phase is a critical step and another important role for the iBanking Dream Team.

As They Say, the Devil is in the Details

At this stage of the seller’s journey, you've likely gone through a range of emotions. Selling is a monumental step and likely a culmination of years of hard work. You’ve had your company dissected from every angle and begun to show significant and confidential details about business. And, for an owner, this can feel like the home stretch of a marathon. It takes every bit of strength and energy to keep going toward the end of the race. In our final article of the series, we’ll focus on successfully getting the deal across the finish line.

M&A Explained | Five Part Founder Series

Read the full, five-part series detailing business owner M&A ("Mergers and Acquisitions") best practices when looking to sell a company:

Part 1: Supercharging Your M&A Process and Maximizing Your Exit

Part 2: Laying The Groundwork for M&A Success

Part 3: Why Your Investment Banker Is Critical To Recruiting The Right Buyer

Part 5: Avoid the Fourth Quarter Fumble: M&A Diligence and Documentation