By Dennis Michaels
Even if the possibility of selling your business is still years away, it’s essential to your long-term company goals to begin planning for that day as soon as possible.
In part 2 of this series, I discussed the art of valuation and issues of control. Today, we’ll delve deeper into the topic with a look at how relationships with key employees, contracts, and other relationships can affect the process.
For most businesses, at least a few employees are truly essential for the company’s continued success. The challenge for the seller is how to retain these employees through the sale process. What is the likelihood that a buyer would require their continued service post-deal?
Too often, sellers find negotiations with key employees holding a seller’s deal hostage. In most cases, it’s the seller, not the buyer, who ends up paying the ransom. Understanding what employees may or may not be essential and then frankly assessing their stake in the business pre- and post-deal can prepare a seller for these negotiations.
Most buyers simply want to ensure the continuity of the business, pay no more than market for essential talent and provide the employees of a newly acquired business with the same basic compensation structure and benefits as their existing employees. For their part, most key employees will be focused on job security and maintaining their current level of compensation and benefits.
Inexperienced sellers may be surprised to find that they, not the buyer, end up having to bridge any gaps economically in order to get any deal done. Likewise, sellers may find that buyers sometimes reject existing favorable compensation and benefit packages, requiring sellers to negotiate and terminate these arrangements with the affected employees with any risk or payouts coming out of the sellers’ pockets.
Understanding the value of key employees to a prospective buyer and/or the potential cost to the seller of transitioning that employee relationship to a buyer is essential when determining the true value of business sale.
Key Contracts and Relationships
As part of the pre-sale planning process, sellers should carefully review key customer and vendor relationships and include them in the plans. In the event of a change of control, do key contracts require the consent of a vendor or client? Most credit agreements and leases, for example, typically have “deemed assignment” provisions that require lenders or landlords to consent in the event of a change of ownership. Timing can be a challenge here, and if handled improperly, these third parties could take the opportunity to extract additional concessions in exchange for their consent to the sale.
Does your business face any long-term contracts due for renewal in the near future? If so, it may be prudent to consider renewing that agreement for a new term prior to beginning the sale process.
On the other hand, are there any customers or vendors with off-market sweetheart deals (e.g., above-market pricing, generous renewal provisions, exclusivity, etc.)? If so, it may be time to consider re-negotiating these arrangements or simply let them sunset in advance of a deal.
Are there any permits or licenses that are critical for the operation of the business? If so, then there may also be restrictions on their transfer (or on a change of control of the licensee). Those provisions should be understood so both buyer and seller can set appropriate expectations in the event that transfer is a lengthy or cumbersome process.
Next time, I’ll tackle the final steps in the lengthy list of considerations when planning to sell your business: Business and personal financial impact.
Check out Dennis Michaels’ Guide to Raising Cash here. Plus, read the rest of the “Guide to Selling Your Business” series at the links below:
- Guide to Selling Your Business, Part 1: Planning and Preparing
- Guide to Selling Your Business, Part 2: Valuation and Control
- Guide to Selling Your Business, Part 3: Considering Key Relationships
- Guide to Selling Your Business, Part 4: Finance Matters
Dennis Michaels is an experienced business lawyer focused mainly on start-ups, angel and venture capital financings, mergers & acquisitions, and corporate law. Dennis advises entrepreneurs, investors and companies about business issues throughout the corporate life cycle from formation through finance to exit. You can e-mail Dennis at DMichaels@boutinjones.com.
Originally published: Jan 23, 2011