July Energy Advisor: Selling Your Business
Creating a Work of Art that Works for You
Thomas L. Bakaitus, Jr., CPA, MST
Many business owners have dedicated their lives to growing a successful company, often without giving appropriate thought to an exit strategy. You have discussed it with your family, friends and advisors, and worked with a valuation professional to determine the value of your business. Now it’s time … you’re selling your business. While some buyers may have a team in place and have completed other transactions, a seller usually only goes through this process once. There are emotional as well as financial issues to consider.
Once the potential buyer (or buyers) has been identified it’s time to identify your professional advisors. Think of your team as the artists who will help to craft the deal. Many businesses have their general counsel and accountants. While these professionals may have been trusted advisors for years, these individuals may not have the experience to guide a seller through the complex and unique aspects of selling a business. So first things first, you must identify the right attorney and accountant. These individuals must know the unique transactional terminology and concepts and be able to work together as members of your deal team.
While the sell and buy teams may have different priorities, the ultimate objective is to make a fair deal that satisfies everyone. The best business transactions are not zero-sum scenarios. With this in mind, your deal team will make the following initial determinations:
- Which assets are you selling, and which are you keeping?
- Who owns these assets? i.e. real estate may be owned by another family member or goodwill may be tied to a specific asset or individual.
- How much of the purchase price will be needed at closing, and how much can be spread over time?
- What are the tax ramifications associated with the transaction?
- To what extent do you, your family or key employees want to remain with the business after the sale?
Once these issues have been identified and it appears as though all parties are interested in moving to the next step, a confidentiality agreement (CA) or nondisclosure agreement (NDA) must be signed. This document will give the seller comfort that all disclosed information will be kept confidential and will be used only for purposes of evaluating and completing the acquisition. The deal attorney should assist with this document.
Once the CA or NDA has been signed, the buyer will provide the seller with a letter of intent or an L.O.I. The L.O.I. is a nonbinding letter outlining the basic terms, conditions and price you have informally agreed to. The L.O.I. is also referred to as a Term Sheet. The L.O.I will specifically identify the assets to be acquired, what the consideration will be, due diligence review, time line for the deal, who will pay for the deal expenses and may include a breakup fee. Typically the L.O.I. will provide that the seller is now committed to the buyer and should prevent the seller from shopping the business to other potential buyers during the term outlined in the L.O.I.
Once the L.O.I. has been signed the due diligence begins. The due diligence period is the time that the interested parties have to investigate each other to determine if they want to proceed with the deal. From the buyer’s standpoint, due diligence will be the time that they examine financial statements, review tax returns, evaluate bookkeeping policies and procedures, etc. This process is used to determine if the information presented is accurate and also to establish possible benchmarks needed to close the deal. There will be financial as well as legal due diligence. The seller’s accountant must be involved in every phase of the financial due diligence, while the deal attorney must be involved in the legal due diligence. As due diligence continues the deal team will begin developing the purchase agreement. The attorneys, with the assistance of the accountant, will negotiate the purchase agreement.
Generally the buyer is responsible for preparing the purchase agreement, however it is a negotiated document with both teams participating in the process. This is the document that outlines legally the agreement of the interested parties and is forever binding. This agreement will specifically identify the assets to be sold, it will provide the representations and warranties (Reps and Warranties) of all parties, and it will specify total considerations and payment terms. The seller, attorney and accountant must work closely together during this process. The attorney will handle all legal aspects of the document.
The accountant will assist with the determination of the financial aspects of the deal and help determine the federal, state and possibly local tax ramifications resulting from the purchase. The ramifications will differ depending on the structure of the deal (stock or asset) and the allocation of the purchase price. The accountant should also help determine the need for escrows. For example, there may need to be an escrow to protect the buyer from possible unpaid sales tax or perhaps future warranty claims. Often times the consideration is structured using an “earn out” – a portion of the consideration paid in the future, provided certain benchmarks are achieved. A typical benchmark might be reaching a certain EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a measure of cash flow, and a reasonable and achievable benchmark must be established before the agreements are signed. Also closing the deal may require certain working capital or cash balances. The accountant will be invaluable in determining the earn out and benchmarks.
The Final Stroke – Finish and Sign It
Once the documents have been finalized, it’s time to close the deal. Closing involves signing the documents and funding the deal. This is the date that cash is exchanged and the deal is consummated. The seller must provide the buyer with wiring instructions and may need input from the bank. It may be that a portion of the consideration is used to reduce bank debt, while remaining proceeds end up in the seller’s bank accounts. When disbursing funds the final distribution of cash may not be completed for several weeks after closing. There are wrap up expenses and costs associated with the deal that may not be immediately known.
A deal can be completed quickly or take years. Each deal is unique and must be approached with the right team of competent advisors. You must have patience and be willing to understand the ebbs and flows of the deal to make it truly a work of Art.
For more information or any questions, please contact the author Thomas Bakaitus, Jr.
Thomas L. Bakaitus, Jr., CPA, MST
Partner / Operating Officer – Herbein + Company, Inc.
buying and selling a business | Due Diligence accounting | EBITDA | Herbein Energy Advisor | Jr. | Marcellus Shale Accountants | Marcellus Shale CPAS | nondisclosure agreement | Potential business buyers | Selling Your Business | tax ramifications | Thomas L. Bakaitus Jr.