When things go wrong with the sale of a business the parties involved look for remedies in the liquidated damages provisions established in the purchase agreement. Such provisions are included when a purchase agreement has been signed in advance of an actual closing when the business is transferred and a purchase price is paid.
When a business is about to be sold, the parties to the sale may find it beneficial to establish an escrow agent to handle the transfer of certain assets and cash between the buyer and seller. Many times the parties agree to use the escrow account held by one of the party’s business attorneys. However, in many cases the parties prefer to hire an independent escrow agent to handle the assets and cash that will change hands.
When working through a business sale, an inordinate number of resources on both sides of the table are dedicated to drafting and negotiating the Stock Purchase or Asset Purchase Agreement. This is true especially in the last one-to-two weeks before the closing. In fact, I’ve had clients remark that during their entire tenure as an entrepreneur, they never spent as much time speaking to their advisors as they did during the last week of their business ownership journey!
So you’ve decided to sell your business, but what structure is right for the transaction? Buyers and sellers often prefer different structures due to various factors which change based on the structure and which have different impacts on the parties. Generally there are three (3) categories of factors that drive the eventual structure of a deal: (1) business issues, (2) assignments and consents, and (3) tax issues.
Term Sheets or Letters of Intent (LOIs) are commonly used in the buying or selling of businesses. The purpose of LOIs are to state clearly the principal terms that the parties have agreed to as part of the deal and to represent the intent of the parties to pursue the contemplated transaction.
One of the many questions asked by entrepreneurs as they plan for the sale of their business is related to the Adjusted EBITDA definition.
When an asset has a grossly inflated price, it is by definition an asset bubble. Does this apply to many small businesses in the US? Probably yes, in my opinion. Most small businesses have a balance sheet listing some assets; therefore they are subject to being part of a bubble.
Indemnification allocates the risk of various post-closing losses between buyer and seller. For this reason, the indemnification provisions of your purchase agreement will very likely be among the most heavily negotiated provisions in your purchase agreement.
As markets recover post-recession, business owners are presented with growth opportunities. However, a business owner may not have access to the capital needed to execute on a growth strategy. Where does a business owner turn?
There are many pitfalls to avoid and precautions to be taken when contemplating the sale of your business to a competitor. In particular, selling a business to a competitor can have tricky antitrust implications that require much care prior to closing.
Many entrepreneurs faced with the demands on cash of a growing business are tempted to sell equity to outside investors, or perhaps give away stock to retain a valuable employee. Diluting your stake in this way may solve the immediate problem, but it can have unforeseen consequences when the business eventually is sold. Stockholders’ personal circumstances evolve in different ways over the lifetime of a company, and whatever the original intention everyone may not be on the same page when you are ready to sell.
Many business owners are under the wrong impression that their business debt will disappear when their business is sold. In some cases, the debt is absorbed or is assumed by the buyer. But usually this is not the case.
Recapitalizations can be used to provide liquidity to owners, refinance the balance sheet or fund future growth initiatives. When the owners sell a majority of the business but still retains some ownership, it is termed a “majority recapitalization”.
When the Letter of Intent (LOI) expiration date and time is defined, the buyer is putting the seller on notice that he or she must either agree to the terms defined in the letter or lose the opportunity to sell the business to the buyer authoring the LOI.
Management Buyouts, or MBOS, can sometimes have a negative connotation. Maybe that’s because it sounds like the management team is getting “taken out”. On the contrary, it is the exact opposite. A Management Buyout is a fancy acronym for when the current managers buy controlling interest of a company from its owners. That’s a good thing for management!
If you have ever endured the process of selling a business with the assistance of professional advisors who specialize in mergers and acquisitions, you will agree with me that this is not something to try at home!
During the initial negotiations of a business sale, one of the primary issues is whether to structure the sale as an asset sale or a stock sale. Typically the seller and the buyer have opposing preferences in this regard. The seller generally prefers a stock sale; while the buyer generally prefers an asset sale.
EBITDA is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is often used as a measure of a business’s cash flow. Also it is used frequently in many business valuation formulas, depending on the business’s specific industry.
Your worst nightmare comes true! You get an email on Friday afternoon from your largest customer indicating that they are changing suppliers for “strategic reasons.” They represent 20% of your sales revenue and 35% of your profits.
It is a unique pleasure to find two equal partners or shareholders acting in harmony over selling a business. Unfortunately, when I say “unique”, I mean rarely ever. Please understand, it is not as if this never happens. It is just so unusual, that when faced with the situation, I find myself warning both parties before they proceed to sell their business.
If you have the opportunity to buy or sell a business, negotiating the terms of a letter of intent (an “LOI”) is one of the first and most critical steps in the process of completing the transaction. A well-written letter of intent provides a valuable foundation for a potential transaction as it captures the parties’ intentions with regard to the structure, timing and material terms of the transaction. An LOI often imposes significant obligations on each of the parties, and consequently is typically the product of fairly intense negotiations between the parties.
When you sell a business, typically you will find language in the Stock or Asset Purchase Agreement that defines exactly what the Seller and the Buyer agree to do or guarantee as part of the transaction. In other words, each may agree to make the other party not responsible. The term used to identify this particular form of guarantee is indemnification.
The “indemnification basket” is one of the most important deal terms found in the Letter of Intent and ultimately in the Purchase Agreement and is often misunderstood by both the buyer and seller of a business. Buyers want the basket to be as low as possible and Sellers want it to be as high as possible. Baskets may be one of two types: a deductible basket or a tipping basket.
A typical entrepreneur invests a tremendous amount of time, effort and money in building a business. That is why it is so important for entrepreneurs to make sure employees and third parties who work with the business are prohibited from improperly using or disclosing any confidential or proprietary information of the business(e.g. customer lists, trade secrets and financial statements). Similarly, and in connection with the opportunity to sell a business, it is critical for the owner of the business not to provide any confidential information to a prospective purchaser until that party has signed a well-written non disclosure agreement.
There are ways to improve the likelihood you will achieve a successful sale of your company if you take the time to develop ground rules with your business partners. The sooner you do so in the process of selling a company, the better.