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

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

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 four in a four-part series.

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

IV. Other Considerations of the Seller

A. The Importance of Recasting

Since privately-owned companies often keep reported profits – and thus tax obligations – as low as possible, financial recasting is a crucial element in understanding the real earnings history and future profit potential of your business. Since buyers are interested in the real earnings of a business, recasting shows how the company would look if its philosophy matched that of a public corporation, in which earnings and profits are maximized. As part of the confidential information memorandum, a seller should recast the company’s financial statements for the preceding three years. For example, adjust the salaries and benefits to prevailing market levels, eliminate personal expenses (expensive car leases, country club dues, etc.) and exclude nonworking family members. Recasting presents the financial history of your business in a way that buyers can understand. It translates the company’s past into a valuable, saleable future, and it allows sophisticated buyers the opportunity for meaningful comparisons with other investment considerations.

B. Selling the Pro Forma

The price that a buyer may be willing to pay depends on the quality and reasonableness of the profit projections the seller is able to demonstrate and substantiate. The profit and loss statement, balance sheet, cash flow, and working capital requirements are developed and projected for each year over a five-year planning period. Using these documents, plus the enhanced value of your business at the end of five years, you can calculate the discounted value of the company’s future cash flow. This establishes the primary economic return to the buyer for his acquisition investment.

C. Prequalifying Your Buyer

It is critical to prequalify the potential buyers, especially if the seller contemplates a continuing business relationship after closing the deal. Thus, the buyer must demonstrate the ability to meet one or more pre-closing conditions, such as availability of financing, a viable business plan for post-closing operations (especially if the seller will be receiving part of its consideration in the form of an earn-out), or a demonstration that the post-closing efficiencies or synergies are bona fide. Take the time to understand each potential buyer’s post-closing business plan, especially in a roll-up or consolidation, where the seller’s upside will depend on the buyer’s ability to meet its business and growth plans.

V. Conclusion

The seller has decided to sell the company, and it is time to execute. The process of selling the company is energy and time-demanding. Why not ensure the seller’s success to the extent feasible by hiring an investment banker, an accountant, and legal counsel composed of experienced M&A deal lawyers to get the job done right? A shrewd seller will want to listen to the perspective of each of the professionals hired to weigh risks versus the goals of the transaction. The first team meeting should be used to develop an action plan including the confidential information memorandum drafting and identifying the seller’s goals in the context of market realities. Shortcuts in the planing stages can be costly, and open flow of information among team members is key. Further, the temptation not to disclose negative information to the buyers with the strongest prospects should be avoided. The preparation stage that occurs after the first meeting is the time to clean up corporate matters and issues that may rear their ugly heads later. Finally, the seller should strive to avoid common preparation mistakes.

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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