By Stuart M. Brown, Partner and Co-Chair, Commercial Transactions
So you’re thinking about selling your business. You decided that it is “time.” You are emotionally ready. You are financially ready. Great!
Working with sellers like you, here are four (yes, just four) points to consider before you go any further:
- Create a deal team… you will need an experienced accountant, attorney, intermediary and financial planner. Experience is key, but do NOT settle for experience. Make sure that you have a good gut feeling for the person/firm. A good gut feeling includes being able to communicate easily and feel like you are on the same page as your advisors.
- You will sell on your company’s past performance; however, the purchaser will buy based on what it views as future opportunities. So be realistic in your goal for a sale price. Be as introspective as possible (aka, don’t believe your own sales pitch because buyers will poke holes).
- No one can guarantee you anything in addition to what you receive at the closing table. There are multiple ways to characterize sale price:
- Cash at closing (which is most preferrable)
- Deferred payments (you, as the seller, take back “paper,” a promissory note which is a contract from the buyer to pay you at a later date)
- Contingent payments (these payments are predicated on an event occurring such as gross revenue or EBITDA targets post-closing, a concept referred to as an “earnout”)
- Rollover equity (this means that you, as the seller “partner” with the buyer because you either retain a certain amount of your company’s equity or you get equity in the buyer in lieu of cash).
Be careful when it comes to structuring the payment of the sale price. The question that I often ask clients is would you rather sell your business to me if I offer you $50 million or to Sally if she offers you $7 million? The answer is obvious, right? Clearly, my offer is better. Oh, did I fail to mention that Sally is paying you $7 million at closing but I’m paying you $1 million at closing and $1 million a year for the next 49 years? Still think my offer is better?
- If your transaction was a Broadway show, you should be in the starring role as the “reluctant seller.” Do NOT be anxious, meaning you should not purchase that red Ferrari until the deal closes. You have maximum leverage early in the negotiation process. Use your leverage, but don’t be a pig… remember, ultimately, pigs get slaughtered.
Each one of these points is worthy of a much longer discussion. Hopefully, you will choose a deal team that can properly advise you and manage your expectations. By the way, deals take time — don’t expect to close in 60 days. It rarely happens. So, enjoy the journey because the destination is within reach of the patient and thoughtful seller. Good luck!