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//Marriage Proposal: Preparing Yourself and the Company for an M&A Deal (Part III)

Marriage Proposal: Preparing Yourself and the Company for an M&A Deal (Part III)

sherman_andrew edited backgroundBy: Andrew J. Sherman, Esq.
Jones Day

This article addresses issues that a business owner and his or her team of advisors face in the process of negotiating with prospective buyers. It was written for the Topline Business Owners Workshop, an event hosted by Topline Valuation Group in conjunction with Kaulkin Ginsberg Company and Santos, Postal & Company, P.C., on Tuesday, May 12, 2015.

This is part three in a four-part series.

Click here to read part one. Click here to read part two.

 III. Common Preparation Mistakes

Once the seller has assembled his or her team, conducted an internal presale legal audit, and pulled together the “good, the bad, and the ugly” in a detailed confidential information memorandum, the seller is ready to start contacting potential buyers. To maximize the selling price, however, the seller must take certain strategic and reengineering steps in order to build value in the company and to avoid the common mistakes made by sellers, as discussed below. To properly reengineer and reposition the company for sale, hard decisions need to be made, and certain key financial ratios need to be analyzed in critical areas, such as cost management, inventory turnover, growth rates, profitability, and risk management techniques. The following are a few of the common preparation mistakes sellers make in getting ready to sell their company:

A. Being Impatient and Indecisive

Timing is everything. If the seller seems too anxious to sell, buyers will take advantage of his or her impatience. If you sit on the sidelines too long, the window of opportunity in the market cycle to obtain a top selling price may pass the seller by.

B. Telling Others at the Wrong Time

Again, timing is critical. If the seller tells key employees, vendors, or customers that he or she is considering a sale too early in the process, they may abandon the relationship with the seller in anticipation of losing their jobs, their customer or supplier, or from a general fear of the unknown. Key employees, fearful of losing their jobs, may not want to chance relying on an unknown buyer to honor their salaries or benefits. A related problem for companies that are closely-held (or if one person owns 100 percent of the shares) is how to reward and motivate key team members who may have contributed over time to the company’s success and will not be participating in the proceeds of the sale at closing. It is critical that their interests are aligned with the seller and that they work hard and stay focused on getting to the closing table. A bonus plan or liquidity event participation plan can be an effective way to bridge that gap and allow them to participate in the success and share in the proceeds at closing without owning equity in the seller’s company. Vendors and customers will want to protect their interests, too. Yet these key employees and strategic relationships may be items of value in the sale; the buyer may count on their being around after closing the deal. If the seller waits too long and discloses the news at the last minute, employees may feel resentment for being kept out of the loop and key customers or vendors may not have time to react and evaluate the impact of the transaction on their businesses – or, where applicable, provide their approvals.

C. Retaining Third-Party Transactions with People Related to the Seller

If there are relationships that will not carry over to the new owner, shed these ghost employees and family members. They should follow the seller out the door once the deal is secured.

D. Leaving Loose Ends

Purchase minority shareholder interests so that the new owner won’t have to contend with their demands after the sale. Very few buyers will want to own a company that still has remaining shareholders who may present legal or operational risks. It’s akin to the real estate developer who needs 100 percent of all of the lots in a development to agree to sell before proceeding with his or her plans—a lone straggler or two can break the deal.

E. Forgetting to Look in Your Own Backyard

In seeking out potential buyers, the seller should look for those who may have a vested interest in acquiring control of the company, such as key customers, employees, or vendors.

F. Deluding Yourself – or You Potential Buyers – About the Risks or Weaknesses of Your Company

The seller’s credibility is on the line—a loss of trust by the potential buyer usually means that he or she will walk away from the deal.

G. Trying to Save Legal Fees by Not Keeping Legal Counsel Informed

One of the main duties of the seller’s legal counsel is to negotiate the purchase documents, including the representations and warranties, and assist the seller in drafting disclosure schedules. If your legal counsel does not have all the information, he or she can only provide limited assistance. Given that most sellers do not fully understand the legal language in the representations and warranties of the purchase agreement, the effort to save legal fees by not keeping legal counsel informed may result in a breach of representation and warranty for a lack of disclosure, which usually means that the seller will be paying much more in indemnification payments than the dollars he or she saved in legal fees.

About the Author

Andrew J. Sherman is a partner in the Washington, D.C., office of Jones Day, with more than 2,600 attorneys worldwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University, where he has taught courses on business growth, capital formation, and entrepreneurship for more than 20 years. Mr. Sherman is the author of 23 books on the legal and strategic aspects of business growth and capital formation. Mr. Sherman can be reached at (202) 879-3686, or email


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