If you’re reading this, there’s a good chance that congratulations are in order. Someone is very interested in what you’re doing.
But best not to get too excited just yet.
There’s a lot of work ahead before you get to your final destination.
If you have a business that has been the main source of your income for a year or more,
and someone is looking to acquire that business from you, then every decision you make likely has expensive consequences. Any misstep can cost you – depending on your business – from tens of thousands to many millions of dollars.
If someone is looking to buy your business, it’s time you assemble a knowledgeable team. Make sure you have a team around you that can help you with your sale. Your team – at a minimum – should include a law firm and an accountant. Depending on the size of the deal, you may need the assistance of an M&A broker or possibly investment bankers.
This is not a situation where you should go it alone. As a business owner, if you have made it to the point where someone is looking to acquire you, then you have savvy with how to allocate capital. But when it comes to selling a business, you don’t know what you don’t know. A good lawyer and an accountant will provide benefits that will result in you ending up with more money in your pocket at the end of the deal – and with fewer liabilities and less risk.
In a $500,000 acquisition, the structure of the deal could change the tax consequences by $100,000 or more.How you structure the transaction, whether as an asset sale, a stock sale, or a combination of the two, will result in a massive difference in the amount of taxes you may pay as a seller. Furthermore, Colorado has some unique laws in terms of how taxes are paid as part of the sale of a business – you’ll need to consider these taxes before you negotiate the price of the sale as well.
If someone expresses interest in your company, the first thing to do is determine if the buyer is legitimate. There is a big difference between someone saying, “I want to acquire your company” and someone who is actually serious about writing a big enough check (or wiring enough money) to acquire your company. Understand whether the offer on the table is worth disrupting your existing business to engage in the prolonged process of a sale.
If you think they’re serious, before progressing any further, you should consider your options. If you have one company that is interested in acquiring you, there’s a decent chance that there might be others as well. The best way to get a best price and best terms for your company is to have multiple offers – this improves your negotiating leverage because it gives you a walk-away point that you can exploit if the first buyer tries to push too hard during negotiations. Get creative in the marketplace to see if there might be additional interest – let it be known that you are open to the possibility of a sale. Once negotiations get serious with one buyer, if the buyer knows what they’re doing, they will insist on you agreeing to exclusivity throughout the due diligence and acquisition process. This means that if you want to consider your options, you have to be aggressive in doing so early in the negotiations. Savvy buyers will want to limit your window for exploring alternatives that might increase the price of the deal. Use your time judiciously before any formal agreements are signed.
If the buyer is serious, the next thing to clarify is value expectations. If the buyer is offering less than you’ve raised from investors, or simply less than you’re willing to sell for, there’s no reason to continue the discussion. Also, always consider the tax implications of the sale. The headline number might sound impressive, but how much will be left after paying whatever fees are associated with the deal, plus taxes?
Perhaps the buyer might be flexible about structuring the deal in a way that reduces your liabilities. Always keep in mind the size of any liquidation preferences from prior capital raises or money owed to creditors. Depending on how your prior documents are drafted, someone else might have priority in receiving capital from a sale before you do.
At this point, you should also find out as much as you can about the acquiring company, their culture, their CEO and other high-level decision makers. This is important, because you don’t want to do business with someone you don’t respect or trust, especially if the deal involves acquiring a lot of stock in their company or you working there — which, 90% of the time, it will. Frequently, the acquirer wants more than the IP and the assets of the business. They want the talent. That means you. After years of working for yourself, do you really want to go work for someone else again?
One important consideration that most founders rarely explore: has the company acquired anyone else recently? If so, that’s probably the first group of people you’ll want to meet. They’ll have the inside scoop about how the acquirer treats its new acquisitions and what it means to be acquired by them.
Once you decide that someone is serious, and that you are serious, it may be time to proceed with a letter of intent, a term sheet, or a similar instrument. A letter of intent is a non-binding first step to commence negotiations for a potential deal. While a letter of intent usually isn’t a guarantee, it’s a sign that everyone’s ready to bring in the professional heavy hitters to see if you can put together a deal. It’s a sign that everyone’s committed to making it happen.
But just because letters of intent are usually non-binding, does not mean that they are not important. There are many companies that think it is prudent to seek out legal representation only after a letter of intent has been signed. This is absolutely a horrible approach. In many ways, the letter of intent, simple and bare bones as they usually are – may represent one of the most important legal documents you’ll ever sign. These letters of intent – non-binding though they might be – serve as an important psychology anchors during the negotiation process. If you try to introduce a significant change – such as the structure of the transaction itself, the price, or any other key terms for the seller – after a letter of intent has been signed, there’s a real chance you could kill the deal. At a minimum, you’ve introduced an element of mistrust or created tension in the deal. Buyers and sellers in large transactions get psychologically attached to their understanding of key deal points. If these shift after an original understanding takes place, it almost always presents a problem. And many times, sellers are stuck with onerous terms that they could have easily avoided if they had just taken the time to think through the key early stages of the negotiation.
Key elements of a letter of intent should include price, expected closing date, structure, assets to be purchased, confidentiality provisions, other consideration, jurisdiction, retention, terms, and salaries for any key personnel that will be working with the acquirer after the transaction, and an expiration date.
The next key step in an acquisition is the due diligence process. This is where the buyer investigates the underlying business in earnest. There’s only so much a buyer can learn from publicly available information. Due diligence is where the buyer inspects every contract, employee, employee’s history, piece of intellectual property, and every other key element of the seller’s business. This is where the buyer determines whether the business has been set up in a way where it can easily take the assets and property of the selling business and make profitable use of them in the future. If there is an issue with the way the business has been set up – if there are issues that cast doubt on whether the seller fully owns its intellectual property, if there are previously unknown liabilities that have been discovered, if the assets and contracts of the business are not readily transferrable – it might make sense for the seller to simply walk away.
This is one of the areas where having a good law firm before the transaction takes place is essential. A law firm with experience in M&A should be able to identify any areas of weaknesses that might arise during due diligence that might cause problems in potential acquisition – such as if the company has no IP assignments in place with employees, or if contracts with key revenue sources are not properly assignable. The earlier a seller can address these issues, the better position it will be in when it comes time to sell.
The next stage for an asset purchase is the seller disclosure schedule. This is where a buyer and seller get into the weeds of what is being purchased and what the seller, if anything, plans to exclude from the deal. Here the seller would typically list all business contracts, all intellectual property and assets, open source materials, items requiring consent to transfer, actions required to transfer intellectual property, and whatever liabilities are and are not going to be transferred with the deal structure. As you might imagine, when you get into the details of this process, the details of the transition can get very complex.
The next-to-last stage is to draw up the definitive documentation. This is where the lawyers get the hard task of describing in detail how the transfer of ownership, assets, and business processes will occur. When will payments belong to the seller and when will they belong to the buyer? When will the seller or the buyer have to make payments on expenses? What’s the strategy for accounts receivable? Will the company retain cash assets or will those transfer to the new company? There are literally hundreds of difficult questions that must be answered in figuring out the logistics of sale of a company or its assets. It’s a painstaking, but necessary, process – and one you’ll want someone experienced to be able to provide you guidance.
Finally, the last step is the closing and payment. This is the day when you sign the documents – and if you’ve done everything right, it’s also the day you get paid. It’s probably not accurate to say it’s an easy process. But if you get to the stage where you receive one of the biggest paydays of your life, it’s usually safe to say that all the hard work was worth it.
If a company wants to acquire yours, move cautiously, consider your options, and make sure you have a good team by your side to help you make the right decisions.
If you’d like to speak with one of our experienced lawyers about your company’s acquisition, contact us here.