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Private Equity Funcast
10 Lurking Problems for Sellers with Bill Snow
Nov 29, 2023
Bill Snow, noted authority on mergers and acquisitions, discusses common problems sellers encounter in the deal process. Topics include ad backs in selling a business, owner succession, challenges with service-oriented businesses, the impact of rent on transactions, common mistakes in selling a company, and the importance of tax planning for sellers.
01:10:14
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Podcast summary created with Snipd AI
Quick takeaways
- Negotiating a reasonable working capital target is crucial for both parties in a deal.
- Setting a fair and accurate rent is essential to reflect the true value of a business.
- Establishing reasonable boundaries and clear communication can help navigate retrades effectively.
- Accurate accounting for accruals and clear communication prevents disputes during the deal process.
- Parallel planning for retirement and business sale maximizes proceeds and ensures a smoother transition.
- Early engagement with tax advisors helps minimize tax liabilities and optimize net earnings from a sale.
Deep dives
The importance of proper working capital target in a deal
Working capital target is a crucial aspect of a deal, as it determines the amount of cash needed to run the business after the sale. If the working capital target is set too high, it could result in a lower purchase price for the seller. On the other hand, if it is set too low, the buyer would need to invest additional cash. It is essential for both parties to negotiate a reasonable working capital target that accurately reflects the needs of the business.
Understanding the impact of rent on the purchase price
In cases where the business owner also owns the facility, the rent paid by the business can have a significant impact on the purchase price. If the rent is below market rate, it can artificially inflate the earnings of the business, thus increasing its valuation. Conversely, if the rent is higher than market rate, it can reduce the earnings and ultimately lower the price. It is crucial for the seller to set a fair and accurate rent to ensure the purchase price reflects the true value of the business.
Managing retrade effectively in a deal
Retrades, or renegotiating the terms of a deal, can occur due to various reasons, such as changes in the business or negotiations between the buyer and seller. While retrade is sometimes legitimate, it is important for sellers to clearly communicate their needs and expectations to the buyer. By establishing reasonable boundaries and working with an experienced advisor, sellers can navigate retrades effectively and ensure their interests are protected.
The impact of accruals, including vacation accrual, on the final purchase price
Accruals, such as vacation accrual, can have a noticeable impact on the final purchase price of a business. Vacation accrual, for example, represents the unpaid vacation time owed to employees. If the seller has not properly accrued vacation time in their financial statements, it can result in a reduction in the purchase price to account for the outstanding liability. It is crucial for sellers to accurately account for accruals and properly communicate their handling to the buyer to prevent any disputes or discrepancies during the deal process.
Importance of Properly Counting Vacation Time
It is important for companies to ensure that vacation time is properly accounted for to avoid issues when employees expect to be paid for accumulated vacation time during a sale of the business. Failure to accurately count vacation time can cause problems and potential disputes during the deal process.
The Benefits of Parallel Planning
Business owners should consider engaging in parallel planning, rather than serial planning, when preparing to sell their business. This means working with a wealth advisor to plan for retirement and post-sale life while simultaneously positioning the business for sale. By doing so, owners can maximize their proceeds from the sale and ensure a smoother transition. It is also essential to establish clear communication channels and follow a chain of command between sellers, buyers, and intermediaries to avoid miscommunication and unnecessary delays in the deal process.
Pay Attention to Taxes and Seek Professional Guidance
Taxes can significantly impact the net proceeds from selling a business, so it is crucial for sellers to engage with tax advisors and accountants early on to understand the tax implications of different deal structures. By running tax models and exploring tax-efficient strategies, sellers can potentially minimize their tax liabilities and optimize their net earnings from the sale.
Caution with Employee Promises and Managing Expectations
Founders and owners need to be cautious about making informal promises to employees regarding bonuses or other compensations upon the sale of the business. Such promises can create false expectations and lead to disgruntled employees if they are not fulfilled. It is essential to formalize any agreements or bonuses in writing to avoid misunderstandings and maintain trust during the selling process.
Plan Ahead and Don't Underestimate the Work Involved
Selling a business requires careful planning and organization well in advance. It is crucial to start early by gathering all necessary documentation and data, such as customer retention statistics, preparing financial records, and organizing due diligence information. Underestimating the time and effort needed to compile these materials can significantly delay the deal process and potentially deter buyers.
Considering Tax Implications and Early Structuring
Early consideration of tax implications and structuring options is key to maximizing the sale's financial outcome. Sellers should work closely with tax advisors to determine the most favorable tax structure and plan accordingly. Clear communication with potential buyers about the preferred tax structure can also help align interests and facilitate smoother negotiations.
The Importance of Following a Chain of Command
Maintaining a clear chain of command and communication between sellers, buyers, and intermediaries is crucial for efficient deal execution. By following a chain of command, potential miscommunication and information gaps can be minimized. Sellers should designate a single point of contact within their organization, and buyers should ensure that communication is directed through the appropriate channels to avoid unnecessary delays and confusion.
Thinking Beyond the Sale: Wealth Planning and Investment Considerations
Business owners should not only focus on the sale of their business but also consider wealth planning and investment strategies for their post-sale life. Engaging with wealth advisors and investment bankers can help create a comprehensive plan that optimizes both the sale proceeds and the long-term financial goals of the owner.
Avoiding Legal Issues with Employee and Buyer Communication
Sellers should be cautious about informal conversations with employees and buyers, as unfulfilled informal promises can lead to legal disputes and damaged relationships. Formalizing any agreements and promises in writing is crucial to prevent misunderstandings and maintain trust throughout the selling process.
Preparing for the Closing Process and Managing Expectations
Closing a deal takes time and requires extensive documentation and due diligence. Sellers should be prepared to provide the necessary information and materials to buyers promptly to avoid unnecessary delays. Buyers, on the other hand, should understand that the process takes time and manage their expectations accordingly.
Understanding the Impact of Taxes on Sale Proceeds
Sellers should work closely with tax advisors to understand the tax implications of selling their business. By modeling different scenarios and considering factors such as stock deals versus asset deals, they can optimize their net proceeds from the sale. Proper tax planning is crucial to avoid surprises and ensure accurate financial projections.
Avoiding Problems with Miscommunication and Informal Conversations
Miscommunication can be a significant challenge during the selling process. Sellers should encourage a clear chain of command and direct communication through designated points of contact. Informal conversations outside of the established channels can lead to confusion, lost information, and hinder the overall progress of the deal.
Financial Planning and Setting Realistic Expectations
Sellers should engage with wealth advisors and financial planners to set realistic expectations and plan for their post-sale financial needs. Understanding the amount needed to fulfill personal and business-related obligations while maintaining desired lifestyles is crucial for making informed decisions and negotiating fair deals.
The Importance of Documentation and Avoiding Last-Minute Surprises
Proper documentation and due diligence are critical to a successful deal. Sellers should ensure that all necessary records, contracts, and financial data are readily accessible and organized. Waiting until the last minute to gather and review these materials can lead to delays and surprises during the deal process.
Balancing Promises with Financial Realities
Founders and owners need to manage employee expectations and promises carefully. Informal commitments to bonuses or other compensation should be evaluated in light of the financial realities of the sale. Avoiding over-commitment and ensuring proper communication with employees can help maintain a positive working environment and foster trust throughout the selling process.
Effective Communication Channels and Clear Documentation
Maintaining effective communication channels between all parties involved in the deal is essential to avoid misunderstandings and delays. Formalizing agreements, documenting promises, and providing clear instructions can help ensure that all stakeholders are on the same page and can facilitate smoother negotiations and deal execution.
Optimizing Proceeds Through Tax Planning and Deal Structure
Working closely with tax advisors and structuring the deal in a tax-efficient manner can help sellers optimize their net proceeds. By modeling different tax scenarios and exploring structuring options, sellers can identify the most advantageous approach and communicate their preferences to potential buyers for a mutually beneficial outcome.
The Complexity of Due Diligence and the Importance of Preparation
Sellers should fully understand the complexities of the due diligence process and prepare well in advance. Gathering all necessary documentation and information, including customer retention statistics and financial data, is crucial for a smooth and efficient due diligence phase. Underestimating the time and effort required can lead to delays and frustration for both sellers and buyers.
Avoiding Miscommunication and Issues through Proper Channels
Following a clear chain of command and utilizing proper communication channels is vital for effective deal execution. Sellers should ensure that all information flows through designated intermediaries to avoid miscommunication, lost information, and unnecessary delays. Clear communication helps maintain transparency and builds trust between all parties involved.
The Importance of Tax Planning and Professional Advice
Tax implications can significantly impact the net proceeds from a business sale. Sellers should seek professional tax advice early in the process to understand the tax consequences of different deal structures and optimize their results. Proper tax planning can help minimize tax liabilities and maximize the value realized from the sale.
Managing Employee Expectations and Formalizing Promises
Sellers should be cautious about making informal promises to employees regarding bonuses or other forms of compensation. It is essential to formalize such commitments in writing to avoid misunderstandings and potential legal disputes. Properly managing employee expectations fosters a positive work environment and maintains trust during the selling process.
Planning for Post-Sale Life and Financial Goals
Business owners should consider engaging with wealth advisors and investment bankers to plan for their post-sale life and financial goals. By understanding their desired lifestyle and financial needs, owners can make informed decisions about the sale and create a comprehensive plan to ensure long-term financial security.
The Consequences of Unfulfilled Promises and the Importance of Documentation
Informal promises made by sellers to employees can create issues if they are not fulfilled during the sales process. Proper documentation and clear communication are key to avoid misunderstandings and mitigating the risk of legal disputes. Honoring commitments and managing expectations helps build trust and enhance the overall success of the deal.
The Significance of Early Tax Planning and Modeling Different Scenarios
Early tax planning and modeling different tax scenarios can help sellers optimize their net proceeds from the sale. By working closely with tax advisors and considering factors such as stock deals or asset deals, sellers can position themselves for the most advantageous tax structure and achieve their desired financial outcome.
Avoiding Miscommunication and Delays with Proper Communication Channels
To prevent miscommunication and unnecessary delays, sellers should establish clear communication channels and follow a chain of command with buyers and intermediaries. This ensures that information flows efficiently and prevents confusion or lost messages. Effective communication contributes to a smoother deal process and strengthens relationships.
Understanding the Impact of Taxes and Planning Accordingly
Sellers should closely assess the tax implications of the sale by working with tax professionals. By analyzing different deal structures and understanding the tax consequences of each, sellers can make informed decisions to optimize their net earnings. Early tax planning helps sellers anticipate any tax-related challenges and adjust their strategies accordingly.
Proper Communication and Clear Expectations with Employees
To maintain a positive work environment and avoid potential conflicts, sellers should communicate with employees about the sale and manage expectations. It is crucial to be transparent and honest, especially when it comes to any promises made to employees. By involving employees in the process and addressing their concerns, sellers can minimize disruptions and maintain a productive workplace.
The Role of Taxes and Seeking Professional Guidance
Taxes should be carefully considered during the sale process, and sellers should seek professional guidance from tax advisors to fully understand tax implications. By collaborating with tax professionals in modeling different tax scenarios, sellers can optimize their net proceeds. Thorough tax planning can help sellers navigate potential tax complexities and make well-informed decisions.
Avoiding Informal Promises and Preparing for the Unexpected
Sellers should be cautious about making informal promises to employees or buyers, as unfulfilled promises can lead to disputes and damaged relationships. It is important to formalize any commitments in writing and manage expectations effectively. Sellers should also prepare for unexpected challenges and be ready to adapt to changing circumstances throughout the sales process.
The Importance of Advance Planning and Organized Documentation
Sellers should initiate the planning process well in advance and gather all necessary documents and information to ensure a smooth deal process. This includes organizing financial records, due diligence materials, and other relevant data. Proactive preparation helps sellers avoid unnecessary delays and ensures that the necessary documentation is readily available.
Clear Communication Channels and Following an Established Hierarchy
Following a clear chain of command and utilizing proper communication channels helps maintain order and efficiency during the deal process. Sellers should designate a single point of contact to streamline communication with buyers and intermediaries. Effective communication reduces the risk of miscommunication and confusion, facilitating a more successful transaction.
Understanding the Tax Implications of Different Deal Structures
Sellers should work with tax advisors to analyze the tax consequences of various deal structures, such as stock deals and asset deals. This analysis helps sellers optimize their net proceeds and efficiently manage tax liabilities. By educating themselves about the tax implications, sellers can make informed decisions and prioritize their financial goals.
Managing Employee Expectations and Maintaining Trust
Sellers should be mindful of employee expectations and avoid making informal promises that may be challenging to fulfill. Open and transparent communication throughout the selling process helps manage expectations and maintains trust between sellers and employees. Ensuring that promises are in writing and align with the financial realities of the sale fosters a positive work environment and reduces potential conflict.
The Importance of Proper Planning and Early Engagement with Experts
Effective planning is crucial for a successful business sale. Sellers should engage with wealth advisors, tax professionals, and financial planners early in the process to optimize their financial outcomes. Proactive engagement with experts helps sellers navigate tax implications, plan for post-sale life, and make informed decisions to achieve their desired financial goals.
Recognizing the Complexities of Due Diligence and Ensuring Adequate Preparation
Sellers should not underestimate the complexity of due diligence and the preparation required. Thoroughly gathering all necessary documents and information, including customer retention statistics and financial records, ensures a smoother due diligence process. Adequate preparation avoids delays and frustrations for both sellers and buyers and strengthens the overall deal execution.
The Role of Clear Documentation and Avoiding Last-Minute Surprises
Having proper documentation is crucial for a successful business sale. Sellers should ensure all necessary records and contracts are readily available and organized. Waiting until the last minute to compile and review these materials can lead to unexpected surprises and delays during the deal process. Proactive and organized documentation management facilitates a more efficient transaction.
Communication Best Practices for Smooth Deal Execution
Maintaining effective communication channels and following an established hierarchy is essential for smooth deal execution. Sellers, buyers, and intermediaries should communicate through designated points of contact to avoid miscommunication and information gaps. Clear and structured communication ensures that all stakeholders are well-informed and can contribute to a more successful transaction.
Strategic Financial Planning and the Role of Wealth Advisors
Proper financial planning plays a crucial role in maximizing the value of a business sale. Sellers should work with wealth advisors to develop strategies that align with their long-term financial goals. This includes considering investment options, estate planning, and understanding the financial implications of post-sale life. Strategic financial planning helps sellers make informed decisions and optimize their outcome.
Avoiding Legal Issues with Clear Agreements and Avoiding Misleading Conversations
Sellers should avoid informal conversations or misleading statements that may lead to legal disputes or damaged relationships. Clear and documented agreements are essential to minimize misunderstandings and ensure that all parties involved are aware of their rights and obligations. By maintaining transparency and avoiding misleading conversations, sellers can navigate the deal process more effectively.
The Importance of Preparation and Early Tax Analysis
Sellers should prioritize thorough preparation and engage tax advisors early in the process. By analyzing different tax scenarios and modeling potential outcomes, sellers can gain insight into the tax implications of the sale and make informed decisions. Early tax analysis helps sellers avoid surprises and optimize their net proceeds from the transaction.
Maintaining Employee Trust and Honoring Promises
Building and maintaining trust with employees is crucial during a business sale. Sellers must honor any promises made to employees, whether it's about compensation or other benefits. Clear communication and transparent agreements help foster trust and ensure a smooth transition for all parties involved.
Mitigating Tax Liabilities and Optimizing Net Proceeds
Sellers should work with tax professionals to understand the tax consequences of different deal structures and transaction scenarios. Optimizing net proceeds requires careful tax planning and analysis. By considering tax-efficient strategies and structuring the deal appropriately, sellers can minimize tax liabilities and maximize their financial outcome.
Importance of Clear Communication and Managing Expectations
Clear communication is vital in managing employee expectations and avoiding potential disputes. It is essential to communicate openly and honestly about the sale process and any promised bonuses or compensation. Ensuring that expectations are aligned and clearly communicated helps maintain a positive work environment and preserves employee trust.
Planning for Post-Sale Life and Setting Realistic Financial Goals
Sellers should engage with wealth advisors and financial planners to plan for their post-sale life and establish realistic financial goals. By understanding their desired lifestyle and financial needs, sellers can make informed decisions about the sale and ensure long-term financial security. Proper planning sets the groundwork for a successful transition.
Avoiding Miscommunication and Ensuring Proper Information Flow
Miscommunication can lead to delays and misunderstandings during the deal process. Sellers should establish clear communication channels and follow a structured approach to ensure proper information flow. Facilitating effective communication between all parties involved enhances transparency and minimizes the risk of miscommunication.
Managing Taxes and Optimizing Financial Outcomes
Sellers should proactively manage taxes and seek expert advice to optimize their financial outcomes. By working closely with tax professionals, sellers can analyze different tax scenarios and make strategic decisions to minimize tax liabilities. Proactive tax management and planning contribute to maximizing net proceeds from the sale.
Bill Snow, a noted authority on mergers and acquisitions, is back with the second part of our discussion on his new book, Mergers and Acquisitions for Dummies. He joins host Jim Milbery to discuss the most common problems that sellers encounter in the deal process.
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