Industry Insights

Benjamin Franklin’s Advice to Sellers

June 2015
Author:  Matt Klauser

Matt Klauser

Director

Transaction Services

Health Care
Manufacturing & Distribution

14241 Dallas Parkway, Suite 1100
Dallas, Texas 75254-2961

Dallas
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Regardless of whether your childhood interests were sports, music or books, you’ve likely been told numerous times, “By failing to prepare, you are preparing to fail.” Benjamin Franklin’s famous quote has been used in lectures, on posters and in leadership discussions. You were probably told this while practicing for the big game, performance or exam.

Strangely, we often forget our childhood lessons as we move into our professional careers. 

As I recently discussed with Kerri Salls of This Way Out Group, many private business owners don’t think about the eventual sale of their company—and when they do, they may believe a future buyer will magically arrive one day and offer fair value for their company. They may fail to fully consider the impact they have on the eventual valuation; sellers forget what happens when they fail to prepare.

As part of their preparation, sellers need to understand the potential exposures a buyer will explore and understand that when a buyer looks at the business, the buyer will be evaluating risk. However, the seller also should understand the true value of its organization, including any synergies the combination may provide. Rather than just thinking of its company in a vacuum, a seller needs to consider its value to a specific buyer.

A seller also should be able to clearly articulate how the company makes money. This doesn’t mean stating “our company makes money by selling product ABC.” It means a seller should be able to communicate, with supporting documentation, the products and customers that have driven the sales and margin changes during the last several years and how this is expected to trend in the future. A buyer wants to understand a company’s key performance indicators, so if a seller isn’t actively monitoring these, there’s homework to be done. That’s OK. You’d rather do the homework before walking into the classroom for the exam, right?

Another vital aspect of seller preparation is the tax impact of the transaction. Many sellers immediately gravitate toward a stock sale and object to an asset sale, without having completed an after-tax sales-proceeds analysis to understand the sale’s impact. A seller might benefit from selling assets by requesting a larger purchase price for an asset sale compared to a stock sale and splitting the tax impact with the buyer. 

Remember:  The seller has the most leverage prior to signing the letter of intent (LOI). Once the LOI is signed, the leverage shifts to the buyer, and the seller often is in defensive mode. Very few purchase agreements include a higher purchase price than the LOI, but many agreements include a lower purchase price than the LOI. By adequately preparing before initiating discussions with potential buyers, sellers can increase their chances of closing the deal, reducing the time to close and increasing deal value. To learn more about these issues, contact your BKD advisor.

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