02 Oct Around the Web: A Week in Summary
A recent article from Inc. entitled “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability” explains four ways in which business owners could be inadvertently sabotaging their own business’s potential and worth.
Even if you never plan on selling your business, it is always a good strategy to treat your business as though you plan to. This sets you up for a mindset that is always focused on growth and puts you in the position to be worth top dollar should the circumstances unexpectedly change. If you haven’t thought about selling or if you are but haven’t taken a thorough look at your company yet, here are four mistakes you could be making that may lower its value:
- Poor recordkeeping – Anyone evaluating your business is going to want to look through at least three years of financials. If your books are a mess, you may struggle to show growth, scalability and credibility. This is a major red flag to investors and buyers alike.
- Delayed investment and improvements – If you stop investing in your business, you cease the ability to show how it has a promising future for growth. This will significantly reduce its value.
- Failure to innovate – A failure to keep up with modern technology can harm your business in multiple ways, like reducing your ability to stay competitive in the market.
- An unstable workforce – Well-trained employees and a stable workforce with low turnover contribute to a stable, smooth running business.
A recent article from Axial entitled “The Makings of the M&A Purchase Agreement” explains the items included in a typical purchase agreement and provides some tips on how to keep the deal process running smoothly.
The purchase agreement is a more in-depth written agreement than the Letter of Intent that precedes it. Often including more detail as well as additional terms and conditions, the most common sections included in the document are:
- Definitions – This section lays out exactly what each term used throughout the document means. This avoids later confusion and disagreements regarding what certain terms include or do not include.
- Execution Provisions – This section includes what is included in the purchase price, payment mechanics, earnout targets/timing, escrows, purchase price adjustments and more.
- Representations, Warranties, and Schedules – Buyers will ask sellers to write up a section detailing certain conditions within the business and verify their veracity. These conditions can include current litigation, employee benefits, the state of taxes, financials and accounts, and more.
- Indemnifications – The purpose of this section is to determine who will be liable for issues that arise after the deal is closed.
- Interim and Post-Closing Covenants – What is expected from each party pre and post close of the sale will be laid out in detail here.
- Closing Conditions – This section will lay out the circumstances of closing the deal such as a closing date, regulatory approvals, written third-party consents such as those from a landlord and a material adverse change clause.
- Break-Up Fees – As suggested, this section details what will occur should the deal be terminated before closing.
Negotiating a purchase agreement can be stressful and tensions will inevitably arise. Going into this process, it is important to remember that everyone is simply looking to protect their best interests and to understand the basics of negotiations.
A recent article from Exit Strategies Group entitled “Why Business Transactions Don’t Close: Signs of a Flaky Buyer/Seller” discusses the signs to look for that would suggest that a seller or buyer is likely to drop out of a deal last minute or without warning.
It is more common for a business sale not to close than it is for it to make it to completion. However, there are steps you can take to avoid working with a flighty or unreliable seller or buyer who is more likely to skip out before the deal is closed. When entering into a deal with someone, look for these signs:
- They are untrustworthy – Do some due diligence on the other party’s character. Check references, look up past deals they’ve done, do your research.
- The buyer seems to have financial problems – This is an obvious red flag, it’s encouraged that you ask for proof of funds for a down payment before moving along any further.
- They are slow to act – An individual who is not quick to respond to requests for disclosures or other diligence items could be indicating either a lack of interest or that they have something to hide.
- Lack of transparency – This sign could mean a lot of things, but they’re generally not good things.
- The seller, buyer or agent becomes less responsive – Time is a deal killer, therefore it’s best to avoid anyone who is consistently taking longer than necessary (as in days) to respond to simple requests.
- Low enthusiasm for the deal – If you can spot discord between business partners regarding the sale or a lack of excitement about the sale, the chances are much higher that it will fall apart.