When is a deal in a business sale really good? Entrepreneurs who want to sell their business generally look first at the price, observes acquisition specialist John Hoekman of Rembrandt Fusies & Overnames.
And that’s understandable: price is an extremely important factor. Nevertheless, it can be wise to also consider other factors in your decision. At the end of the day, other preconditions are at least as important on closer inspection.
Structure of the acquisition
For example, most selling DGAs initially want to sell 100 percent of the shares, but only find out during the sales process that there are other options.
Hoekman: “A selling entrepreneur is often curious what a buyer intends to do with his or her company. If, on second thought, you still want to achieve a certain growth together with a potential buyer, it may be advisable to only sell part of your shares.
Smooth transition for business sales
“An example: during a recent transaction we supervised, the DGA ultimately chose not to sell 100 percent, but 60 percent of his shares. That way he could remain active in the company for some time. This was not initially his intention, but after discussions with various takeover candidates, this construction ultimately emerged as the best option.
And don’t forget: for a buyer this is often a pleasant construction as well. As a director and major shareholder you often occupy the most important position within your company. In this way the buyer can fall back on your expertise for a while, so that the transition goes as smoothly as possible.
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Searching for multiple buyers
‘Other entrepreneurs want a firm guarantee that at some point – for example within three to six months after the transaction – they will be able to say goodbye to their company. I recently experienced that a director and major shareholder did not ultimately opt for the highest bidder, but for a party that, on balance, offered better conditions for his departure.
It is advisable in any case to investigate several candidates, Hoekman emphasizes. ‘It is always wise to approach several types of buyers. That way you can expand your palette and discover for yourself which party offers the best conditions. Moreover, in this way you create competition, which generally results in a better price and other acquisition conditions.’
Earn out as a precondition
For the selling party it is often also most attractive if the buyer pays in one go. But it also happens that both parties agree on a so-called ‘earn out’ construction, outlines Hoekman. In such an arrangement, (part of) the final purchase price depends on the future profits of the company.
Often such a construction is useful if during the price negotiations a difference of opinion arises about the value of the company. Buyer and seller can then bridge the difference by including it in the purchase price as an ‘earn out’.
The advantage for the seller is of course that if your company performs well after the sale, the selling price will also be higher. But beware: the price can also be lower if performance is disappointing. Moreover, such an arrangement is often a source of ‘nagging’ after the transaction.
Correct and complete information
This price mechanism – is there a single payment or are there dependent payments? – can be an important element of choice, Hoekman stresses. ‘If ‘hassle’ still occurs after a completed transaction, it’s often over these kinds of agreements.’
This makes it all the more important that you prepare the sale well and that you provide potential buyers with correct and complete information about your company. What are the strengths and weaknesses of your company? If you communicate openly and transparently, potential buyers can make a proper assessment – and there is a much greater chance that both parties will be happy with the deal after the transaction.
Covering risks with C&I insurance
In order to prevent discussions, Hoekman believes that buyers and sellers are increasingly taking out Warranty & Indemnity insurance (C&I insurance) for transactions. W&I insurance can be a good choice if you and the buyer want to make a deal, but can’t agree on the exact distribution of risks.
‘In that case, the W&I insurance covers all damages resulting from the breach of certain warranties and indemnities in a purchase agreement. For a buyer, such insurance offers extra security; he is insured for all unexpected risks that did not fully emerge from the audit, but which can lead to claims.’
Clean exit as a precondition
But such insurance is also beneficial for the selling party, Hoekman explains. After all, you can be sure that there will be no hassle afterwards. In this way a ‘clean exit’ comes into view: a smooth departure, without additional conditions. Moreover, such an insurance – precisely because the buyer runs less risk – often results in a higher sales price.
Bear in mind that you don’t just take out W&I insurance for the sake of it. If you want to make agreements about this with the intended buyer, it is important that you anticipate this in time during the sales process.
Finally, real estate is often another important precondition for the sale of a company, Hoekman continues. Some owner-managers choose to rent out the real estate to the buyer for a long time, as a nice source of income in addition to the transaction itself. Other directors and major shareholders prefer to get rid of everything at once and sell the real estate immediately. This is also an element of choice that you can take into consideration – in addition to an appropriate price – as soon as you sell your company.
Start on time with a business sale
When selling a business, stop and think about what is important to you, Hoekman emphasizes again. Of course: the price is often the main factor. Sometimes, after an analysis, it turns out to be wiser to wait a little longer with the sale, so that you have more time to position your company even better and increase its potential market value.’
But the other preconditions must also be right. Sometimes it can even be smarter to go for a lower offer with more favorable underlying conditions. So think about what’s important to you in good time and start preparing. Then you can be sure of reaching a deal where not only the price, but everything else is in order.