- How To Choose A Business Broker Intermediary - January 25, 2023
- Buying and Selling a Business in a Changing Market - July 22, 2022
- How to Add Value to Your Business - January 18, 2022
Have a Question?
Ask your question below and one of our Advisors will answer.
Doing deals can be expensive. A lot of business owners want to save money by not hiring an advisor. In many cases, they simply don’t know when they should make the investment in an advisor.
It’s important to understand the roles of the broker and other advisors, especially legal counsel, and to know when to bring in a professional. Here are some milestones in a deal, and how to know when to hire a business advisor.
When Doing Due Diligence
When a buyer shows interest in a business for sale and gets an offer accepted, he or she will get a chance to “look under the hood.”
It’s time for the buyer to do their due diligence; to confirm that the business performs as the broker and seller have represented. It’s important to understand each stakeholder’s positioning when doing a deal. Because the business broker normally represents the seller, he or she can’t and shouldn’t be giving a buyer a list of things to look for in the business.
This may be a time to hire a business advisor.
Accountants can confirm that the financials are valid, and business attorneys can validate that the seller has complete and legal ownership of the business. Advisors like these can also look for other issues that could cause a problem after the sale. Another business broker can also provide assistance in due diligence as well, as long as he or she is on the other side of the deal.
When Starting a Business or Partnership
When people start a business together, it’s important to have valid articles of incorporation and operating agreements. Start the partnership with a clear plan of how it could be dissolved. Proactive planning and documentation is the only way to avoid protracted drama when it’s time to move on, as all great things must come to an end.
In these agreements the details are important, so it’s worth investing in advisors as opposed to choosing the discounted online, templated options. Owners who take this approach may save money on the front end, but often end up paying more when vague or ill defined documents fail to protect them on the back end.
Before Signing an Agreement
Successful owners get purchase agreement contracts for the acquisition of their businesses.
But unlike a lot of real estate contracts, purchase agreements are often bespoke to the deal at hand. Every business is different, and every purchase agreement can have caveats and contingencies that can have significant effects on when and if an owner receives full consideration for the business, as well as his or her future involvement in the business. From the details of the transition periods to a family name that may or may not come with the transaction, the specifics of the purchase agreement are the instructions for how the deal will transpire and how success is defined when the deal is done. Other agreements in addition to purchase agreements may include items such as franchise agreements, vendor agreements, partnership agreements, and more…
Contract review and negotiation is an important time to hire an advisor.
Remember that a business broker can share experiences that they’ve learned from previous deals involving attorney advice, but only an attorney can give legal advice when it comes to contracts.
When Money Is Involved
Just about any time that a significant amount of money is involved in a transaction, it’s probably worth hiring in an advisor.
It may sound obvious, but if it says the money is non-refundable, for example, it’s quicker, easier, and cheaper to have it reviewed and potentially negotiated by an attorney than to try to fight to get the money back later. Major issues like refundability are not always in bold or “above the fold,” but attorneys are trained to look for the important details like these.
When Making It Official
Nobody wants to waste resources by hiring an advisor, investing money and time, and ultimately not completing a transaction. To mitigate this possibility there are less official documents and communications that can “test the waters” before the professionals are brought in. It’s not a bad idea to float an offer verbally or by a simple email to make sure that a buyer and seller are in the same ballpark on price and terms, but more formal communications such as term sheets, letters/indications of intent, and ultimately purchase agreements show commitment.
Advisors including business brokers can help in underscoring the validity of an offer by putting it on paper and delivering it in an official manner.
The same offer that may have been dismissed if shared in a text could be accepted if it’s drafted and presented properly by an advisor…
In summary, despite the cost involved, it’s wise to hire an advisor. There are many milestones in a deal when business advisors are vital to success. Such milestones may include after a buyer and seller have reached a meeting of the minds, when money is about to be spent, or when new partnerships or agreements are being formed. Furthermore, there is a spectrum of “officialness” in documentation as communications move from an idea to an official transaction. From term sheets to purchase agreements, business advisors can add value in preparing, reviewing, and presenting official documents. When hiring an advisor, instead of focusing on how much you will have to pay for quality advice, consider how much it may cost when making an uninformed decision.
Congrats on reaching the negotiation stage of your deal with a prospective buyer Lanny. When negotiating an earn out, I always recommend the key performing index be revenues, not earnings, because it’s harder to manipulate the top line than the bottom. Furthermore, I’d recommend memorializing that the calculation of the earn out payments are done by a third party accountant. This way the buyer’s accountant won’t be able to influence the pay out.
Our company is negotiating a sale at this time, but we are expecting a significant increase in revenue over the next three years. Are there some earn-out models that eliminate the risk of manipulating the finances toward one party or the other? I would like to find a scale that rewards us for over achieving targets.
Lanny, you will also want to have some color on gross margins, defining the costs included in COGS. That will make it fair for both parties. Anyone can drive revenues at really low margins and create a problem for all parties down the road. I agree that revenues are key, but you’ll want to prepare to commit to some gross margin profile.