1.
Prepare presentation package: This professional selling document for your business
describes your company in detail to prospective qualified investors.
Investor candidates see objective proof of not only what your business
has actually done, but more importantly, what it is capable of doing.
This “Offering Memorandum” is generally prepared by your Intermediary
to optimize the value of your business.
2.
Identify qualified investor prospects:
Only those who have a genuine interest in buying – with cash to back it
up – become real prospects. Your
Intermediary will assist you to qualify prospective investors and provide access
to private investor databases containing up-to-date acquisition criteria on
thousands of active investors worldwide. Close
attention is paid to synergy criteria because investors who are looking for
synergy (just the right product, service, customer list, or technology to
complement their existing operations) often pay a premium price.
3. Confidentially
approach each target prospect: Secure
a written “non-disclosure” agreement. Early
contacts with prospects should be at the highest possible level beginning with
the Chairman or CEO. Those at lower
levels of responsibility may encourage you to believe that a transaction can
result, while their senior management has no such thing in mind.
This initial contact should provide enough information to determine the
investor’s level of interest. In
order to maintain confidentiality, discussions may take place away from the
office of the seller. Your attorney
will generally prepare the “Confidentiality Agreement”.
4. Meet
with the prospective investors: In
the first meeting, the investor and seller become acquainted and set the tone
for future dealings. Your
Intermediary should attend this meeting and, as a seller, you want to avoid
disclosing a sales price.
5. Begin
negotiations: Creativity with
proper deal structure accomplishes the seller’s needs, meets the investor’s
objectives, and balances the risk of the transaction.
Your Intermediary will help negotiate the structure of the deal.
Remember,
there are always three parties involved in the transaction:
the investor, the seller, and the IRS.
The form of the transaction and the structure and payment of the price,
as well as its timing, are frequently affected by tax consequences of both the
investor and the seller. Often tax
savings are the key to closing a gap between the seller’s price and the
investor’s ability to pay.
Alternatively,
there are ways to structure the deal with no current tax due.
In a tax-free exchange, stock of the investor is exchanged for the stock
of your company; your tax basis for the investor’s stock you receive is the
same as the basis for your stock of the company you are selling.
Another creative tax saving approach involves the use of a Charitable
Remainder Trust. With the right
help from your Intermediary and CPA, your tax bite can be reduced and you may
net a great deal more than you thought.
6.
Use a letter of intent to expedite the sales process:
This non-binding letter:
q Discloses
the name(s) of investor and seller
q States
the price and terms
q Sets
forth assets to be purchased and liabilities to be assumed
q Describes
other major matters on which you have agreed
q Clearly
states which parts of the letter are intended to be binding on both you and the
investor (confidentiality, etc.)
q
Requires selling corporation’s
shareholder approval
q
Outlines a timetable for completion
of due diligence and contract(s) preparation
q
Lists all contingencies and sales
price adjustments
7. Understand
the importance of the due diligence process:
With negotiations in process and a letter of intent signed, the due
diligence process begins. Unquestionably,
this is the most distressing, most dangerous phase of a business sale. The prospective investor and his legal, accounting, and other
experts will want to gather additional information, examine records and speak
with key members of your staff. You
will want to insist that confidentiality be maintained at this early stage in
order to avoid upsetting employees, customers, competitors, and suppliers.
It is important to
remember that no contract or letter of intent will be legally binding until this
investigation has been completed and the results found to be satisfactory.
8. Financing
– “The Fuel Needed To Make The Deal Go”:
You should understand exactly where the money will come from to finance
the purchase and help the investor secure acquisition financing.
Your Intermediary can provide access to the financing needed to fund the
deal.
*
The Investor (their equity)
* The
Business (Balance Sheet/Cash Flow)
* Deal
Structure (Seller Financing)
*
Lenders (banks, financing companies, other “Non-Bank Banks”, and
other resources)
9. Making
Sure You Get Paid: Security is possibly the most misunderstood aspect of a
transaction and certainly the greatest cause of a sale breaking down or totally
falling apart. Once the two lawyers
begin protecting their clients, the degree of security required becomes a
question of how much the parties will compromise and how reasonably each can
approach the subject.
If
the seller is going to carry back debt and is expecting to receive periodic
payments for non-compete or consulting agreements from the investor, then it is
important that the security for such debt consideration be reviewed and mutually
agreed upon prior to drafting contracts.
The
parties must agree as to which investor obligations should be secured.
Should it include promissory notes, lease payments, consulting fees,
covenants not to compete, etc.? Following,
in order of their practical importance to a seller, are levels of security:
* Quality
of Investor: integrity, competence,
industry knowledge, business experience, etc.
* A
lien on the assets of the corporation, usually against Accounts Receivable,
Inventory, Equipment, and Real Estate. Most
often this will be a second lien, subordinated to any existing or planned bank
borrowing.
* Default
provisions in the loan agreement incorporating financial operating ratios,
monthly statements to the seller, and cure within a specified period of time.
These are all aimed at the seller being able to quickly judge a problem,
go to court for a judgment if the default is not cured, and repossess the
business before erosion has taken place.
* Pledge
of stock of either the old corporation being sold or the new corporation.
* Decreasing
term insurance on the investor during the period of obligation to the seller,
for the amount of the decreasing obligation.
* Limitations
on bank borrowing for the investor while obligations to the seller exist.
* Limitations
on compensation for the investor while obligations to the seller exist.
* Contracts
with key employees, which, if broken, trigger immediate payment of any remaining
obligations to the seller.
* Personal
guarantee of the investor (a last resort in collateral priorities because a suit
in the courts is costly, could take one to three years, and the estate of the
investor would probably be eroded in that time).
10. Prepare
Legal Documentation and Close the Deal:
In order to make certain that both the investor and seller are protected
properly, a comprehensive and detailed contract must be prepared and signed.
The final contract will be very comprehensive and will include specific,
definitive language on such items as outlined in an Acquisition Contract
Checklist.
a.
Are assets being acquired?
b.
Is stock being acquired?
c.
Will payment be made in stock?
d.
Will payment be made in cash?
e.
Is the transaction tax-free?
f.
Is the transaction taxable?
g.
Is the transaction a statutory merger?