Successful Deal Facilitation in a Business Sale

Mar 23, 2021

Agreement on comprehensive business terms in a letter of intent for a business purchase & sale transaction between a buyer and seller in a deal negotiated in an environment of full disclosure where the buyer has had an opportunity to review and evaluate a significant amount of operational and financial information prior to the seller granting the party a period of exclusive negotiations to finish the acquisition largely transitions the process from negotiations to deal facilitation.  This achievement is traditionally celebrated at IBA, a business brokerage firm that has successfully completed over 4200 transactions in its history, for two reasons.  First, it is rare for IBA “sell side” clients to fail to finish transactions when parties reach agreement on letters of intents. This successful completion rate is necessary for our 100% paid on performance business model to work effectively, as it has year in and year out since 1975.  Second, agreement on a LOI substantially transitions the relationship between the parties from confrontational with divergent vested interests, the most obvious being the sale price for the company, to one of collaboration where the buyer & seller are working together to achieve a common goal.

An often undervalued skill set of a professional intermediary is deal facilitation.   Successful deal facilitation requires knowledge, experience, strong written & verbal communication skills, and the ability to problem solve collaboratively with the parties and their professional advisors to finish the project.

The following is a summary of common deal elements facilitated by a business broker in a transaction:

Due Diligence

Due diligence in a properly facilitated transaction should be more a verification than discovery process.  A common analogy used at IBA in describing due diligence is a vehicle inspection by a mechanic prior to the acquisition of a used car.  When you are considering the purchase of a used vehicle, it is common to inspect the body, interior, and take the vehicle for a test drive prior to entering into negotiations.  In a business acquisition, the comparison would be reviewing operations, facilities, and financial records.  Only if the personal inspection of the vehicle and test drive were satisfactory would someone negotiate a price and spend the money to hire a mechanic to evaluate the transmission, brakes, hoses, etc. of a car.  If unknown issues are identified by the mechanic, the deal has a probability of failing unless a price adjustment is negotiated.  The same is true in a business sale, except the mechanic is frequently replaced by a CPA who will drill into the reported numbers to insure the figures conveyed on tax returns and internal income statements and balance sheets used as the foundation for price negotiations hold as an accurate portrayal of the business.  The facilitation of this process takes knowledge & experience to explain the Why? behind  information  requests and to create a process that is efficient and effective. The process can also include facilitation with other buyer side professionals completing additional analysis in the form of customer satisfaction surveys, IT infrastructure assessments, Quality of Earnings Reports, etc.  Due diligence should be viewed not as a burden, but a benefit for both sides.   If a comprehensive due diligence process is facilitated and the buyer completes the acquisition with “open eyes” the potential for trailing liability issues for a seller are significantly mitigated post sale. If a referral to a CPA or consultant is needed for due diligence or a Q of E report, IBA has a deep Rolodex of parties to introduce who have experience with business acquisition transactions.

Legal Documentation

After price, the area in negotiating a business sale transaction with the greatest potential for confrontation is the legal documentation.  Prior to entering into legal document negotiations, a buyer & seller should communicate to their respective attorneys that the goal is to get to a “handshake” and not to folded arms across chests. Confrontation will occur between attorneys in a business sale.  In the 300+ transactions I have successfully facilitated as a business broker I have never witnessed a transaction where attorneys did not knock heads on verbiage. The value of a trusted, experienced intermediary with a reputation for integrity is they can provide the parties with a reference point to what is reasonable and standard for both sides of the transaction.  A business broker also has the unique ability to talk directly with the buyer, seller, and legal counsel to help communicate and problem solve through issues.  Direct communication with parties is discouraged and only available with prior authorization from opposing counsel for attorneys often preventing them from explaining positions to decisionmakers comprehensively.  It should also be recognized that the DNA of attorneys is very different from entrepreneurs.  Entrepreneurs by nature are risk acceptant.  Attorneys by profession have the duty to illuminate risks.   It is often said in the business world, that if executives listened to their attorneys 100% of the time and mitigated all risk that no great innovations or financial achievements would occur in the private sector.  As a simple example, there are over a 100 COVID-19 vaccines in development around the world, nine companies are ahead in the process, and three have been authorized for use in the United States.  Each of these companies took substantial financial risk and have risk exposure in terms of market success and side effects.  I am confident that in board rooms last year it was the business executives who accepted the relevant risk and pushed forward to produce vaccines and not company attorneys.  Lawyers play a very important role in transactions, but at the end of the day parties are the decisionmakers.  It is strongly recommended that both the buyer and seller select legal counsel carefully.  At IBA, we like to compare attorneys to doctors and desire ones in our operating rooms that will do everything possible to keep the patient alive.  We are always happy to provide contact information for “deal-making” lawyers to interview.  We have relationships with many of the “best of the best” business attorneys in the Seattle, Portland, and Spokane metropolitan areas and a spectrum of other places in the Pacific Northwest.

Acquisition Financing or Investment

No transaction is ever completed without the buyer arriving at closing with a “bag of gold”.  Frequently funds are delivered at closing by a bank or investors to support a buyer.   The ability to secure financing requires knowledge, experience, and ability.  Working with the right bank or group of investors, can be the difference between a completed and failed transaction.   IBA has strong market knowledge on which banks are financing acquisitions in which industries and geographic areas in the Pacific Northwest.  If a referral is desired, we would welcome the opportunity to make introductions.  Buyers are encouraged to shop their loans as appetites for loans, credit and underwriting policies can vary significantly between lending institutions.  It is not uncommon at IBA for a buyer to be rejected by one bank or asked to contribute more capital at closing than by another bank that is enthusiastic to work on a loan and finance an acquisition.  It is also critical to have a professional intermediary involved who is experienced and knowledgeable about acquisition financing who can help problem solve through the underwriting process whether it is providing information to bring clarity to a foggy picture or answer questions about the business for bank personnel or outside contractors (e.g., third party business appraisers).

A current issue being addressed in deal facilitation by IBA intermediaries is PPP loan forgiveness. This issue has many variables ranging from differences in knowledge and ability to forgive loans between national footprint banks and fin-tech providers to the handling of funds in a neutral escrow account as an acquisition financing requirement until loan forgiveness is finalized.

Real Estate

All professional intermediaries on the IBA business brokerage team hold real estate broker licenses in one or more Pacific Northwest states.   These professional licenses allow for the comprehensive sale of real estate along with a business, negotiation of new leases or lease assignments for rented space, and knowledgeable facilitation of real estate processes including property and environmental inspections. Employing a M&A firm to facilitate a sale who does not hold a local real estate license complicates the transaction by bringing in another party who needs to touch and could fumble the ball, plus seeks compensation.

Government Approval

All business models require government approval or licensing for operation. Basic licensing can include mirroring existing state, county, and municipal licenses in an asset sale.  However, many specialized business models require additional approvals beyond the basic license set.  These licenses and approvals can range from approval of a buyer to hold a liquor or cannabis license in a relevant jurisdiction to federal approval of a transaction, like is being sought in one IBA deal for a company with top secret clearance from the federal government from CFIUS (The Committee on Foreign Investment in the United States).   It is wise to have a knowledgeable, experienced guide in the form of a business broker when navigating government licenses and regulations.  Failure to file paperwork correctly the first time can result in deal failure at worst or delays of weeks or months at best.

Outside Party Approval

Transaction approval is not limited to government agencies as an obstacle that needs to be cleared prior to deal completion.   Deal completion depending on the business model can require the consent of publicly traded corporations (e.g., Costco, Amazon, Microsoft, etc.), unions, and/or franchisors.   It is advised to have a broker involved who has knowledge & experience working with these parties.  It is not wise to skydive tandem the first time with a party that has never jumped out of a plane with someone else connected and it is equally questionable to leave navigation of critical business agreement assignments to an intermediary who has never completed the task.

Agreement on a letter of intent is a strong step in the right direction by a buyer and seller, but it is far from the end of the deal process.   Many business sales facilitated by owner or inexperienced representation “crash & burn” because of the pilot in the cockpit.  IBA successfully lands 35 – 60 business sales a year as a firm.  If you are looking to hire a pilot to help you achieve the best possible market value for your company and get the deal done before Congress changes the long term capital gains tax rate relevant to business sales to your detriment, our team would welcome the opportunity to interview for the job.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, 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”.