M&A Tips for Sellers

Read my other article on M&A for Buyers also ....

Most companies these days look for inorganic growth through acquisition of companies. I am not sure why it is called M&A (Merger & Acquisition). It should be the other way Acquisition & Merger (A&M) as the acquisition comes first and then the merger. Companies are sold for various reasons

- No top line growth
- No bottom line growth
- New new business
- Loss of key team members
- Cash flow problems
- Key customers leaving
- Partnership issue

... are a few. But there are always challenges during merger and most marriages result in divorce. Here are few tips to keep in mind as a seller.

Most entrepreneurs are new to M&A. They normally miss out certain basic aspects when they sell their companies. Here are some tips.

1. If you sell your company to a Non-US entity insist on the clause to settle disputes in US courts only. Never allow the parent company to settle legal battles in Asian countries. This is like buying life insurance. If you happen to go the legal route you are better off fighting in the USA.

2. Evaluate the credentials of the person who is helping you with M&A. See if he has done any deals in the past. Ask for references and talk to them.

3. Before you sell take a commitment from your parent company how they will contribute to your growth. Like the way you have earn out there should be some hand cuff for the parent company as well.

4. If yours is a partnership company (more than one owner) have a clause that protects you if your partner has to quit before the hand cuff period. If you have to leave for some reason define the penalty clause.

5. Protect your key employees who contributed to your success from leaving the company before your hand cuff period or earn out period is complete. Share your earn out to retain them and do it before the deal is signed.

6. Do a due diligence(DD) on your parent company after the letter of intent or before you commit to a sale. Normally the buyer does the DD. You can insist on the reverse too.

7. If you have cash in bank before the sale consider increasing the valuation instead of taking the cash out as dividend. i.e if your valuation is $5M and cash in bank is $1M. You may be better off asking for a valuation of $6M. You may save on long term capital gains. But check with your tax consultant before the structuring.

8. Pay attention to your earn out. Are you responsible for just the top line or bottom line or both?

9. Understand how the company will be run during your earn out period. Spend enough time with the person you will be working with during the merger period. This will be the key to your make or break of your earn out.

10. Understand why the parent is buying your company. Make sure you can provide the value add (reason for the purchase) consistently during the lock-in period.

11. After the acquisition give enough space for the parent company to take over and run the operation. Successful transition helps your customers. Keep the customer in mind.

12. Think how your key customers would react to you being acquired by the company. Plan the message and tell them before it is public news. Last thing you want is your customers to know from others and not from you.

13. Think of all the things that you want to hide from a potential buyer and the after effects when they come to know of it post acquisition. Most of it will come back and haunt you. Beware of your non-disclosure.

14. Deal structuring is an important aspect of M&A. Spend enough time with each line item and think win-win.

Read my other article on M&A for Buyers also ....