When business owners decide to sell their companies, demands on their time become even greater than usual. Faced with these time constraints, many sellers fail to take steps that can increase their after-tax proceeds from the sale.
Perhaps the most common mistake a seller makes is failing to solicit enough bids and generate competition among prospective buyers. Without deep knowledge of the everyday workings of the private equity markets, it can be difficult for a client to get a sense for the most that prospective buyers are willing to offer for the business. For example, at any given time, businesses in a particular industry (such as toxicology laboratories) may be commanding a premium in the marketplace. If a seller only deals with one potential buyer, or is unaware of how the markets view the seller’s industry at that time, he or she is unlikely to obtain the best price possible for the business.
A second common mistake is a failure to conduct due diligence on the buyer; failing to do so can result in a host of problems. There may be deficits in the projected post-sale payments to the seller, such as installment payments or “earnouts.” If the seller opts to receive a portion of the purchase price in the form of equity in the buyer (“rollover” equity), the seller’s failure to diligently examine the buyer and its operations can result in a large loss for the seller when the equity of the buyer declines in value. Moreover, the seller can face legal liabilities stemming from the buyer’s actions after the sale depending on the representations and warranties it made to the buyer.
While sellers often make the mistake of not thoroughly examining buyers’ operations, they sometimes also fail to highlight their own strengths to prospective buyers. Does the business have an established, diverse base of core customers rather than two or three customers who account for nearly all sales? Have the earnings of the business increased sharply in the last six months? Does the company have experienced, loyal employees? If the answer to these questions in “yes,” the seller can be justified in demanding a higher price.
Finally, sellers often focus too much on the nominal purchase price rather than the all-important figure: the after-tax proceeds they receive.
Garza & Harris can help business owners deal with all of these problems. We have deep connections to the business community and the private equity markets no matter what the industry- health care, manufacturing, technology, energy, to name just a handful. Rather that accepting the first offer for a business, we can drive up interest in a business preparing for sale, forcing prospective buyers to make their best offer. Our team is well-versed in due diligence and can learn what needs to be known about the buyer. At the same time, we present the seller’s company in the best light and call attention to its unique valuable traits.
Drawing on our years of advising entrepreneurs on the sale of their companies, we will structure the deal in the way that provides the best after-tax result that is consistent with the client’s goals. We can determine whether an equity sale or an asset sale yields the best result, whether an installment sale or earnout is desirable, and whether rollover equity is an attractive option. We negotiate a purchase price allocation that allows the seller to enjoy the benefit of the lower capital gains tax rate. The result is that any client of ours can rest assured knowing that all legal means have been used to maximize the after-tax proceeds from the sale.