The Three Main Concerns of Company Sellers
The nuances inherent in each transaction amass quickly. Without appropriate representation, a company seller can get inadvertently bogged-down in minutiae. While much of the detail can be extremely important, combining deal details with natural seller emotion is a recipe for mistakes. For most sellers, the myriad of deal concerns can be distilled down to three: achieving maximum value, transaction consideration and certainty of close. All other issues and concerns typically point back to these three trunks. Let’s discuss each a bit more in detail.
Achieving Maximum Value
Item #1 on our list is almost a forgone consideration that requires little to no description. It’s one of the reasons we constantly hamper on our investment banking process for maximizing seller value in M&A. It is simply human nature that a company seller will want to sell for the highest price possible.
Form of Transaction Consideration
Considerations in an M&A transaction involve cash, stock, seller’s note and earnouts, among others. As the saying goes: cash is king. When it comes to taking stock as consideration, swapping private stock as consideration, is a rarity I have personally never seen. When it comes to public stock, sellers are often leery about lack of share registration, DTC eligibility and whether the shares trade on a major exchange or over-the-counter. In addition, depending on the size of the deal the SEC’s affiliate rules (rule 144) may apply, further hampering the liquidity of the transaction consideration.
That is not to say that all sellers prefer cash as the major consideration in doing a deal. No, some sellers prefer to forgo cash as it creates an immediate and substantial tax liability. Some owners may wish to push out their tax liability in the business by taking public company stock in lieu of cash. This is likely even more true for older sellers who may not require immediate liquidity and who may have estate planning considerations in the transaction as well. In this case, the seller’s estate will benefit from a stepped-up tax basis on the shares provided for consideration.
The typical successful company owner is likely harvesting a large annual dividend or cash draw from the business. The liquidity preference theory applies here. Whatever is not given as cash (unless something is structured creatively for tax purposes), will not likely be applied with some lack-of-liquidity discount when an apples-to-apples comparison is made.
Certainty of Close
Anyone who has been in the deal business for any length of time knows Yogi Berra was right: it ain’t over ’till it’s over. The confidence level of a buyer’s ability AND desire to see a deal cross the finish line weighs heavily on the minds of many buyers. This concern is often the catalyst for some filters/questions hurled by intermediaries, including:
- Can you show us the source of the financing?
- How are you intent on funding ___ portion of the debt and ______ portion of the equity in this deal?
- If we set a deadline for due diligence, can we expect to close on ________date?
- Basic background checks on C-level execs and/or a pull of Dun & Bradstreet info.
Many of these items are often assumed when the buyer is a well-known brand (particularly if the company is public) or if the buyer preempts the question by showing the source of financing as part of the letter of intent. The certainty of close question is not typically as large of a concern as the deals get larger. The funds and players included in the pool for deals that are large enough is small enough that these types of questions are already known or assumed prior to consummating the transaction.
In fact, most of the certainty of close questions revolve around the potential disruptions to the business that will inevitably happen if a deal is not completed. Customers, employees or competitors can significantly impact operations (and by default, revenues and profitability) after the deal is announced internally. This is not only a real risk, but also a very strong fear among company sellers.
Volumes could be written on strategies and tactics implemented by intermediaries to assist sellers in getting comfortable with the risks inherent in selling a business. It is the job of intermediaries to mitigate such risks and concerns before and while they are fresh. All the stresses of doing a deal rarely subside until the docs are signed and the cash changes hands.
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