This headline is not intended to dissuade any committed business owner from selling. It is a warning that a deal may go sideways or crater at any point in time, even just before the cash is wired to the seller. Even anticipating the worst, the seller should still expect the best.
The key is preparation, and especially to avoid the most prevalent pitfalls:
- Seller financials are not continually updated, inconsistent, or not easily explained. For example, the internal CFO or controller cannot explain all of the metrics, such as cost accounting.
- The primary IP of the seller must be documented as to ownership; advantages to the company, how it is protected; and the remaining economic life.
- Management roles are not clearly defined nor well expressed at management presentations. In order to support adjustments to EBITDA, excess compensation to current staff must be supportable.
- Original purchase price may be revised downward (re-traded) by the potential buyer during or after due diligence. The seller’s counter arguments should be cogent. At this juncture in the process, a “silent auction” among 2-4 solid buyers should counter re-trades. The best IBanker really earns his fee by actually pushing the original price up.
- The primary Letter of Intent issues to be negotiated are the following. This stage of the process is probably the last best leverage for the seller.
- Time allowed “chosen” buyer for due diligence
- Funds committed by buyer, including financing
- Breakup fees
- Assignment of seller contracts (e.g. government relationships)
- Specific definition of working capital, with math examples, to mitigate closing and post-closing disputes. One critical component of this calculus is the excess cash given to the seller in addition to the purchase price.
- Transaction structure, including indemnification periods (post-closing) and holdback amounts.