Expensive Mistakes When Buying & Selling Companies
Expensive Mistakes When Buying & Selling Companies

Expensive Mistakes When Buying & Selling Companies

Earn-outs usually are linked to winning a new contract, gaining new customers, increasing revenue, increasing gross margin, or employee retention. (Location 2494)

Except for unusual circumstances, the earn-out period should be two years or less. (Location 2513)

Protect yourself with the ability to take-back the business in case of default (if the seller can’t take-back the business, such a provision doesn’t provide additional security for a seller), personal guarantees from the buyer (such guarantees are of no value if the buyer has little net worth), (Location 2544)

First, the buyer may default on loan payments, which happens all too often. (Location 2562)

Rather it means considering each sincere offer in terms of its price and structure. A low price with tax-advantaged structure and good payment terms actually may yield higher net proceeds. (Location 2605)

First, it is almost always fatal for the buyer to widen the price gap or change the transaction basis during the deal. (Location 2808)

Studies confirm that buyers earn a higher return-on-investment when payments to the seller are contingent on future performance than in all-cash deals or stock-swaps. (Location 2825)

A third variant is a “participatory note” where the seller finances the deal at a variable interest rate - say six percent as the interest floor with step increases up to12 percent based on margins or revenue growth. (Location 2837)

Believe the seller and be optimistic about the future of his company - but verify everything that he claims and leave no stone unturned in your search to find the true value of the company you are about to buy. (Location 2928)

Unfortunately, three months after closing the buyer lost two key customers because of quality issues and strained relationships he didn’t know about. (Location 2941)

One of the seller’s long-term contracts (40 percent of annual revenue) expired six months after closing. (Location 2945)

If the seller has been audited for several consecutive years and there are no unusual contingencies, 10 percent escrow for a post closing audit and representations is about right. (Location 3084)

to a high of 20 percent of the purchase price when the target is a small, unaudited company. (Location 3087)

Sellers (often jointly and severally if there are more than one) are liable for the damages. Escrows, hold-backs, and offsets are set up so you (the buyer) can collect damages, if any, quickly and easily. (Location 3144)

Depending on circumstances, the cap is usually 10 to 30 percent of purchase price for general representations and warranties. To avoid the seller being nickeled-and-dimed, the agreement may define a minimum claim size for liabilities and establish a bucket - typically one percent of the purchase price. (Location 3147)

If you also are using a third-party lender to fund part of the purchase price, most lenders will require that the seller financing be subordinated and they have provisions they require relative to subordination. (Location 3173)

note that allows you to offset loan payments in case of a subsequent breach of representations - such a provision is often less controversial than an escrow or holdback. (Location 3175)

any buyer reduction should be held in a separate escrow until the parties agree on the amount of the reduction. (Location 3176)

Experienced M&A negotiators are adapt at inserting win-win thinking into the tedious, intense, and sometimes confrontational discussions that produce a Purchase & Sale Agreement that both sides are willing to sign. Have confidence in your negotiators - but review the documents thoroughly before you sign them! (Location 3184)

The buyer dodged a bullet while the seller drowned in a bad economy - but the both were oblivious to the changing economic conditions as they negotiated the deal. (Location 3195)

However, near the end of the negotiations, the SBA implemented a new rule that limited employment agreements with sellers to a year or less. (Location 3200)

Most experts agree that buying a company typically takes five to nine months from the initial contact until closing - but the time frame varies widely. (Location 3216)

The seller’s job was to cross-sell products and services to the buyer’s customers and to his former customers - it never happened. (Location 3366)

The sales agreement specified four equal cash payments, the first at closing and the remaining three at one year intervals. (Location 3371)

His primary post-sale responsibility was to gain new clients, since his former clients were serviced by the buyer’s staff. (Location 3374)

unemployable because they are used to operating independently. For years, they made the rules and told others what to do. So whatever the relationship is between you and the seller during negotiations, expect it to deteriorate after closing. (Location 3379)

Automatically receiving a copy of internally-prepared financial statements on a monthly or quarterly basis, 2. Automatically receiving a copy of the annual audit report, 3. Having a right to examine company records, and 4. At his own expense, having a mutually-agreeable CPA review the company’s records and financial reports. (Location 3394)

We recommend that, except for unusual cases, you keep the former owner around for the shortest possible time! (Location 3414)

As the buyer, you will want to retain the most competent executives, and put them in positions of authority. Ideally, the updated organization chart was designed during due diligence, and you are confident that it will work. If you have lingering doubts that the seller’s key executives may resign after closing, maybe you should question the wisdom of the transaction. The new organization should be based on the go-forward strategy in order to increase the chances of: (Location 3453)

staff was (Location 3573)

A functional hole is usually created when a member of the seller’s management team leaves the company after closing, especially roles that the former business owner played in the organization. What functions did the owner and other managers perform? (Location 3746)

Financial buyers (in Dick’s case, the buyer was a venture capital firm) do not directly manage the company they acquire. (Location 3752)

and very close oversight mechanisms. (Location 3754)

They hired a President to integrate and manage the business since the owner-managers of the acquired companies left after their respective closings. (Location 3775)

(1) the operational infrastructure was put in place after the acquisitions, (Location 3779)

management structure was built after the acquisitions, and (Location 3779)

capital was inadequate to finance post-closing infrastructure investments. (Location 3780)

Negotiating an M&A transaction requires sober assessments of the situation, candor with shareholders and executives about threats and opportunities, emotional and intellectual discipline in evaluating the alternatives, and the wisdom to expect the unexpected. (Location 3857)

credit for M&A deals had dried up and only a few firms had the financial wherewithal to make acquisitions from current reserves. (Location 3868)

Financial and strategic investors with capital and creative strategies will always be able to find first-rate opportunities at favorable prices. (Location 3873)

Most business owners don’t realize that it takes two years (or longer) to sell and exit from a company. (Location 3886)