Kenneth R. Charette

Kenneth R. Charette

Shareholder & Chair, Mergers & Acquisitions Group

Fitzpatrick, Lentz, & Bubba

What steps can a business owner take to be prepared for a potential M&A transaction?

For any business owner whose ultimate “exit strategy” may involve a potential “sale” of their business, it is important to take the steps necessary to properly position that business for a sale process. In order to make their company more attractive to potential buyers and to help maximize the value in any sale transaction, business owners can make certain strategic decisions before the sale process beings.

As noted above, business owners can take the following steps to help prepare a company for a sale, including, but not limited to:

• Engage experienced legal and tax advisors (and if necessary, an investment banker to assist with the sale process).



• Obtain a third-party valuation in order to ensure that you can appropriately establish your “expectations” for a sale.



• Ensure that your legal documents (e.g., entity organizational documents, customer contracts, vendor contracts, employment agreements, etc.) are in order and that any governmental licenses and permits associated with the business are up to date.



• Identify and eliminate any potential legal matters that may “spook” a potential buyer (vendor complaints, employee claims, etc.).



• Organize and “Normalize” the financial statements of business. If a company: (i) maintains sloppy books and records; or (ii) runs many personal expenses through the business, then it will be difficult for a buyer to determine the true “value” of the business. Another way to think about this is that “anything that you have to explain away, will ultimately cost you money”.

 

Due Diligence - What’s necessary and how?

Due diligence is the process by which a potential buyer gathers information about the target company in order to identify any potential issues that may impact: (i) the potential transaction; or (ii) the buyer’s operation of the business following the closing. As a result, buyers will want to review various items throughout the due diligence process such as: all material contracts; the target company’s internal controls and processes; the target company’s litigation history; the condition of any real property; any legal compliance matters, etc.

The due diligence process provides buyers with an opportunity to discover potential “landmines” before the transaction is completed, thus allowing them to negotiate any appropriate protections in the transaction documents (e.g., purchase price adjustments, indemnities, holdbacks, earn-out, etc.). This is why, as noted above, it is extremely important that potential sellers have “their house in order” prior to commencing a sale price, as any unaddressed issues discovered in due diligence could negatively impact a deal.

Acquisition Agreement - What’s important?

Aside from the obvious items of price and payment, from both parties’ perspective, the next most important provisions of an acquisition agreement would be: (i) the seller’s representations and warranties regarding the business; and (ii) the related indemnification. These sections are important because they effectively allocate risk and liability for certain pre (and post) issues among the parties. From a seller’s perspective, FLB always tries to negotiate certain limitations on the seller’s post-closing liability under the acquisition agreement in order to ensure that any post-closing exposure is fair and reasonable.

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What is the timeline to market, negotiate and close?

Typically, anywhere from 3 to 6 months, although deals certainly can happen faster, or take longer, depending on the specific facts and circumstances.

 

What makes a successful M&A transaction?

At FLB, we understand that for many of our clients, they may only go through an M&A process once. As a result, we believe that successful M&A transactions require that clear (and frequent) communication is necessary between the advisor and the business owner in order to ensure that they understand the sale process and can then manage their efforts and expectations accordingly.

 

Who should a business owner look for as an M&A advisor?

Business owners should look to work with advisors with significant experience handling M&A matters and who, ideally, understand the seller’s business and the market in which they operate. At FLB, our team has been a leader in the sales, acquisitions and mergers of local, regional, national and international business for 35 years and have an institution understanding of the market and practices for the transfer of businesses that is difficult to match. We take particular pride in our ability to navigate the intensity and complexity of large-dollar national transactions while maintaining the values (and cost-effectiveness) of a Lehigh Valley firm.

 

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