How to avoid pitfalls and missteps in business acquisitions and sales

Structuring, implementing and closing a business acquisition or sale is a complex process fraught with unanticipated consequences for the unwary.

“Proper planning and an experienced team of advisers is essential for a successful transaction,” says Jill M. Bellak, Esq., a member of Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Bellak about how to ensure an acquisition or sale is implemented in a cost effective and timely manner.

What factors into the transaction structure?

The transaction structure can take many forms. The tax consequences to the buyer and seller have a significant impact on determining the structure. For example, if net operating losses are available on the seller side, a stock transaction or merger may be desirable for the buyer to take advantage of these losses as an offset against future income. Similarly, if the seller has significant customer contracts that may be terminated or subject to renegotiation upon a change of control, a stock sale would be more favorable than an asset sale. On the other hand, if the buyer is concerned about liabilities during the seller’s operation of the business, a sale of assets may be the preferable structure.

Why is due diligence important?

The buyer and its team of advisers must review the books and records of the seller’s business, including financial statements, tax returns, employee benefit plans, union contracts, customer and vendor contracts, employment agreements, leases, stock records and minute books. In addition, inspection of the seller’s real estate, facilities, equipment, inventory, vehicles and other personal property is a key part of the process. If real estate is involved, an environmental assessment is performed.

A lien search is undertaken by the buyer’s counsel to determine if there are security interests encumbering the equity interests or assets being sold. Third-party loans must be paid off by the transaction’s close.

A careful and thorough review of the documents and property will flush out issues that must be addressed by the parties and could result in further price negotiations.

What documentation is needed?

A letter of intent is often used by the buyer and seller to outline the principal terms, including purchase price, timing of due diligence and closing, and to restrict the seller from negotiating with or selling to other parties for a specified time period. Typically, the obligation to consummate the acquisition or sale arises when the parties enter into a definitive agreement, which specifies the price, terms and conditions that govern the deal.

The buyer will typically insist on confidentiality, non-solicitation and non-compete provisions in the definitive agreement that restrict the seller from operating a similar business, calling on customers or hiring away the employees. The seller makes extensive ‘representations and warranties’ in the definitive agreement relating to the business operations, title to the stock or assets being sold, compliance with laws, payment of taxes, claims or pending litigation and similar matters.

Disclosure schedules provide detailed information to the buyer regarding the business and typically identify: the owners of the business and the capital structure, the business assets, customer and vendor contracts, leases, employee matters, benefit plans maintained by the seller, debt obligations, violations of laws or regulations and other information that is provided or discovered during due diligence.

While a thorough due diligence investigation is critical, equally important are accurate and complete disclosure schedules, which impact the representations and warranties made by the seller.

What is involved in closing the transaction?

To close the acquisition or sale, the buyer may need to line up financing if it has insufficient cash on hand. Typically, the lender will take a lien on the stock or assets being acquired by the buyer. Other aspects include the transfer or issuance of licenses and permits to the buyer, obtaining consents of landlords, customers and vendors if contracts are being assigned, transfer of title to real estate and motor vehicles, payoff of the seller’s debt obligations, and transfer/hiring of employees. An experienced team of advisers is key to a successful closing.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Douglas Sibila stays steady at the wheel as Peoples Services pursues acquisitions


Peoples Services Inc. has shifted gears with third-generation President and CEO Douglas Sibila behind the wheel. Gone are the days when organic growth was sufficient to fuel the 104-year-old company. Now acquisitions are key to success. Fortunately for Peoples, the timing is right, and its reputation and old-fashioned who-you-know networking are driving opportunity.

“A lot of baby boomers are starting to retire,” Sibila says. “They’re looking to possibly sell and fortunately, I’m at a young enough age that I am interested in acquiring. There are fewer of us in my age range than baby boomers, so that creates some opportunities from our perspective.”

The number of operators in the segmented logistics and warehousing industry who are looking to exit could rise given the general success over the past few years of companies in this industry. Word has spread about Peoples’ reputation for fairness in its dealmaking approach, which gives exiting owners confidence that their employees have a future and won’t be seen as line items that can be cut to create a more profitable acquisition. And that gives Peoples a chance to absorb more companies into its regional network.

To capitalize on this moment, Sibila has devised a growth strategy designed to enable Peoples to not just survive in the changing market, but thrive.

Taking the wheel

Peoples’ approach to acquiring Terminal Warehouse in 2010, the deal that was the first in a series of relatively rapid acquisitions, is considered the foundation for those that followed.

With the Terminal deal on the horizon, the company spent 2009 making adjustments that allowed it to remain profitable during the downturn. It also had a lot of equipment that was fully depreciated, but still had significant market value to leverage. Those factors enabled it to borrow at a time when others had trouble renewing their lines of credit, giving Peoples the chance to take advantage of the bottom of the cycle.

The success of the Terminal Warehouse transaction and paying off that debt gave Sibila additional cash flow to make the next acquisition, pay it off and move on to the next. It’s also the deal that marks the start of the Douglas Sibila era, which is characterized by buying healthy rather than undercapitalized companies with an eye toward maintaining or improving Peoples’ total profit margin.

Acquisitions haven’t always been wholly under Sibila’s control. When he joined the family company in 1990, Sibila spent his first decade as part of the due diligence team. When he became president around 2001, his father moved into the chairman role and began hunting for, rather than executing, deals, handing off opportunities to his son who became a majority shareholder in 2010.

Today, Sibila leads a deal team that consists of a few key management staff, his father, and some outside advisers. Now before an opportunity is presented to that group, it comes through Sibila, who does a lot of the due diligence and prep work upfront.

“We walk away from a lot more than we ever get serious about,” he says.

To find deals, the company looks at trade magazines, networks within trade associations and fields calls from brokers it’s worked with. Sibila believes Peoples gets those calls because the company is reasonable to work with.

“We keep in touch with those people and that’s why we’ve been around for 100 years. I believe in karma in the sense that if you do what’s right, things have a way of falling into place. Because we’ve handled those transactions well, not only are the sellers satisfied with how we approach things, so are the brokers,” he says.

For example, when first presented with an opportunity to acquire Style Crest Logistics in 2014, a lead that came to him from a broker on an earlier deal, he was interested, but wanted to digest an acquisition that the company had recently completed. So he passed.

“I even gave him a reference to a couple other people I knew in the industry,” he says.

About a year later, after other transactions had fallen through, the frustrated seller came back to Peoples to see if there was interest. The timing was right and Peoples closed the deal in September of ’15.


Through its current approach, the company has grown into seven states with 42 locations. It owns Peoples Cartage, Total Distribution, Crown Warehousing & Logistics, Terminal Warehousing, Quick Delivery Service, Central Warehouse Operations and most recently Grimes Logistics Services Inc. (now Grimes Total Distribution) for a total of 7.5 million square feet of warehousing space. Its revenue has doubled since 2012 and more than quadrupled from what it was in 2009.

Pat Covey and Davey Tree learn and grow through strategic acquisitions


Pat Covey, president and COO of U.S. operations at Davey Tree Expert Co., has seen the company’s revenue more than double and its geographic reach expand since coming aboard in 1991. The company owes much of that growth to an emphasis on acquisitions that has brought 30 companies under the Davey umbrella in the past decade. That’s a pretty incredible achievement, and somewhat surprising.

“If someone would have said five years ago that you would do five acquisitions in the first six months of the year, I think we would have looked around and said, ‘How are we going to do that?’” Covey says.

That sentiment can be traced back to early acquisitions that had been hit or miss for Davey, he says, which left the organization hesitant to aggressively pursue strategic growth. It’s strange, then, to consider that Covey would oversee two of the largest acquisitions in Davey history.

Fear of the unknown

When Davey’s chairman, president and CEO, Karl Warnke emphasized top line growth in 2008, a goal was set to achieve 40 percent of it through acquisitions. In order to see that directive through, the company had to find the source of its anxiety. Part of the issue was its organizational structure.

“I think we figured out a process, in a way, that said we need to have an acquisition team in place. We can’t just have this as being a job that we plug a person in if they have time. We needed a more devoted, consistent approach to the process. We needed to put people in the process that had been through it a few times and not just whoever was available,” Covey says.

The company’s confidence in the process was cemented after it completed two of the largest acquisitions in company history that year — one for $50 million and another for $45 million. That made smaller acquisitions less daunting.

“That repetitiveness, that ability to go through it a few times and learn from our mistakes has really helped us improve the process of bringing companies in and knowing where the hurdles are,” Covey says.

But there’s more to an acquisition than just the purchase. What happens after a sale, Covey found, is critical to its success.

Does your company have the talent in place to weather a transition? 

Many acquisitions are taking place in the market today, a change from a few years back when downsizing and restructuring were the dominant trends. While they lie on opposite ends of the spectrum, both types of transactions require organizations to make adjustments to the talent they have on board.

“All companies should maximize the talent they have who are familiar with the organization or have ‘tribal knowledge’ — an understanding of a particular company’s nuances or homegrown processes,” says Tony Nicol, managing partner at Alliance Search Solutions.

“The real focus is to determine which employees align to the values, mission and goals of the organization and put them in the right positions. Depending on the organization, transition and the roles involved, it is likely that external talent will be needed for specific expertise in leading through transitions.”

Smart Business spoke with Nicol about how having the right talent in place will help ensure a successful transition.

What are some common business transitions? 

Companies going through an acquisition, whether planning to acquire or sell; downsizing or restructuring; investing in talent because of increased business or proactive planning; investing in equipment and technology; new product development launches; or the termination of products or services can all require talent adjustments.

What is the consequence of not having the right talent in place for a transition? 

These common transitions are a lot bumpier when a company hasn’t paid close attention to the talent it has at hand. In some cases, initiatives must be rebooted, starting over with new leadership to lead a transformation because staffing wasn’t properly planned out.

Sometimes with mergers, particularly where talent from within is being kept, companies often don’t wait long enough to evaluate an employee before making a cut. That can delay the success of the transition. Patience and planning often leads to a better, quicker transition.

Who is necessary for companies to have on staff as they move through a transition? 

Companies need transformation leaders with experience in implementing change and establishing the right culture, and that involves having a deep understanding of the transition at hand.

Some critical change leaders are CFO, vice president of operations, director of lean/ OPEX, director of six sigma, CIO, etc. It depends on the transition that is occurring as to what types of employees or expertise is needed. The key is that the people leading a transition have the ability to implement, lead and maintain the objectives of the transition.

When does it make the most sense for a business to evaluate its talent? 

Companies should be evaluating their talent continually. Talent development and planning is crucial for stability and growth. Quarterly and annual forecasts should always include a detailed evaluation of the current talent across all levels and departments. There should be proactive planning, and all companies should have some level of internships and development programs to keep a sufficient pipeline of entry-level employees.

How can companies acquire the talent they need to make a successful transition? 

Business relationships with suppliers, customers and industry colleagues are a great place to start. But companies often need more help finding key leaders. A third-party recruiter can search its broad network, sourcing and recruiting the necessary talent from across the globe. These organizations have established relationships with transition leaders and can provide an introduction to talent who bring needed experience.

This type of talent is in demand and it takes a great amount of knowledge and effort to find the right leader for the specific situation. Through a consultative relationship with a third-party recruiter, companies get help making crucial matches.

It is critical to have the right talent on board to lead a company through a transition, whether that means growing or downsizing. Every company will, at some point, deal with one of these situations. It’s important that they go into it with their best foot forward to avoid a costly backstep.

Insights Talent is brought to you by Alliance Solutions Group.

Cleveland Business Pulse: Merger momentum is building

In the broader M&A market, news of mega deals hitting the headlines is signaling that companies are aggressively pursuing acquisitions with transaction activity reflecting a mix of corporate and private equity buyers and diverse industries. Deal value in February was up more than twofold from January levels with Heinz, Dell and Virgin Media among the billion-dollar-plus deals.

Local corporate buyers are also flexing their muscle. If February transaction activity is any indicator, momentum is building for what is expected to be an active year for M&A in 2013.

An M&A highlight in the health care arena, Cincinnati’s Catholic Health Partners Inc. announced a strategic partnership with Summa Health System Inc. of Akron, whereby it will acquire a minority ownership stake in the health care provider. The move is reflective of the broader consolidation trend taking place in hospitals and health systems in anticipation of changes from health care reform. Summa announced last July that it was seeking a potential partner as part of a three-year strategic planning process.

The combination brings together two regional leaders and expands CHP’s market share. With $5.6 billion in assets, CHP operates more than 100 health facilities, including 24 hospitals throughout Ohio and Kentucky, and is the largest health system in Ohio. CHP reported $3.8 billion in net operating revenue in 2012.

In a highlight for the industrial market, Beachwood, Ohio-based private equity firm Rockwood Equity Partners completed the acquisition of TIM-CO (aka CAL-RF Inc.), its first strategic add-on for portfolio company Astrex Electronics, which it acquired in 2008. TIM-CO is a distributor of electrical and electronic components and value-added assembler of coaxial connectors and cable assemblies with a focus on the commercial aviation, space, oil and gas, industrial, and military markets.

Also in the industrial segment, Timken Co. announced its second acquisition this year with Roller Bearing Industries Inc. Roller Bearing manufactures balls and roller bearings for the railway and automotive industries. Timken purchased the company from The Greenbriar Cos. Inc.


Deal of the Month

The health care industry garners the spotlight this month with the announced $2.1 billion acquisition by Cardinal Health of AssuraMed Holding Inc. of Twinsburg. AssuraMed distributes disposable medical products for the home health market, with a product range than spans more than 30,000 SKUs from ostomy, diabetic and respiratory supplies to wound care and insulin infusion products.

The acquisition gives Cardinal Health an entry into the growing home health market, adding an estimated $1 billion to the top line. The company estimates synergies from the combination to reach $50 million by 2016. Cardinal Health reported EBITDA of $2.3 billion on revenue of $104.8 billion in 2012.

AssuraMed is backed by private equity firms Clayton, Dubilier & Rice and GS Capital Partners, which acquired the company in 2010. During their ownership AssuraMed completed the acquisition of Invacare Supply Group, the domestic medical supplies business of Invacare, in a $150 million transaction.


Andrew Petryk is managing director and principal of Brown Gibbons Lang & Co. LLC, an investment bank serving the middle market. Contact him at (216) 920-6613 or [email protected]

Five things you need to know about business valuation when making an acquisition

Sean R. Saari, CPA/ABV, CVA, MBA, Senior manager, Skoda Minotti

When one company is acquiring another, the deal price is often the primary factor considered. Too many times, however, critical issues are overlooked, says Sean R. Saari, CPA/ABV, CVA, MBA, senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team.
“Deals get started and then take on a life of their own. During the acquisition process, the company is often focused on negotiating and finalizing the deal. However, there are a number of valuation-related issues that can be important to consider, but which are often overlooked,” says Saari. “Some companies try to address these issues after the fact, but the earlier you’re able to get the valuation and accounting issues handled on the front end, the easier things are going to be on the back end.”
Smart Business spoke with Saari about the five things you need to know regarding business valuation before making an acquisition.

What is the appropriate standard of value to consider in an acquisition scenario?

There are two different standards to keep in mind — fair market value and strategic value. Fair market value represents the value of the business if it were to be sold to an unrelated third party and it sets the floor value to what an acceptable purchase price may be.  Fair market value is typically most appropriate when financial buyers are involved because they don’t really have any synergies to squeeze out of the company, they simply want to purchase the business ‘as-is’ and continue its operation. However, if the potential acquirer is in the same industry as the target company and the deal is a strategic acquisition, it is important to consider the ‘strategic value’ of the business. Under this standard of value, the acquirer considers the impact of certain redundant expenses that may be eliminated. The elimination of certain expenses may allow a strategic acquirer to pay a price that is greater than fair market value while still receiving an appropriate return.

Can the structure of an acquisition impact the price paid for the target company?

There are competing benefits between structuring a deal as a stock or an asset deal, which can impact the purchase price of an acquisition. Generally, sellers prefer stock deals because their proceeds are taxed only once as capital gains. In stock deals, however, the buyer cannot pick the assets and liabilities that it would like to assume, all unknown and contingent liabilities must be assumed by the buyer and the buyer gets no step up in the basis of the assets purchased. Therefore, buyers typically prefer asset deals because they can pick the assets and liabilities they want and they get a step up in the basis of the assets acquired. This step up, typically for fixed assets and intangible assets, creates additional depreciation tax deductions for the buyer, which can allow them to pay more than they would under an asset deal. This is particularly true when fixed assets with little carrying value are purchased or when intangible assets make up a significant portion of the purchase price. Sellers can be averse to asset deals, however, because contingent and unknown liabilities existing as of the purchase date typically are retained and the sale proceeds can be subject to double taxation.

How are earnouts accounted for?

Earnouts can be an effective tool to bridge the gap if the owner and the seller can’t agree on price. In an earnout, the buyer and seller agree that, after the transaction has closed, there may be additional payments to the seller based upon company performance. It allows the buyer to compensate the seller if certain levels of activity are achieved or to keep the purchase price lower if the targets aren’t met.
However, while it is a great tool, there are some accounting issues that the acquirer is often not aware of.
When an earnout is present, generally accepted accounting principles require the buyer to record the fair value of the earnout as a liability on its books. This is based on the likelihood of the earnout being paid and how much the earnout payment might be. Buyers often don’t realize they have to carry that extra liability on their books and that the balance has to be adjusted every reporting period until the earnout is settled, with the changes in value being reported in the income statement.

What other accounting requirements must be addressed when an acquisition is made?

When making an acquisition, consider the post-acquisition purchase price allocation, in which the purchase price is allocated to the various assets acquired. In many cases, the purchase price exceeds the value of the tangible assets acquired. Accounting rules require that the purchase price in excess of the tangible asset value be allocated to the intangible assets purchased, such as trademarks, customer relationships, technology and non-competition agreements. Any unallocated purchase price left after the intangible assets have been valued is assigned to goodwill.
Determining the fair value of intangible assets acquired is a complex process and typically involves the use of a third-party valuation expert to develop a supportable valuation analysis that will withstand scrutiny from the acquiring company’s auditors.

What are the potential issues if you overpay for an acquisition?

If an acquirer overpays, it results in a lower return on their investment or possibly the loss of a portion of the investment.
From an accounting standpoint, if an overpayment has occurred, it’s likely that goodwill and certain intangible assets may need to be impaired, which can result in a significant charge to the company’s earnings in the period of impairment. Assistance from a third-party valuation expert is often necessary when goodwill or intangible asset impairment is present to determine an appropriate amount that satisfies the company’s auditors.

Sean R. Saari, CPA/ABV, CVA, MBA, is senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team. Reach him at (440) 449-6800 or [email protected]

Insights Accounting & Consulting is brought to you by Skoda Minotti

How Punit Shah reinvigorated Liberty Group of Cos. by focusing on acquisitions

Punit Shah, president and COO, Liberty Group of Cos.

When Punit Shah saw that people were no longer paying premiums for completed real estate development projects in 2008, he knew that his company needed to get out of the construction business.

“We saw where the market was going and we had to take reactive measures to make sure that our future was protected and the future of our employees was protected,” says Shah, the president and COO of Liberty Group of Cos., a Clearwater, Fla.-based real estate company with 400 employees.

To keep the company profitable, Shah has implemented a new business strategy to grow through aggressive acquisition of existing properties.

Smart Business spoke with Shah about the keys in investing in growth through acquisitions.

What is your approach to new acquisitions?

Any acquisition that we’re buying has to have a value-add component to it and have a big upside that we can conservatively rely on to have a long-term gain in.

One thing that really makes us different is our ability to analytically look at every piece of information upfront. That makes it a lot easier for us on the back end, because we know what we’re getting into and we know how to proactively deal with whatever is coming our way.

So it’s something that we think may tie up equity or capital for a really long time and then have minimal returns, we usually pass on that deal, because we want to make the most and highest return that we can on our equity. We also want to make sure that it’s a safe investment, because right now is not the time to be making risky investments. Now is the time to be making investments that you are 100 percent confident in and that you’ve got a reasonable return on the money that you are putting at risk.

We’re not forecasting tremendous numbers with a forward-looking basis. We’re buying what we deem to be profitable as-is right now. As the market improves overall, as the economy improves, as our management team goes in there and adds more professionalism in overall management of the asset, we see that all as value-add opportunity.

What criteria do you use to evaluate investments during due diligence?

The most primary thing is location and demand generators. We want to be conservative and consider all different options, whether if there is a terrorist attack, what that would do to the core business of the hotel, during recessions, what happens during peak periods. So we look for diverse demand generators. We look for location of course. Then we look at the physical plans of the hotel or whatever the asset is. We look at the long-term intrinsic value of the asset itself but also the submarket and the overall region. We want to know if this is something that is going to be sustainable and is there going to be a demand generator for this property 10 years from now. As far as my ranking, it would go in that order.

We’re looking just for the best products that we can find, and we’re filtering out anything that doesn’t meet our core criteria. We’ve been very diligent about establishing that criteria upfront and knowing what we’re pursuing.

What mistakes can you make when pursuing acquisition opportunities?

The biggest thing anyone can do if they’re getting involved in what we’re doing is make sure they spend the time, money and resources on the due diligence. It’s almost turning into the height of the market again on a different scale, because people are just buying things sight unseen, guns blazing and not necessarily knowing what the repercussions are because there are a lot of legal complexities when dealing with distressed assets. I’ve seen a lot of people who are just jumping in all at once without understanding the risks involved with those investments. The other thing is real estate and cash-flowing businesses are still businesses and you have to have great management and employees to make those investments profitable. You can’t just buy an assisted living facility or hotel and expect just because you got a good deal on it, it’s going to turn profitable. It’s not like land. There is an inherent business component to it, and a lot of people fail to realize that when they are looking at these types of deals.

How to reach: Liberty Group of Cos., (727) 866-7999 or

How to evaluate whether now is the right time to sell your business

Albert D. Melchiorre, President, MelCap Partners, LLC

If you’re thinking about selling your business, there are a lot of factors to consider before making that decision.

“First and foremost, you need to determine whether it is a good time as it relates to you, as the business owner, to help meet the goals and objectives of the business life cycle,” says Albert D. Melchiorre, president of MelCap Partners, LLC, a middle market investment banking firm. “Other factors include trends in the business and the industry, and economic trends.”

Smart Business spoke with Melchiorre about how to evaluate whether now is the right time to sell your business.

How can a business owner begin to evaluate whether selling is the right decision?

Beyond whether it’s a good time for the business owner and current trends, do you have a successor in place? Are you aging and considering a sale because you’re 75, or are you 55?

Is it a good time as it relates to trends in your specific business? Is the business performing at high levels, with the added opportunity for further growth? Is it a good time in your industry? You may be performing, but if your industry is declining rapidly, is the business’s performance sustainable based on what’s going on in the industry?

Also consider whether it is a good time from a mergers and acquisitions perspective. Is capital plentiful? Are there plenty of potential buyers?

It’s good to have all of these factors lined up. Historically, it’s rare, but in the current economic environment, for a lot of business owners, they are lining up.

How can the current mergers and acquisitions market impact the decision to sell?

Although some areas of the economy are still struggling, other industries are doing very well. As a result, the earnings of corporations remain strong, giving strategic buyers the financial resources to be able to buy companies. Right now, there are trillions of dollars sitting on corporate balance sheets resulting in an incredible amount of liquidity from a strategic buyer’s perspective.

In addition, although the availability of bank debt to lower- and middle-market companies remains tight, overall, banks are beginning to lend money again. And with lower interest rates, the cost of capital remains low and there are a lot of private equity dollars looking to invest in good, quality companies.

So if your business has performed well and has good prospects for growth, the trends in your business are positive, and it’s personally a good time for you, it may be a good time to consider a sale.

How could the potential end of the Bush-era tax cuts impact a decision?

Nobody has a crystal ball, but in all likelihood, the extension of the Bush-era tax cuts will come to an end this year. Whether or not new tax cuts go into effect, there is a strong likelihood that taxes will be going up for businesses and that you will pay more next year on the sale of a business.

I would look at that as the tipping point. I don’t think it’s necessarily a primary driver in determining whether it’s a good time to sell, but it may be a secondary driver if everything else lines up for you.

How can an outside expert help you through the process to maximize your return on a sale?

For most business owners, this is a once-in-a-lifetime event, the most significant liquidity event in their lives. Business owners should focus on what they do best and let investment bankers focus on their expertise. The role of the investment banker is to help business owners maximize the value of their business to allow them to reach their goals and objectives in the sale of their business.

The investment banker will also work with the business’s other advisers, such as an attorney, an accountant and financial advisers. While the investment banker may be leading the charge, it is clearly a team effort.

How can a business owner’s decision about whether to stay with the business after the sale impact that transaction?

Some business owners, especially if they are the founder, may be key to the continued success of the business. But many just want to sell the business and walk away today.

If you’ve taken the step of bringing in key managers or finding your successor, you’re more likely to be able to exit the business at sale. But those who have not taken those steps from a succession standpoint will find it much more difficult to exit upon sale, because if you are still very key to the business, that will have a negative impact on the value of your company if you were to leave upon a sale.

How far in advance of a sale should a business owner begin to prepare?

It varies from owner to owner, but you should begin thinking about it years in advance. This is not a decision any business owner should take lightly, just suddenly deciding, ‘Today, it’s time.’

Having an early conversation with an investment banker can help you think through the process and evaluate where you are with the business today, what you can expect to receive and provide you with an overview of the process. It’s a very good exercise to get the input, advice and assistance of someone who can help you execute on that transaction.

Because this may be a once-in-a-lifetime event, you need to make sure it is the right time for you before moving ahead.

Albert D. Melchiorre is president of MelCap Partners, LLC. Reach him at (330) 239-1990 or [email protected]

Insights Mergers & Acquisitions is brought to you by MelCap

Conducting the proper due diligence to ensure a successful acquisition

Thomas Vaughn, member, Dykema Gossett PLLC

When you’re considering buying a company, it’s not just a matter of locating a target and writing a check. There’s a lot that goes into doing proper due diligence, and if you fail to do it right, the transaction could be disastrous, says Thomas Vaughn, member, Dykema Gossett PLLC.

“From the purchaser’s perspective, conducting an effective due diligence process is critical to maximizing value from your acquisitions,” says Vaughn.

Smart Business spoke with Vaughn about why due diligence is critical to ensure a successful acquisition.

When considering purchasing a business, what is the first step?

Start by assembling a team of in-house and outside lawyers, inside and outside financial professionals, and possibly experts in various areas impacting the target. In the due diligence process, it is the job of the buyer to learn and understand everything it possibly can about the prospective target, and that requires a very deep dive by the due diligence team.

What is the next step?

The team should develop a due diligence strategy, and one of the most important components of that is to agree on the purpose of the due diligence effort.

From a buyer’s perspective, due diligence can be a very expensive process, so it is typically done in stages to keep costs down until the buyer is certain it is going to complete the transaction. As a result, in the preliminary due diligence, you are trying to determine the target company meets your investment parameters. You’re looking for ‘go, no go factors.’

The early stages of due diligence are very financial and operations oriented. For instance, making sure the financial statements and projections accurately represent the company’s business prospects and that there aren’t any major customer problems or potential defections are critical elements of due diligence.

From a legal standpoint, you look for high-dollar legal issues, like pending litigation or claims, or legal impediments to completing a deal, such as regulatory issues.

Also determine that the value you see in the company is an accurate perception of its true value. As part of that, identify and confirm synergies. All of these efforts will help you negotiate the purchase price and other deal terms.

Once you are satisfied with value and have signed a letter of intent, you can conduct the detailed part of the due diligence process.

How do you proceed with the detailed due diligence?

This is when the process starts in earnest. Have your team divide up responsibilities so that you’re not duplicating efforts and you are conducting the process as efficiently as possible. You want to make the process as smooth as possible for the seller. Due diligence is burdensome and time consuming for the seller. Don’t have multiple people asking the same questions or asking for the same documents.

One of the best ways to help this run smoothly is to present the seller with a detailed checklist. Often there is information listed on there that the company doesn’t have, but you can use the list to trigger the seller to think through the information documents the seller has and should be providing to you. Then keep the list updated to reflect documents received and make the list available to all team members

How is the due diligence information delivered?

Determine up front the deliverable to come out of the due diligence process. Is the expectation a written report from the accounting and legal staff? That is the most typical result, but there is an expense involved, so you have to determine if you want to incur that. You can also start with an oral report or short written report that notes red flags and items that are potentially problematic as a precursor to the full report.

That report should come with recommendations as to which problems can be potentially fixed and how to fix them, or whether the problem is so significant that it should have an impact on the purchase price or the decision to move ahead. Another outcome when due diligence identifies problems or uncertainties might be to have part of the purchase price paid as an earn-out. If certain things represented by the seller happen, you’ll pay the full price, but if they don’t, you won’t have to.

What are some red flags?

The biggest one is a very disorganized seller. In this case, the buyer needs to do very thorough due diligence. Lack of documents where you expect to see them, or poorly drafted documents or contracts, are also an issue.

Another red flag is a seller who provides you with certain due diligence but is slow providing other information. This may be an indication the seller is holding back bad news.

How does due diligence help in preparing schedules used in the typical acquisition agreement

The seller makes representations and warranties in the acquisition agreement and puts exceptions in the schedules. Then the buyer reviews them to get comfortable that nothing new has appeared in the schedules that was not disclosed in the due diligence process. It’s not unusual for new information to appear in the schedules, which can be a big problem.

If the buyer feels the seller intentionally didn’t disclose information until the last minute, it can have a very negative impact on completing the transaction and the ongoing relationship between the retained members of the management team and the buyer.

What kinds of things can show up at the last minute?

Usually it is a problem the seller was trying to solve before he or she has to disclose it, but can’t. The seller discloses it in the schedules just before the acquisition agreement is signed to avoid later indemnity claims. But doing so at the last minute is a problem in itself.

Thomas Vaughn is a member at Dykema Gossett PLLC. Reach him at (313) 568-6524 or [email protected]

How Bill Sasser developed an acquisition strategy at The Management Trust

Bill Sasser

Bill Sasser, founder, chairman and CEO, The Management Trust

Bill Sasser created The Management Trust in late 2005 as part of an industry rollup, merging six companies to form an employee share ownership plan, or ESOP. The community association management company is owned by its 700 employees, but it is Sasser’s job as chairman and CEO to provide value and profitability for the company’s employee-owners. As part of that, he has helped to spearhead a growth-by-acquisition strategy that has helped the company broach new markets and new lines of business.

Smart Business spoke with Sasser about the acquisition strategy at The Management Trust – which is the DBA name of The Management Association Inc. — and how to effectively implement an acquisition strategy at your company.

At the outset, what was the process like to roll all of the companies together to start The Management Trust?

We really invoke the ESOP culture quite a lot in just about everything we do, and probably our biggest cultural difference between an ESOP company and a nonemployee owned company is the degree to which we engage our employee owners. That really kind of changes the dynamic considerably. What we’ve done is we operate with a high degree of transparency for all of our employee owners, because they are our shareholders.

In doing so, they understand the good, bad and ugly of what our strategic vision is, what our financial performance is, all of those sorts of things. So as we are going through the post-merger integration issues, which is compounded by the recession, we would share with them the challenges we’re having. What we have found, and this is the beauty of an employee ownership culture, is even when you are sharing with them news that is not entirely positive, they feel honored and respected for being given the information at all.

Moving forward, what has been your growth strategy?

Historically, we have relied heavily on the homebuilders to fuel our growth. Obviously, over the last five years, there has not been a lot of home development. So we really found ourselves in the position of needing to reinvent the company. What we have done is a couple of things: No. 1, we realized we needed to find recurring nonvolatile revenue streams that are predictable, as opposed to the volatility of the real estate market. We went about doing that, creating some proprietary programs and so forth, and in so doing, we built a model that became scalable. So once we realized that we had built a strong business model that could prosper even in a difficult economic time, and had recurring predictable revenue streams, that is what then gave rise to the acquisition strategy.

What makes for a good growth opportunity in your situation?

I think it is a couple of things. First of all, every company’s long-term strategy is going to be somewhat different. My job description is very simple: the creation and preservation of ESOP share value for our employees. That is really what I do. Parenthetic to that is a lot of different things. But as it relates to the acquisition opportunities, we look for three different things. We look for companies that are either strategic markets, meaning markets that we know we need to be in to grow this company into a national presence. We look for companies that have what we call a strategic skill set, which may be a particular area of expertise that we can leverage throughout all the positions of the management trust. Again, with the idea that we want to create a business model that is scalable. Thirdly is simply tuck-unders, where we just acquire a focused business and fold them into an existing office of the national trust. The most important criteria that we look at when we are exploring a potential acquisition opportunity is where we can create value.

What would you tell other business heads about developing an acquisition strategy?

I think if I had to identify a couple of key points for somebody considering acquisitions, the first point would be to find a point of differentiation between your company and other acquirers in that business space. If the company is simply trying to compete on price while not considering other factors, a bidding war is going to ensue, and that is not going to work. Sellers want to find a company that is going to be a good fit. So any way you can differentiate yourself from your competitors is better. I think that culture is critically important in any acquisition strategy. You need to find a company that is going to fit.

How to reach: The Management Trust, (714) 285-2626 or