You’ve heard it before: when you’re ready to sell your company, your very first step should be to hire a team of seasoned deal professionals. But why? What, exactly, should you expect from your deal team? In a word: advocacy. A professional boxer would not step into the ring without a team to coach and keep him on his feet from start to finish, and neither should you. From taking your company to market through reviewing offers, due diligence, negotiations, definitive agreements and closing, your deal team will champion your cause by providing valuation, contract, and strategic advocacy.
Getting your deal team on board from the beginning is critical to help you avoid building a deal on a shaky foundation, such as a weak valuation or contract terms that are not favorable to you. It’s very difficult (if not impossible) to walk back something you neglected to deal with in your conversations with prospective buyers early in the process.
1. Valuation Advocacy.
Sophisticated deal advisors will begin by taking a cold, hard look at your business to assess its readiness for market. This is not the time to have advisors tell you what you want to hear. Are the right systems and management team in place? Are sales moving in the right direction, and supported by a strong marketing plan? Are the numbers favorable and defendable?
Early on, your deal team will work to position your company to garner the highest possible valuation. The level of interest in the market will determine the value of your company, typically based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Your investment banker will advise you on multiples typical in your industry and will present prospective buyers with an adjusted EBITDA portraying the most profitable picture. Expect to answer endless questions while your financial and accounting representatives scrub your financials. They need to know, before a potential buyer moves into the picture and commences due diligence, where any skeletons are hidden. They may add back one-time or owner’s expenditures. An above-market owner compensation package? Addback. That all-expense-paid company retreat in Jackson Hole? Health and country club memberships? Addbacks. The resulting “base case” presents buyers with a reasonable run-rate for the company post-acquisition, and your deal team will backstop the position with an “upside case” to demonstrate the enhanced profitability the buyer may expect with growth and synergies.
Buyers frequently request a Q of E (quality of earnings) assessment performed by an unbiased third party. Having gone through the adjusted EBITDA “dress rehearsal”, you and your accounting team will be prepared to deal with the rigor of this analysis of income and earnings. The last thing you want to do is weaken your negotiating position by damaging your credibility with a potential buyer. Nothing scares off potential buyers faster than sloppy financials or questionable accounting practices.
You should also understand that valuation is not just simple math, and that the highest-priced offer is not necessarily the best one! In a competitive sale process, an interested buyer may be forced to offer a market-rate multiple but do so in such a way as to preserve their cash at closing and protect their potential downside (should the company not perform as expected). This means you can often expect prospective buyers to include earnouts, rollover equity, and other financing options as part of their valuation and offer. Buyers want to buy low, you want to sell high, and these financing options are commonly used to bridge the gap. Through the offer and negotiation stages, your deal team will work to maximize cash to you at closing by negotiating to minimize the impact of these delayed and conditional payments. After all, as we say in the deal business, “Cash is King.”
2. Contract Advocacy.
Expect your deal attorneys to continually interface and negotiate with scores of sophisticated M&A attorneys that leave no stone unturned looking not after your interests, but rather the buyers’ desire to make more money for themselves in the deal. There will be numerous interrelated variables to consider, negotiate, and manage. Look to your deal professionals to translate the numbers, help you to understand every nuance, and draft your desires into the letter of intent and definitive agreements. This process takes extraordinary attention to detail and significant expertise with complex contracts.
Most deals have a contingent piece in the equation when it comes to a portion of the purchase price. Even all-cash deals invariably have an escrow holdback, where a portion of the price is held in an escrow account as insurance for the buyer. Wouldn’t a $50 million cash at closing offer be more attractive to you than a $50 million all-cash offer that requires a 20% ($10 million) holdback to protect against working capital adjustments or undisclosed liabilities for an extended post-closing period? Although it’s likely in just about any sale deal that some portion of the closing proceeds will be escrowed, an M&A expert will know if you’re being asked for too much to be held back and/or for a time period that is too long. An experienced M&A attorney will also have access to market studies and experience to advocate for market (or better than market) terms for you on these elements. Similarly, the representations, warranties and indemnities included in your definitive agreements can lead to price erosion and should be in line with what’s market for similarly situated deals. (You may not be familiar with what’s market for these items, but a specialized M&A attorney will be).
Additional layers of complexity come into play with the interrelations between the purchase or merger agreement and the numerous other complex agreements required to fully memorialize a deal. For instance, implications of each of the following (among many other key contractual provisions) must be seamlessly woven into the definitive agreements:
- Rights and conditions attached to seller rollover equity under lengthy and complicated operating, limited partnership, or shareholders agreements
- Terms of post-closing employment agreements for sellers
- When applicable, terms and conditions attached to earnouts
- The scope and implications of the representations, warranties and indemnification obligations (and any associated implications or benefits of any representations and warranties insurance policy that may be part of the deal)
- Extensive agreements around pre- and post-closing tax matters
You need contract experts to run interference, identify what’s critical and what’s not, translate it for you, and then negotiate it, get it, write it and ensure it stays in the contract through signing and closing. The cold, hard truth is that all the terms of your deal will be included in the contract and your deal gets done exactly according to the contract. All those tantalizing valuation figures discussed between principals are ultimately meaningless if they’re not properly reflected in the contract. Reality.
3. Strategic Advocacy.
Valuation and contract advocacy require consistent, coordinated strategic planning as well as negotiations involving you, your deal team, the buyer and the buyer’s representatives. Your team needs to always be aligned and repeatedly realigned. Each of you must know who is talking to whom on the other side, and you must continuously coordinate your messaging and negotiation strategy. It’s essential that your buyer constantly hears the same message from each of you, with no chinks in the armor. The many variables, negotiations, and staying in tune with your team inevitably takes a toll, and you will need allies in your corner. Expect them to recommend where to push back, where to concede, and remind you, when the going gets tough, that hard conversations are part of making deals.
Your deal team should keep you strong, focused and on task when the deal gets muddied – as it will. A key strength of a seasoned deal professional is their ability to keep their eyes on the prize when the deal bogs down (as most do) in the innumerable details. Expect your deal team to help you see beyond all the noise and disarray and keep your sights on stepping off the playing field victorious (which in practical terms for owners selling to sophisticated buyers can mean you got to the 50-yard line, i.e., you ended up with a deal that was fair).
We Can Be Your M&A Deal Advocates.
We are strong proponents of hiring deal experts to guide you through the complicated, lengthy, and all-important process of selling your business. At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we have represented buyers and sellers in hundreds of M&A transactions. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.
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