The Complete Buyer’s Guide to Selling a Business: Structuring the Transition

Selling a business is a long and complex process. You may be ready to sell this year or just curious into what it will take to sell – this series will help. The business sale process can be broken down into core stages – from who you need to hire, to what questions you should be prepared to answer, to how to hand off your company once you’ve signed on the dotted line.

The sale of a business has many financial and professional considerations for the management team/owner. The purchase price is only one component of the overall result. Other decisions and considerations  include: Stock sale versus Asset sale; earn outs; terms and interest rate on financing; liabilities assumed by the acquirer, employment contracts; non-compete agreements; current assets retained by the seller; stock ownership and equity options packages; relocations; employee preservation versus redundancy layoffs, etc.

10 Key Factors Other Than Purchase Price

1. The Consideration: How will you be paid? In cash? In stock of the acquirer? Seller financing or some other combination? If stock is a significant portion of the consideration, that value of the deal becomes linked to the future performance of the acquirer, which is probably out of your control. Also, the stock may not be freely tradable or liquid. If there is a seller note, the terms (interest rate, repayment terms, etc.) are very important
2. Adjustments To Purchase Price: Will the purchase price be subject to adjustments based on performance between now and the closing date? Typically, adjustments are based on trailing revenue or EBITDA at close and/or changes in working capital or net assets. A key consideration is the limitations to the adjustments.
3. Earn-Outs: An earn-out is a payment at a future date contingent on certain performance criteria. While relatively simple in theory and seemingly useful to bridge a valuation gap, they can create a contentious relationship due to the misalignment of goals and the wide range of interpretations. In fact, earn-outs are a frequent source of litigation after closing. It is important to consider the protections you have as a seller during the earn-out period. The best way to eliminate an earn-out scenario is by making your business’ revenue and profits more predictable.
4. Taxes: Depending on the structure, the after-tax impact on the seller can vary dramatically.
5. Escrow: Escrow is the amount that will be held back at closing to fulfill some contingencies. Key considerations are how much of the total purchase price is being held and for how long.
6. Indemnity Limits: Indemnification is a form of protection against certain risks in the transaction. They ae some of the most complex and heavily negotiated provisions. The provision can cover a wide range of subjects: breach of contract terms, breach of representations and warranties, fraud, excluded liabilities, taxes and environmental issues. As a seller, you will want to limit the indemnification liability both in terms of dollar amount and duration.
7. Employment Issues: There may be non-compete agreements and /or employment agreements with the seller(s) and key employees. On the other hand, there may be employee terminations. A key consideration is who incurs the severance costs.
8. Approvals: Are third-party approvals needed? Approvals can be required from Board of Directors, Stockholders, or lenders. It might also involve regulatory approvals for the DOJ/FTC, SEC , or FCC
9. Fees: Who is responsible for the legal, accounting and due diligence costs? These can add up, and must be netted out. Especially in smaller transactions, these can have a big impact on net proceeds.
10. Deal Protection Measures: Many times, the buyer will require deal-protections measures such as break-up fees, voting agreements, materials adverse changes or no-shops. These protections are usually in favor of the buyer.

Sunbelt Business Brokers can help you with structuring your transaction. Some of the material in this blog came from Axial Forum .