Bill Snow, a noted authority on mergers and acquisitions, shares insights on the common pitfalls in deals. Topics discussed include financing considerations, factors influencing private equity valuation, market additions vs. escrow, personality in accounting, challenges in selling a business, analyzing tax implications of accounts receivable, and the role of accounting firms in M&A.
Understanding the buyer's financing is crucial for assessing the viability and risks of a deal.
Analyzing the cash component in an offer helps determine the immediate financial benefit and overall reliability of a deal.
Escrow accounts play a significant role in protecting both buyers and sellers, so detailed terms should be included in the purchase agreement.
Proper evaluation and consultation are crucial when choosing between a stock or asset deal due to the tax implications and benefits for both the buyer and the seller.
Deep dives
Understanding the buyer's financing
When considering a sale, it is important to understand how the buyer plans to finance the deal. This includes looking at the amount of cash offered, notes, earnouts, and potential stock exchanges. Evaluating the buyer's financing can help assess the viability and risks involved.
Cash on hand in the offer
The amount of cash included in the offer should be carefully considered. Sellers should analyze the cash to be received at closing versus any structured payments, notes, or earnouts. Evaluating the cash component is crucial in determining the immediate financial benefit and the overall reliability of the deal.
The importance of escrow
Escrow plays a significant role in protecting both buyers and sellers in a transaction. An escrow account is established to hold a portion of the proceeds based on negotiated terms. This money serves as a source of recourse for the buyer in case of breaches in representations made by the seller. Escrow duration and conditions should be well-detailed in the purchase agreement.
Stock or asset deal considerations
Choosing between a stock or asset deal requires understanding the tax implications and benefits for both the buyer and the seller. Proper evaluation and consultation with accountants or tax professionals are crucial to determine the most advantageous approach based on the business structure, basis calculations, and potential tax consequences.
Importance of Tax Planning in a Business Sale
When selling a business, it is crucial to prioritize tax planning. Sellers need to carefully consider whether to sell assets or stock and understand the tax implications associated with each option. Sellers should not simply accept the general advice of their tax professionals, but rather request detailed calculations and assessments. By doing so, sellers can avoid unexpected tax liabilities and ensure that the transaction is structured in a way that maximizes their financial gains.
Working Capital Considerations in a Business Sale
Working capital plays a significant role in determining the success of a business sale. Both buyers and sellers need to thoroughly assess and negotiate the amount of working capital to be transferred at the time of sale. Sellers should ensure that working capital is accurately determined and that any adjustments account for factors such as inventory, receivables, and payables. Failing to properly address working capital can lead to unanticipated adjustments and potentially affect the final sale price.
The Importance of Clear Debt Obligations in a Business Sale
Long-term debt obligations should not be overlooked in a business sale. Sellers must fulfill their responsibility to pay off all outstanding long-term debts at the time of the sale. Buyers, on the other hand, must conduct due diligence to ensure that all liabilities are appropriately addressed. It is crucial for sellers to understand that long-term debt cannot be transferred to the buyer without affecting the final sale price. Clear communication and negotiation are key to reaching a mutually agreeable resolution regarding long-term debt obligations.
Bill Snow, a noted authority on mergers and acquisitions has represented buyers and sellers in a multitude of industries. He joins host Jim Milbery to discuss his new book, Mergers and Acquisitions for Dummies. In this episode, we focus the conversation on the most common pitfalls that can derail a deal.
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