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April 13, 2003 at 08:00 PM
The Art Of The Deal For Independents Selling Their Firm
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It is said that what you see is what you get. But, as we all know, this is often not the case, even under the best of circumstances. For those of you who read my first two articles on opportunities for independent advisors and guidelines for those considering a sale (see NU, 9/23/02 and 11/18/02) and want to move forward with a prospective buyer, lets discuss how to make sure you get the deal you see and that it is the best deal for you and your future.
There are two parts to a sale: the economics and the terms. If your desire is to stay in the business, then the most important principle is to avoid pushing valuation beyond sustainable performance realities. If you do, you will be under tremendous pressure to make it work under any set of circumstances, and that can be difficult. This is particularly true in an entrepreneurial business where circumstances change and results do not occur in a linear fashion.
Assuming the economics are fair and you desire to stay in the business, the most important aspect is the terms of the deal. Generally, you need operating and acquisition agreements. What are the buyers rights and obligations and what are yours? Is there an earnout payable based on the performance of your firm after the closing? Whats negotiable and whats not? For example, do you have the right to operate the business like you did before the deal closed? Do you have the right to select successors with the buyers approval? How long is the noncompete? Can you be terminated for cause? What constitutes cause?
Dont ignore the possibility that the buyer may want to turn around and sell your firm someday. Does he have the right to re-sell it? How does it affect your rights and obligations? If the company is sold, what happens? Does your earnout accelerate?
The most important of all the terms is who has operational control following the transaction. Does the buyer have the right to tell you what to do, what carriers or other manufacturers to use and how to do business?
If so, then you have a problem. The reality is that no one knows how to run your business better than you do. The buyer should have a right to be intimately involved, but if you want to survive, you need to run the business day to day. If you dont, you wont have a level playing field.
The buyer will, by nature, impose itself, and chances are the results will be less than positive for both you and the buyer. You need to maintain leverage–or at least a level playing field–in the relationship for the benefit of both sides.
Deal points that drive economics have to do with how the multiple is calculated. If the buyer pays four times, under what set of circumstances would he pay five or six times? If you have 70% of your income in recurring revenue, would he pay more? If not, theres less reason for you to do the deal. The higher your recurring revenue, the lower the risk for the buyer.
