1. What key points do I need to negotiate in addition to the price of my Company?
The sale of a business involves many elements of financial opportunity to the Seller. The purchase price is only one component of the overall goal. When representing a client, my understanding of all of the available options maximizes the total financial yield for a Seller. I take into account all of the elements of the financial transaction including: yields from a stock sale versus asset sale; amount of initial investment; terms and interest rate on promissory notes; liabilities to be assumed by the acquirer; transfer and negotiation of leases; personal guarantees; employment contracts; consulting agreements; non-compete agreements; current assets to be retained by the Seller; earn-outs (percentages of future sales paid to Seller); stock ownership retention; continuation of perks and fringe benefits (i.e. health insurance); purchase price allocation and other pertinent details. The total financial package goes well beyond the base purchase price.
2. Is it necessary to get environmental clearance even if I do not own the property?
It is the responsibility of the Seller to obtain required environmental clearances prior to the closing of a business sale, regardless of whether the Seller owns or leases the business property. This generally applies to businesses subject to environmental scrutiny such as manufacturing businesses or firms routinely dealing with hazardous substances. It is always in the Seller’s best interest to conduct an Environmental Assessment before handing over the property to a Buyer so that there is some record indicating that the property was handed over to the Buyer in a “clean” state.
3. Is my transaction likely to be a share sale or asset sale?
In most cases, a Buyer will be interested in acquiring 100% of the assets of the Company, as opposed to buying the shares. In a share purchase, Buyers are primarily concerned about inheriting any potential or contingent liabilities flowing from the past operation of the Company. An asset transaction also enables the Buyer to restate the value of the assets to fair market value (as opposed to its current depreciated book value on the balance sheet) and to re-depreciate these assets. The difference in accounting treatment of buying assets versus shares has tangible financial and tax benefits to the Seller and the Buyer. If the Company is an Incorporated business, it is advantageous for the Seller to sell the shares of the Company to avoid being taxed both at the corporate and individual level plus the Seller may be able to take advantage of the capital gains tax exemption. However, there are a number of creative techniques in deal structuring that can be considered in order to minimize the tax impact for both Buyer and Seller regardless of the transaction being an asset or share sale. It is imperative to retain the advice of a professional that is familiar with these strategies early in the M&A process.
4. How many years of financial information does a Buyer typically want to review?
Three years of historical financial information should be sufficient for potential Buyer to formulate an opinion of value and a comfort level with the business. In today’s fast changing world, statements more than three years old are not very relevant to the operations of the current ongoing business. In addition to historical information, year-to-date or interim financial statements are required. It may be advantageous to prepare a projected income statement for the upcoming period as well. The Seller should also be prepared to discuss any dramatic swings (up or down) in sales, profit margins or expenses.