Nine Surprises For the First-Time Business Seller

By Tom McLain

It is the American way.  Entrepreneurs dream (if not fantasize) about the day when they finally sell their business for a huge pile of money.  But when the dream day comes, many business sellers are selling a company for the first time and do not know what to expect.  Aside from the fact that the actual size of the pile of money on that day may not match the size of the money pile in those fantasies, there are several aspects of selling a business that may come as a surprise to the first time seller.  Of course, every transaction is different and no one can truly predict what you will face.  However, here are nine “surprises” that any first-time business seller may encounter:

1.         Nothing Personal, It’s Not About You.  You and your business may nearly be alter egos and it may be nearly impossible for you to conceive a world in which your company survives without you.  However, you will soon learn that the process of selling a business is not about you at all.  Remember, we live in a free society, and indentured servitude is no longer a vibrant business model.

In reality, if you and the business are so intertwined that the business truly cannot survive without you, it will be hard to convince somebody to buy your company.  Also, you need to understand that, during the sales process, the business (a/k/a your baby, your alternative self) will be questioned, criticized and belittled.  Don’t let this get to you – it’s not personal and its not about you!  As hard as it may be, you need to develop a thick skin and embrace the idea that things do not always have to be done your way.  If you can do that, and convince the buyer that your company will actually survive without you, your business sale will less painful and more profitable.  On the other hand, do not lose sight of the fact that, with certain buyers, you may need to be prepared to help your business through the transition period in order to ease the buyer’s concerns and maximize value realized for the

business.  

2.         The Future Can Only Hurt You.  Most sellers want to talk endlessly about how well the business will do next year – “the future is so bright, you ought to be wearing shades!”  Regrettably, buyers only want to talk about what happened last year and will tell you that the future is irrelevant.  Secretly, the buyer may agree with your projections to some degree, but no wise buyer will admit it.  The only time a buyer will show any interest in the future is when they believe that next year’s prospects look dim.  If that happens, the buyer will want to talk about little else.  Recognize the buyer’s perspective and how it impacts pricing, and be prepared to make the case for a high sales price using historical data.  In the end, this all becomes an argument over price and is often solved by the use of an earn-out (part of the purchase price is tied to the future performance of the company). 

3.         Earn-out Ebb.  When buyers and sellers disagree over the value of a business, usually as a result of a differing view of the future, the concept of an earn-out appears.  This can be a brilliant comprise between the optimism of the seller and the pessimism of the buyer which allows both sides to proceed in a state of bliss, each remaining convinced that their view will prevail and the price will be adjusted accordingly.  The danger for you is that you adopt an overconfident view of the earn-out.  An over-confident seller frequently discovers that the earn-out should have never been considered “money in the bank.”  It is critical to understand that an earn-out only provides you with partial control (at best) over the destiny of your earn-out.  A paradox takes hold: You have to sell your company and give up control, yet maintain sufficient control over the business going forward to make sure you get your earn-out.  Do earn-outs ever get paid? Yes, absolutely; but the savvy seller recognizes that they are often contingent upon circumstances over which they have no control.  It is best to view earn-outs conservatively - assume that the earn-out will not be paid in full.

4.         Due Diligence Drudgery.  How is it possible for the buyer to want to know this much about your business?  Are they idiots?  Can’t they figure out anything on their own?  Every scrap of paper seems to become critically important.  Even more worrisome, your buyer won’t commit to anything at all (pricing, terms, etc.) before your business has been studied under their microscope.  You will be caught between trying to find that “last %^&$ amendment to that stupid contract” and worrying that the buyer is about to walk away with enough information to destroy you.  Due diligence is a necessary evil (at least sellers view it as evil) in the process of selling a business, but it really needs to be viewed as a positive.  Properly conducted and completed, due diligence means that there will be no surprises at the closing or after the closing and that things will work out as anticipated.  As for somehow losing your business – it could happen, but that’s why you made the buyer sign a strong confidentiality agreement.  (You did get one of those, didn’t you?)

5.         Somebody Actually Cares About The Meeting Minutes.  Remember those silly meeting minutes of those significant company actions that you were supposed to keep?  No?  Don’t worry, the lawyers for the buyer will remind you.  For probably the first time in your life, you will actually be worried about whether you’ve kept up with all the legal formalities of operating a business.

Quite obviously, if you have, there is nothing to worry about.  But, if you haven’t – don’t panic, you are not the first entrepreneur in the history of the planet to have this problem.  The good news is that a lot of these types of problems can be “fixed” in a way that provides comfort to the buyer.  However, it is always much better to keep up with these responsibilities and make sure everything is in order before you start trying to sell.

6.         What Do You Mean, Taxes?  Are you selling assets or are you selling stock? Is the business a subchapter S corporation, a subchapter C corporation or an LLC?  Are you taking some of the purchase price as a consulting agreement or in stock of the buyer?  Does any of this matter so long the buyer gives you that pile of money that you wanted for your business?  You bet it does!  The consideration of the tax implications of the structure of the business sale is often considered by first time sellers very late in the process.  The reality is that seemingly small decisions can have large tax consequences.  The after-tax dollars can differ dramatically due to deal structure.  Don’t miss your opportunity to engage in tax planning (including estate planning).

7.         The Phoenix Phenomenon.  It is inevitable.  Your deal will be stone-cold dead at some point.  Some insurmountable issue will smack you between the eyes and you will sink into the depths of despair.  In a sick way, the good news is that this seems to happen somewhere along the line in just about every transaction, including those that eventually close!  Generally speaking, the sale of your business will emerge from the ruins of the calamity like a phoenix rising from the flames.  Sometimes it will resurrect itself more than once.

Sure, deals die, but many close after going through a near death experience (or several).  Don’t lose faith.

8.         Its Not Over When Its Over.   When you close the sale of your business, you’ll never have to worry about it again, right?  Wrong.  Even if you don’t have to face the possibility of an “earn-out ebb,” your worries are not over when it closes.  Your agreement will include representations and warranties which you will have to honor for some period of time following the closing.

Some of the purchase price may even be escrowed for a period of time.  In other words, the buyer will normally have at least some ability to reach through the closing - you will be at risk for giving back some of the money.  Like paying taxes, an occasional sleepless night over a “tail liability” of some sort is nearly guaranteed.  However, instead of being shocked and fighting the concept, you need to try to control the issue.  Simply stated, you do your best to minimize your exposure by disclosing everything imaginable about your business during due diligence and trying to place as many limits as you can on your “tail liability.”

9.         The Lawyers All Envy You.  Maybe you didn’t sell the business for as much money as you had hoped.  Perhaps your ears are still ringing from the criticism of your baby.  But, shock of all shocks, all of the lawyers at the closing table are jealous.  Good business lawyers are like penguins – they know what it is to be a bird, but are denied the ability to fly.  Experienced and valuable legal advisors know what makes a business successful and what makes it fail.

They are trained to sniff out risk where the most conservative business person could never find it and are then able to guide you through the minefield of which risks are acceptable and which are not.  However, ask any good corporate lawyer to actually take a chance, assume a risk and act like a successful entrepreneur and you will discover that they are genetically unable to take that step.  So every single lawyer at the closing table fully understands what you do, but will never be able to fly with you.  They are envious and jealous, even if they never say a word.

About the Author: 

Tom McLain has been practicing law for over 20 years and has served as a legal advisor in connection with numerous sales of businesses.  He is located in the Atlanta office of Womble Carlyle, where he is a Member in the Corporate & Securities Practice Group.  Tom freely admits that he is a “flightless bird.” http://www.wcsr.com/default.asp?id=86&objId=277

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