Over my three decades of practicing corporate law, I have helped hundreds of founders sell their businesses. In the process of helping them achieve a successful transaction, I have noted ten common mistakes that can cost the founders money by way of a lower sale price or higher expenses and that can delay or prevent the successful closing of the sale transaction. If you want to maximize your chances of closing your transaction on time and on the best possible terms, avoid making these common mistakes:
1. Signing an Investment Bank Engagement Letter without Legal Review
The engagement terms of the investment bank hired to help you sell your company can have important economic consequences. Many terms of the engagement letters are negotiable, including the amount of the fees, when they are paid, what type of transaction triggers payment of fees and the length of the “tail” on the payment of fees if a sale occurs after termination. Experienced legal counsel can advise sellers on the range of options available for these and other key terms. Don’t sign an engagement letter with an investment banker without running it by experienced legal counsel first.
2. Not Properly Managing the Sales Process
The investment banker, the seller’s officers, the board members, and legal counsel should all be involved in preparing the marketing materials (the “Book”) for the sale of the seller and designing and managing the sales process. Allowing the investment banker to prepare the Book and manage the sale process without adequate input from the seller can result in a false impression of the seller or cause the seller to be over-shopped or marketed to the wrong buyers – all of which can create potential liability or diminish the value of the seller.
3. Sharing Competitive or Proprietary Information Too Early
Once the seller and the buyer enter into serious discussions and due diligence is conducted, it is important to limit the scope of such discussions to protect the seller’s proprietary information. In addition to requiring non-disclosure agreements, disclosure of sensitive information should be staged until the seller is confident of a deal, particularly if the potential buyer is a competitor.
4. Rushing to Sign a Deal
In order to protect the seller and its stockholders and allow the board to fulfill its fiduciary duties of care and loyalty, a process should be put in place to make sure that any proposed deal values the seller fairly. The investment banker and legal counsel should establish an appropriate process, which includes obtaining independent board member approval and establishing an auction process or performing market checks to determine the market value of the seller. In many cases, the process should include a “fairness opinion” from an independent investment banker.
5. Not Covering All Material Terms in the Letter of Intent
The letter of intent is the roadmap for the ultimate transaction, and it is important that the key economic and legal issues are properly addressed. The letter of intent should address the structure of the deal (e.g. asset sale, share sale or merger) and the amount and nature of the consideration to be received such as cash, stock, notes, earn-outs, etc. It also should address continuing liability of the seller through indemnification and holdbacks.
6. Ignoring the Impact of Preferences and Deal Costs
Common stockholders typically do not receive proceeds from a sale until after the liquidation preferences of the preferred stock are paid. It is vital to understand who will receive consideration in the deal and how much will remain after the payment of the seller’s outstanding debts, liquidation preferences and deal expenses.
7. Not Addressing Personnel Issues Up Front
The buyer of a company will seek to retain key personnel to provide for a successful integration. Since the buyer views these personnel as a key component of their purchase, the terms of the employment agreements, including the term, severance provisions and termination provisions, should be established early in the process.
8. Not Reading the Agreement
Seller’s counsel should verify that the agreement conforms to the letter of intent, but their knowledge of the actual business of the seller is limited. The seller and its board need to review the agreement to verify that the representations and warranties are true and prepare a comprehensive disclosure schedule to protect against any potential breach of such representations and warranties.
9. Not Addressing Post-Signing and Pre-Closing Time Period
Having a simultaneous sign and close helps reduce the risks of a deal not closing and may prevent premature disclosure, but it is not always feasible. Many deals require a period of time between signing and closing to obtain stockholder approval, regulatory approval or to allow the buyer to obtain financing for the deal. Managing the seller’s business during this process and obtaining these approvals is necessary for the deal to be successful.
10. Not Integrating the Business for Future Success
Most acquisitions fail due to poor integration of the two companies, with the typical founder leaving in the first 12 months following a sale. The buyer and seller should continue to have discussions about integration following the closing of the deal, setting objective milestones for success and providing appropriate incentives to retain key personnel, particularly when the seller is to receive a significant portion of the sale proceeds in an earnout.