When selling your business, you will enter into a very complicated and arduous transaction that will consume you for three to six months, maybe longer. It will be the most intense business transaction you have ever dealt with.
To help you prepare for that moment, here is a simplified look at the process you will go through, from start to finish, in what I refer to as “the life of a deal.”
Getting ready to sell.
Gain clarity about why you are selling or transitioning your business – securing your financial freedom, health, age, burn out, about to happily retire, etc. This will help you get through the highs and lows of the process.
Selecting your team.
The first order of business is engaging with the right team of people that will represent you and be your thought partners through the process. You will need legal, tax accounting, estate planning and an intermediary to coordinate the process. I do not recommend trying to go it alone, handling the coordination and negotiations by yourself. Most owners do not possess the proper skill set and you have a business to run while in the process. You should hire a business broker or engage with one of the few firms in the U.S. that specialize in the landscape industry.
Typically, an investment banking firm or intermediary can handle the entire process and has access to all of the professional service firms necessary to complete the transaction. This is much easier for you. Plus, it allows you to focus on managing your business during the transaction. The last thing you can tolerate as a seller is having your company show any signs of negative trending, which can easily occur if you get overly distracted during the sales process.
Hopefully, you have an exit plan in place and have gotten your company ready for sale. Good management team, sales and profits are trending upward, equipment and fleet are current, systems and procedures are working well and your company is truly ready to go to market.
If not, you might get the message from your intermediary that there are some items that should be addressed prior to going to market, and those might take 1-3 years to address. If you do not address them, you can expect to get a lower offer than you could if you addressed them. It will depend if you have the time and stamina to get your house in order. That choice will be yours.
During the interview process to select your team, you will hear about using a controlled auction method or a process that is more selective. Generally speaking, a controlled auction will produce higher offers but it is also extremely hard to keep things quiet once the potential buyers hear about an opportunity. They will use their network to learn about your company and it’s hard to keep all of that quiet. You run the risk of your employees and possibly your clients hearing that you are for sale. If you are more selective and only approach buyers who your intermediary thinks are a good fit, they will be willing to pay a higher price to have the opportunity to purchase you off market. Off market transactions require a premium and will generate a very handsome offer; good intermediaries will play this angle. You and your intermediary will decide which is the best and agreed upon method to pursue.
keep it confidential.
Once you and your team have agreed on which method to use, and collected and evaluated all the relevant data, your team will create a confidential information memorandum (CIM). This is basically an offering statement about your company and will be the initial and primary tool that will be used to market the company.
They will also create a 1-2 page prospectus memo or teaser about your company that will be anonymous in nature but will give a high-level overview of your organization and the opportunity.
If a potential buyer likes what they read in the prospectus, they will agree to execute a non-disclosure agreement (NDA) or a confidentiality agreement (CA) to receive the CIM. This gives you assurance that the information they are about to receive will be held in confidence and will not be discussed to outside parties. It also gives you some level of legal recourse if the agreement is broken. Frankly, this is a bit of fluff as the responsibility will be on you to pursue someone and it will be your legal fees that mount up. But the NDA/CA is meant to keeps things on the down low. Once an agreement is executed the potential buyer will receive the CIM and your identity will be revealed.
It’s possible you will receive a preliminary offer based on the prospectus. We recently received a $14 million offer for one of our clients based solely on the prospectus. That offer went up once we negotiated the letter of intent (LOI). But more typically some information will be exchanged and if the buyer is ready to move forward, they will tender an LOI and once final terms are negotiated, due diligence will begin.
LOI’s are non-binding but they are the basis of the transaction. The LOI will include pricing, terms, warranty and representations that both parties agree to, non-compete and employment agreement language, etc. – the basic terms of the transaction. Again, an LOI is non-binding but the core terms of the document are important.
I’ve heard a lot of analogies around due diligence and most are not able to be printed in this magazine. Due diligence will be the toughest, most stressful and arduous process you have ever engaged in. It is a more in-depth review of your company than any outside party has ever been involved with.
A secure data room will be opened (Dropbox, Citrix) and a serious amount of documentation will be uploaded. This includes contracts, customer data, everything related to HR, workers’ compensation, all levels of insurance, information on your fleet/equipment, your facility if that is involved, an environmental study on the facility and things like background checks on key employees, including the owner(s) if you are staying with the company. It will be you as the owner and anyone on your team that you trust to be involved or an outside party that you engage to assist.
Something to remember is that the buyer is taking on virtually all the risk going forward from the day of closing. They must be 100 percent assured that the investment they are making is sound. Frequently there will be outside investor money involved and the investors must be protected and reassured that their investment is a good one.
While going through due diligence, the purchase agreement will be negotiated. It will either be a stock purchase agreement (SPA) or an asset purchase agreement (APA). Most transactions today involve an SPA and the buyer and seller agree to use IRS election 338 (h) which will treat the transaction as an asset purchase for tax purposes. Election 338 allows the buyer to get the step-up in basis on the assets that they need to make the transaction work.
The advantage to the seller is the unforeseen and future liabilities of the company that might present themselves to the new owner. As the seller you will make very thorough warranties and representations about known and unknown liabilities but they will reside with the new owners post-closing. Additionally, money will be held back at closing for up to 24 months to pay any of these liabilities that might come up. It is not the intent of the buyer to keep any of this money but they do need some monetary protection in the event liabilities present themselves.
An asset purchase agreement is much simpler than an SPA. The warranties and indemnifications are significantly reduced, as well as the time spent on due diligence in general. And the buyer still gets the step in basis on the assets that they need. The past and future liabilities will stay with the seller since the stock was not purchased. The challenge is that all of your contracts have to formally be assigned to the buyer.
Every contracted customer has to receive communication and a document must be executed to assign the contracts. For larger companies this can be daunting. In a stock purchase transaction, technically the customer does not need to be made aware unless the seller has executed contracts that have ‘change of control’ language in them. The APA is much easier but an SPA is much easier to deal with contracts, which is the primary reason most transactions today are handled as a stock purchase/sale.
At this point due diligence will have begun and once the buyer is comfortable with the proceedings, they will then invest the time to work on the purchase agreement. Part of due diligence will be scheduling a Phase I for the site(s) assuming the buyer intends to continue to occupy the property. The buyer may perform much of the due diligence themselves or engage a firm to handle it. As mentioned before, a wide range of documents will get uploaded into a secure data room. Your CPA will need to assist you and once you are comfortable that the transaction appears it will close, you will be doing tax planning with your CPA.
And you should be working with a succession planner and your CPA to talk about several types of trusts and ways to shelter your proceeds. The whole due diligence and negotiation of the purchase agreement will be a minimum of 2 months and could easily take longer. You have your business to manage and the buyer may have other transactions in play, or a business to run.
Ultimately your goal is crossing the finish line. A closing date will have been set in the Purchase Agreement and assuming it is met, a closing not too different than a real estate closing will occur. Attorneys are involved and possibly a closing agent. If the buyer and seller are in two different locations, the closing will be remote. You will sign a lot of documents and monies will be wired. With stock purchase agreement, typically several parties are paid at closing: The seller, the intermediary, the attorneys and possibly the CPA. This occurs because the new owner of your stock will not allow any of these involved parties to NOT get paid and have them come back at the company. These parties act as a sort of lien holder.
They are paid at closing so there is no risk of them not getting paid. As mentioned earlier, some of the seller’s funds will be held for up to 24 months either in escrow or as a promise to pay from the buyer. There will be trigger point dates along the way and some of the funds will be released. Typically and assuming there are no liability issues that need to be resolved, all funds are released within 24 months. In most transactions 10-15 percent of the proceeds are held back as hold back money for the 24-month period.
Post closing: Happily ever after. If everyone has done their work effectively, buyers will be happy, and you’ll be happy. This gives you the freedom to pursue what’s next?