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[Business Builders]
Mergers & acquisitions
Originally Published: August 2007
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ENTREPRENEURS are smart and dynamic people. They know every detail about their business, its strengths and weaknesses, and their vision for the future. But when business owners are negotiating a partnership, merger or sale of their business, all of that knowledge and assertiveness could hurt them. I?ve had clients who have contacted the potential buyer in the middle of negotiations with the idea of speeding the process along, not realizing that this could make them appear too eager to sell or ? worse yet ? disclose too much information. Other entrepreneurs have shared their intentions with the wrong people, giving access to vital company information too early in the process, and inadvertently giving competitors the nod to take their clients or employees. No matter what stage of your business, you will be in a position at some point to negotiate a merger, acquisition or sale in line with growth or succession. Here are five common deal-breakers to avoid in the process. Insufficient planning Before ever taking your company to market, get your ducks in a row. You need a competent team of advisers who can help you navigate the transaction. This includes a business attorney and a CPA familiar with mergers and acquisitions or buy-sell agreements, a business valuation expert and a business intermediary. The business intermediary may be a broker or investment banker with experience in bringing deals to market. These advisers will act on your behalf to package and present the best side of your business. For example, you may have an idea of what your company is worth. But the true value lies not only in your physical assets, but also in your intellectual property, the experience of employees, the value of clients, vendors, and any inventions or plans that will affect future growth. You may also attract buyers due to your market position; buyers may be willing to pay a higher price for a small acquisition because it supports their growth strategy in a particular market. Value must be understood before a price can be established. Unclear terms My clients always focus on price, but the terms of a deal can be equally or even more important. One element that is often overlooked in business transactions is the letter of intent. The letter of intent can seem like a formality, but there are typically binding terms within the letter that may be enforced or subject to litigation if a deal falls through. Entrepreneurs can also be surprised by what they?ve agreed to give away at the deal closing. These unclear terms can blow a deal. For example, which party is assuming which costs during the exploration phase? How is any tax liability for the company handled? What are the terms for consulting and non-compete? Who controls patents or the rights to future inventions? How will key employment contracts be handled? A letter of intent is the outline for the final deal, and the more issues resolved at this stage of the deal, the better for both parties. Fix the future as well as you can before the deal goes forward ? and in case it doesn?t. Think about what role you want to play in the future company. What control do you want to give up and what opportunities for your career or a new venture would you like to keep? Disclosure is an important term. Clearly define how much of the deal should be disclosed, to whom, and when so that you avoid any negative impact on business value or public relations. Both parties should understand their roles and the level of disclosure allowed as the deal progresses. Business erosion Companies involved in a change of ownership are vulnerable to competitors as well as the fallout of uncertainty for employees, clients and vendors who?ve come to trust the status quo. Loss of key employees and clients has ruined deals. So has loss of business. It can take six months to more than a year to finalize a business transaction. Entrepreneurs can?t afford to take their eyes off the bottom line during this time or they risk business erosion. The only way to guarantee the best deal and compensation at closing is to manage your business well. Your team of advisers will handle the deal-making and will bring you into negotiations when appropriate and necessary. Buyer infiltration As the deal moves along and a leading suitor emerges, it may feel natural to allow some access to the company?s daily operations or to impress the suitor with your vision for the company. But allowing too much control or decision-making before the deal is signed can lead to future regrets. Some buyers want the right to approve or reject capital expenditures over a certain amount during the due diligence period. This influence could be viewed legally as intent to buy, creating liabilities on both sides. The best route is to avoid any material change to the business due to a buyer?s recommendations or influence. The parties may also negotiate terms, on capital expenditures for example, that allow the company to operate in case the deal doesn?t go forward. You also don?t want to leave your company vulnerable to competitors posing as suitors who lure clients and employees away or gain access to competitive data. It happens. Deal micromanagement One more piece of blunt advice: Get out of your own way. This is the hardest lesson for can-do, driven entrepreneurs. Especially for those who have built businesses from the ground up, selling or merging their company can feel like sending a child off to college. It?s difficult to keep emotions in check and avoid taking the deal into your own hands; the buyer never moves fast enough. Remember, most companies that acquire other companies also use a team, and business deals are the only thing these teams focus on full time. They are savvy and experienced in negotiating the best deal for the buyer. They don?t care that you mortgaged your house to start the company or that your daughter wants to continue working there. Business transactions are not your area of competency and are too time-consuming to handle alone. Trust your team to secure a winning deal. [contact] John Cameron focuses on business transactions as the managing attorney at Cameron Law Office in Minneapolis: 612.341.0394; john@cameronlawoffice.com; www.cameronlawoffice.com |
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