A primer on the steps, terms and processes connected to the purchase of a business was the focus of the Oct. 8 IBR Business Transitions forum.
The second in a two-part experts series, the event brought together five panelists of varying skill sets who help business owners planning to sell their companies, as well as people who are considering owning a business themselves.
The panel consisted of Kevin Bates of The Anderson Group at UBS Financial, Cory Jakobson of Columbia Bank, Trevin Rasmussen of The Bristol Group, Randy Siddoway of PoleStar Succession & Exit Strategists and Cora Whitney of Smith + Malek.
About 50 people attended the program at Boise Centre West where the panelists took a deeper dive – spelling out how various transitions – if done right – can end in a successful transaction.
Moderator Jeff Sayer of Rectify Partners asked the panelists “how to prepare the actual nuts and bolts” of getting a deal to the closing table.
“Dive into how a transaction feels and looks,” prompted Sayer, suggesting they share advice and best practices, as well as landmines and horror stories to watch out for.
A cautionary theme from the previous program was reiterated on several occasions: how owners are wise to think long term to structure a sale to maximize the greatest return.
Smart planning is a powerful tool, one panelist said.
“We’ve had way too many clients have to sell a business much earlier than they thought,” said Siddoway, a succession and exit strategist with PoleStar.
As advisors, PoleStar works closely with clients to “get the clock ticking” three to five years out before an owner retires or moves into another phase of life, said Siddoway, helping them build value prior to the company coming to market.
The firm connects clients with specialists, such as brokers who can put the business on the market and provide a valuation, retaining accountants to strategize tax ramifications and attorneys to draft documents.
With a three-year window, a business can strengthen its position and correct any weak areas, he added.
He said PoleStar specializes in identifying internal candidates for a business sale, such as a family member, business partner, manager or other key employees. On the subject of taxes, Siddoway said parties to a deal shouldn’t make them such a taxing matter.
“You can’t let the tax tail entirely wag the dog,” he observed. “Sometimes paying the taxes isn’t the worst thing when a sale would have helped a person reach personal and professional goals.”
On the financing end, be smart enough to hire the right talent to steer through the shoals that can derail the most well-intentioned offer, another panelist advised.
“You’re going to have to spend more (money) in the long run if the banker doesn’t understand” the financial workings of the business a buyer is seeking to purchase, said Jakobson of Columbia Bank, referring to sloppy balance sheets, accounts receivable and accounts payable histories and other operating statements that don’t quite add up.
An eagle-eyed lender can spot holes in a business’s books, which can result in a buyer either backing out or using any negative as leverage to negotiate the final sales price down.
The expertise of a banker matters a lot. Some lenders, said Jakobson, are more adept at SBA loans; others are more conversant with mergers and acquisitions.
“The guy who did your real estate loan may not be the best source to get your deal done,” he added.
“It’s much cheaper in the early going to pay fees” associated with vetting your business than to incur a greater cost to possibly “unwind a deal if everything goes wrong” at the 11th hour, said Rasmussen, a mid-market business broker with The Bristol Group.
He said sellers should be prepared “to share every bit of information about the company” with the prospective buyer once a letter of intent is signed and due diligence begins. He said a QuickBooks backup, coupled with a confidentiality agreement, shows confidence and transparency on the part of the seller, giving the buyer’s team of experts an opportunity to survey relevant data.
“Sometimes, you as a broker also have to prepare the seller for someone to tell them that their baby (their business) is ugly,” he said.
The price in the LOI is often not the contracted price, especially if something comes up in the due diligence period, such as undisclosed liabilities, pending litigation or a workers’ comp issue, said Siddoway.
“If you’re willing to have credibility with your numbers and processes, you’ll hold your valuation,” he said.
Panelists also addressed the pros and cons of asset sales and stock sales.
Purchasing a company’s assets may offer tax advantages for the buyer. If the business has equipment that the owner has fully depreciated for their own tax purposes, the new purchase allows the buyer to step up the value of the equipment and begin the process of deprecation anew. With a stock sale, this is not possible because the equipment has already been fully depreciated.
In a stock sale, the company’s shareholders sell their existing stock to a new owner. In this arrangement, the buyer obtains all company equity, including all assets and liabilities. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared.
Whitney, an attorney with Smith + Malek’s Coeur d’Alene office, said not all types of businesses are eligible for a stock sale. A sole proprietorship, partnership or LLC does not issue stock.
When selling these types of businesses, the buyer purchases the entire ownership interest. Only C and S corporations need to make the choice about selling assets versus stock.
Whitney also recommended reading every major issue on the terms sheet before signing it and having awareness of global liabilities before coming to the closing table. Representations and warranties are the promises and guarantees a seller is making about the business, she said.
In an asset sale, employees also transfer in the transaction, she added, but that doesn’t ensure job security.
“As a seller, you lose that control. That’s when an internal transaction might make better sense because you’ve been ‘interviewing’ the prospective buyer for the past 25 years,” she said.
Bates, a financial advisor with The Anderson Group at UBS Financial, cited a statistic that 75% of owners didn’t have a good exit experience after selling their businesses. The negatives related to the seller not being clear about sale objectives; not feeling he or she received a fair valuation or not feeling that their former employees were treated fairly.
“The latter bothers them a lot,” said Bates.
Finally, the majority of sellers said they didn’t have a clue what they were going to do next.
“So make sure you have a purpose post-sale,” advised Bates.