The textbook definition of a middle ground transaction involving the purchase and sale of a business is one where a buyer and seller with equal motivation negotiating in “good faith” both feel that they have given slightly more than they wanted to complete the deal. The obvious parties that can kill any transaction involving the purchase and sale of a privately held company or family owned business are the buyer and seller. Each has the ability to walk away from the negotiating table at any point up until closing and kill the deal. It is critical that these parties remain engaged and motivated throughout the business sale process. A business sale or acquisition is not an emotion driven, impulse decision, but a sophisticated, nuanced process that frequently takes months to complete successfully, even with professional facilitation. Loss of an appetite for a deal by the buyer or seller and the deal is dead.
Assuming the buyer & seller are working collaboratively in “good faith’ to achieve a common goal of a completed transaction, a deal can incorporate up to six additional parties that have the ability to “kill” the transaction. The death blow to a deal from any of these parties can be justified or can be the result of inexperience, lack of knowledge, or selling unwarranted fear. One of the values of employing an experienced, knowledgeable, professional intermediary to facilitate a business sale transaction is that they can serve as a resource for evaluating information and guidance from other parties involved in the transaction.
The following are the six external parties that have the ability to “make or break” a business sale or acquisition. Each has the potential to make a valuable contribution to a transaction facilitated with “best practices” in an environment of full disclosure:
- CPA, CFO, or Accountant – On the seller side of the transaction, an accounting professional plays three important roles in a transaction. Their first role is to provide accurate financial documentation that can be used to value and assess the company. The better the financial recordkeeping for a business the easier it will be for an outside party to evaluate the opportunity. The second role is to help facilitate due diligence. The more comprehensive knowledge of the business held by the seller’s accountant the more efficient the due diligence process that will be facilitated. The final role is to assist in the negotiation of the tax allocation for the transaction. Negotiating the “most favorable” tax allocation possible for a business sale is fundamental to generating the highest possible net from the transaction for the seller. Walking away from a deal can be justified, if the tax liability is significantly greater than what could be achieved with a different allocation of values between assets. On the buyer side of the transaction, an accountant provides value by helping with business valuation, verifying the accuracy of the financial documentation of the business used as a foundation for valuation either through a comprehensive due diligence process or creation of a Quality of Earnings Report, and negotiating tax allocation from the buyer’s perspective. No buyer should purchase a business without getting a “thumbs up” from their accountant on the acquisition.
- Attorney – No profession has a bigger reputation as potential “deal killers” in the M&A world than the lawyers. The best business attorneys are knowledgeable, experienced dealmakers who know what is standard in middle ground legal documentation. It is legal counsel’s job to identify risk, draft documentation to facilitate disclosure, and mitigate future liability for the parties. No deal should be completed without representation by legal counsel on both sides of the transaction. The employment of the right attorney by a party can be the difference between a completed or failed transaction However, there is always a foundation of truth to any well-developed reputation in the public domain. As a 26-year, professional mergers & acquisitions intermediary who has successfully facilitated over 300 transactions, I can tell you that “deal killing” attorneys exist and that I have witnessed their destructive activity.The following are three of the actions that can result in a deal dying on a lawyer’s desk:
- Confrontation – If you recall, earlier in this article I said that no deal will happen if the buyer and seller do not remain engaged and motivated to complete the transaction. Business law is very different than litigation where a win/lose outcome is the predetermined result of legal engagement. In a business sale transaction, respective legal counsel should not be adversarial. They should be collaborative problem solvers. Legal verbiage solutions exist for virtually every scenario in a business sale transaction. The solution just needs to be identified and appropriate verbiage drafted. Transaction parties need to keep their legal counsel focused on the ultimate goal of a completed transaction. A lawyer who speaks disparagingly of the other side or opposing counsel is not creating an environment conducive of goal achievement.
- Selling Fear – Entrepreneurs and attorneys are traditionally made of different fabric. Entrepreneurs commonly are willing to take a calculated risk for the potential of financial reward. Lawyers frequently have a jaded view of the world and risk adverse disposition because their professional experience set is weighted toward problems and negative outcomes. Business owners rarely call their attorneys with reports of the risks they took to achieve favorable business results. It is up to the client to assess risk scenarios in a business deal in terms of their probability and quantifiable, potential damages and make the appropriate executive, business decision. Attorneys will sell fear in a transaction. Any party not willing to override their attorney’s advice in negotiating an asset or stock sale agreement favoring risk over potential liability, will not complete a transaction and should not be an entrepreneur. It is very rare for an attorney to advocate for a legal option that creates risk.
- Cost – Confrontation is good for business when an attorney is paid by the hour. This confrontation commonly takes the form of legal counsel staking out unobtainable positions in legal document negotiations that will take hours of legal negotiation to get to middle ground. Deals can be lost or legal expense balloon if legal counsel is more focused on their bottom line than achieving their client’s goals. Multiple purchase offers on multiple businesses is financially favorably for buyer’s counsel. Potentially losing a valued client can be a scary prospect for seller’s counsel. Creation of a stepper path to the sale for a buyer can be a seller counsel strategy to delay or kill a deal. Unfortunately, I have seen corporate counsel try to take a big, final bite out of the apple when their client sells their business. Parties should be cognizant of the “business of law” and monitor & manage legal engagement appropriately in a business sale transaction.
- Bank or Investors – There is an expression, “He who has the gold makes the rules”. If a bank does not want to make a loan or investors contribute capital toward an acquisition the deal has a probability of failing. It is recommended that if a bank or investors are part of a strategy to acquire a business that they be brought in early in the transaction and provided sufficient information to make a decision. It is also prudent for a buyer interested in acquiring a business to engage with multiple banks and/or investors simultaneously. Lending and investment policies and appetites can vary dramatically between banks and investors. If a quality, fairly priced business is the target acquisition by a qualified buyer there is likely a “lid for that pot”. A professional intermediary can often be a quality source for banker referrals. Every year IBA successfully facilitates transactions where the buyer was initially turned down by one bank only to have another lender located that is enthusiastic about financing the acquisition for the buyer.
- Landlord – A majority of businesses located in metropolitan areas lease their facility. Most leases have a clause indicating that the landlord will not unreasonably prevent the assignment of the existing lease. This is good news, but it does not mean that the landlord will do what is necessary to allow the buyer to complete the acquisition. First, the landlord will assess the buyer’s financial strength and credit history. If these are not equal or greater to the financial strength and credit history of the seller, then the ability exists for the landlord to kill the deal. There is little the seller can do in this scenario other than employing their personal goodwill with the landlord to try to avoid having the transaction die. For this reason, it is prudent for an entrepreneur wishing to sell their business to assess the buyer’s financial strength and credit history prior to reaching an agreement with a buyer on a letter of intent. Never forget that if there is remaining term on the lease, the landlord is not damaged by keeping the existing relationship until a stronger alternative tenant is identified. Additional variables that can “kill a deal” involving a landlord include the term of the lease necessary to satisfy bank underwriting requirements and trailing liability associated with the seller not being released from a personal guarantee on the lease at the time of sale. It is always prudent to have professional real estate representation when working on lease negotiations or assignments. The “best of the best” business brokers working in the United States also possess real estate licenses for their relevant geographic area of representation.
- Franchisor – Similar to a landlord, a franchisor has the ability to “play God” on a potential franchise resale transaction. A franchisor will want to vet a potential buyer in terms of their relevant experience for the business model and financial strength. Obtaining a franchisor’s blessing for a transition of ownership requires knowledge, experience, and a high professional skill set. It is always prudent to engage an intermediary that has facilitated franchise resales previously when selling a franchise. Consideration also needs to be given for the steps necessary (e.g., Discovery Day) and the time period necessary to facilitate a franchise resale, as the buyer will often be required to train for a period of time pre acquisition with the franchisor.
- Professional Intermediary (Business Broker) – The sale of a business is a sophisticated, nuanced process requiring knowledge, experience, and a high professional skill set. Professionally represented business sales are frequently made and lost based on the strength of the intermediary. It is always recommended that a seasoned business broker with relevant industry experience in the geographic location of the business be engaged if a premium price, timely sale, and a transaction facilitated with “best practices” is desired. Every year IBA is engaged to sell businesses by entrepreneurs who were unsuccessful selling the companies with other firms in the Pacific Northwest. IBA successfully sells 80 – 90% of its engagement projects annually, so we welcome the opportunity to step up and help these frustrated business owners who were forced to delay retirement a year or more because a business broker over promised and under delivered related to their professional skill set. 100% of IBA’s fees are paid on performance, so we are only paid by happy clients that have achieved their goals.
The successful completion of the purchase and sale of a privately held company or family owned business requires a buyer, seller, and selection of professional advisors and vested parties. The knowledge, experience, professional skill set, and “bedside” manner of the professional advisors will either enhance or diminish the likelihood of a completed transaction. Scrutiny and preparation of the buyer before introduction to a landlord or franchisor is standard practice in a professionally facilitated transaction and “best practice”. 90% of success is preparation and building the right team. It is my hope that every member of your transaction team is a dealmaker and not a deal killer.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.