Culture consideration

M&A deals aren’t just paper-and-pen transactions

This month’s issue focuses on dealmaking — one of the most significant decisions a person can make regarding their company. It can’t be taken lightly and requires a clear head to execute successfully.

As we bring more focus on dealmaking through our Dealmakers email newsletter and digital publication, and through events such as this month’s ASPIRE Conference, we’ve had conversations with some of the area’s top dealmakers. One of the aspects of the deal that they commonly emphasize is the human element, whether that’s embodied in the person sitting across the negotiating table, or the employees who are the engine driving the business.

No doubt the financial factors are a major consideration. Dealmakers look at the industry and its opportunities, intellectual property, equipment, etc. But they also look at management, and equally as important, the company’s culture.

Buyers are walking the floors of the businesses they’re buying, meeting the people to better understand their strengths and attitudes, and whether and how well that culture will mesh with theirs.

In February, Aaron Grossman wrote a column for Dealmakers on how culture shapes the M&A strategy of his company, Alliance Solutions Group. In it, he wrote about Alliance’s plan to execute 29 transactions in the next decade.

“We have reviewed well over 100 companies since 2014, and we have only moved forward on three of them. Each of these acquisitions has been successful up to this point, and I firmly believe a strong alignment to culture has been the driving force behind each success story,” Grossman wrote. “As we continue to refine and improve our culture, we will continue to understand how to assess this in the diligence process. With a goal of becoming a billion-dollar company in the next 10 years, we know we have to be great at figuring this critical piece out.”

In the pages that follow, we highlight the advice of those who have been there and done that to understand how they see deals, what they believe is important, and what they do after the transaction to ensure the strength of the business.

Adam is interested in the people and businesses making a difference in Akron/Canton.

Why EBITDA matters in M&A

Business leaders are used to the scrutiny of audits, but that doesn’t compare to the fine-toothed comb of due diligence before a sale. A transaction team has a tighter scope, says Ross Vozar, managing director of Transaction Advisory Services at BDO USA, LLP.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is a typical business metric. Generally speaking, the value of a company is a multiple of that EBITDA, based upon the industry you’re in. But buyers don’t want to pay for a non-recurring event and sellers don’t want to be penalized for a one-time expense.

“There needs to be clear expectations on both sides. When these aren’t identified upfront, it can slow down or kill a deal,” Vozar says. “There can be hard feelings, because one party feels like the other is hiding something.”

To avoid confusion, sellers are hiring transaction teams to get a credibly backed and true value on the business before they put the company on the market. This “sell-side quality of earnings” provides a clear understanding of sustainable earnings that supports valuation in a M&A process.

Smart Business spoke with Vozar about the difference between reported EBITDA and adjusted EBITDA and how it impacts value.

How might EBITDA change?

Let’s say a company that manufactures roofing products has an EBITDA of $10 million. The industry multiple is six times EBITDA, so the business owner expects the business to be worth $60 million. The owner settles on a buyer. However, during due diligence, the buyer performs a quality of earnings analysis on that $10 million EBITDA, which in part seeks to understand how the company earns that $60 million value — who are the customers and what is recurring and non-recurring income.

The year prior, several hurricanes hit the southeastern U.S. This company, which sells its roofing products through Home Depot, sees sales spike in that region. The quality of earning analysis determines $1 million of income isn’t sustainable; it’s from a non-recurring event when people replaced roofs. The EBITDA is adjusted from its reported number, and value drops to $54 million. The problem is that the seller expected to get $60 million.

What are other areas that commonly cause EBITDA to be adjusted during a transaction?

Depending on the size of the business, sometimes owner personal expenses are charged to the company. Sellers want to identity those because going forward the business will not incur those types of expenses, which will increase EBITDA.

Another item that will be missed in reported EBITDA are professional fees. For example, a $100,000 legal settlement was correctly reported, but the accompanying $25,000 in professional legal fees could be buried in another line item. Both expenses are non-recurring and can be taken out.

An area to watch is self-insurance reserves used for workers’ compensation and health insurance, which fluctuate. Certain large claims could be justified as non-recurring.

In the case of audited financial statements, some expenses and incomes may be below an auditor’s scope and, as such, aren’t adjusted as part of the audit. Typically, the concept of scope isn’t used in a quality of earnings and the threshold of significance is lower. When multiples of EBITDA are used, a $100,000 item, for example, may impact valuation by $600,000. It needs to be correctly recorded and classified.

Also, most income statements have an ‘other income and expense’ line item that is either a catch-all or kept separate to identify the amounts as non-operating. Other income and expense needs to be scrutinized to understand if these items are, in fact, non-operating or non-recurring in nature.

What else do business owners need to know?

Hire the right adviser, or risk being left in the dark. These kinds of transactions aren’t familiar to many successful business owners. They don’t understand how reported and adjusted EBITDA differ. Instead, they rely on key advisers to point them in the right direction — and that doesn’t always happen.

It’s worth the cost, time and effort to hire a transaction professional. Northeast Ohio is undergoing the most robust transaction environment of the past 10 years. Buyers and sellers both need a clear understanding of a company’s financial history, in order to consummate a transaction.

Insights Accounting is brought to you by BDO USA, LLP

Maximize an M&A transaction’s value by scrutinizing operating expense

There is a lot to consider when approaching an M&A deal, regardless of whether the deal is strategic or purely financial. Often overlooked in this equation is business costs analysis for day-to-day operations, which includes utilities.

“When looking at an M&A deal, the first things we look at are utilities and the costs to operate a facility,” says Roger Zona, president and founder of TPI Efficiency. “In some instances, these can be the largest business expenses outside of payroll. Understanding operating costs and the underlying agreements can often make or break a deal.”

Smart Business spoke with Zona about negotiating operating expenses as part of an M&A event.

Why are operating expenses important to an M&A deal?

Manufacturers, for instance, have a large portion of monthly expenses tied-up in their energy costs. For some industrial businesses, the energy they use in production can represent as much as 70 percent of all expenses. That makes negotiating for the best rates critically important.

What should a buyer do once it is discovered operating expenses are out of line with current market rates?

Look at utilities, telecommunications, copiers, even cleaning supplies. Any large recurring expense should be scrutinized. If current operating expenses are poorly aligned with market cost, the M&A deal should be structured to exclude previous contracts. Ideally, the buyer will add a line item to the purchase terms giving them the option to exit any established contracts at their discretion. If that can’t be accomplished, the deal will need to be scrutinized much more intensely to compensate for the burden of poorly negotiated agreements.

Another important area to explore relates to preventive maintenance and service contracts. If these agreements are not in place or have expired, life expectancy of the equipment should be questioned. Failure to properly maintain equipment can reduce operating efficiency dramatically, reducing longevity by greater than 50 percent.

What can potential buyers learn about a company by studying its operating expenses?

Scrutinizing utility contracts and other large recurring monthly expenses can uncover patterns of behavior and how the owner approached other aspects of the business — whether they were reactive or proactive, for instance.

With long-established companies, it is not uncommon to find cooperative or noncompetitive agreements in place because of the relationships of previous ownership or management with a vendor. The new owner doesn’t have loyalty to those vendors, so there’s no need to pay more because of someone else’s previous cooperative relationship.

The discovery of poorly negotiated contracts should raise red flags, encouraging a buyer to dig deeper for other overlooked areas that could haunt their balance sheet.

Who should be involved in examining operating expenses during an M&A deal?

Utilizing consultants familiar with operating agreements along with your legal and accounting team is always advised. Experienced consultants that know what they’re looking for will bring your attention to caveats and offer great assistance during the discovery period. Additionally, a consultant can often help reduce your accounting and legal fees by pointing these teams in the right direction.

Ultimately, it is important to understand all contracts associated with an M&A deal. It can help a buyer understand how the business was run previously while giving an indication of the business’s true value. Without such scrutiny, a buyer may believe he or she is making a good deal. The reality, however, is that the buyer is underwater from the start.

Insights Energy Solutions is brought to you by TPI Efficiency Consulting

Why sellers should know the value of their company before an M&A event

There is a broad spectrum of concerns first-time sellers have as they approach an M&A event. Sellers wring their hands over the future of their employees and the legacy of the business, but it’s the sale price that can be tough to accept.

“It’s very common that sellers think their business is more valuable than what buyers will pay for it,” says Sean R. Saari, a partner at Skoda Minotti. “Business owners invest so much of their time and money into their business that their estimate of its value is often inflated, and that can create challenges during a sale event.”

Smart Business spoke with Saari about the importance of an accurate valuation in the M&A process.

What common misconceptions do sellers have regarding their company’s value?

It’s not uncommon that sellers, being so focused on running their business, aren’t familiar with the valuation process. It’s more than just applying a multiple to EBITDA. It takes time and careful analysis of the company’s historical and projected financials to determine what multiples are appropriate to apply to that particular business in that specific industry. The end result may look simple, but it takes skill and experience to make sure the valuation assumptions are reliable.

Another common misconception is sellers believing they can retain the accounts receivable of their business without an adjustment to the purchase price. What they don’t realize is that the offered purchase price typically assumes that a level of working capital will be delivered with the business that allows its operation to continue uninterrupted. If the accounts receivable balance is not acquired, the buyer has to make up for the cash flow shortfall during that collection period by investing more of their own money, and is rarely willing to do so without a corresponding reduction in the purchase price.

What are the differences between enterprise value and equity value?

Equity value is the value of the ownership interest in the company or the pre-tax proceeds an owner gets in the event of a sale.

Enterprise value represents the value of the company as a whole, regardless of how it’s financed. Enterprise value equals the equity value plus the interest-bearing debt minus cash. Many times investment bankers talk in terms of enterprise value.

It’s common for manufacturers to fund working capital or fixed asset investments with debt, so there can be times when equity value and enterprise value differ significantly. Therefore, it is very important that sellers understand whether the values being discussed are equity values or enterprise values so that they can appropriately estimate their proceeds from a sale.

What are the differences between financial and strategic buyers?

Broadly, financial buyers aren’t operating in the industry of the business they intend to purchase. They’re buying for a stand-alone investment.

Strategic buyers are often competitors in the same industry as the company they’re seeking to buy. They view the purchase as a growth opportunity. They may be willing to pay more for a business because they could potentially unlock synergies by combining the companies.

Whether pursuing a sale to a financial or strategic buyer, there’s a benefit to having the right advisers to protect and manage the flow of the seller’s confidential information throughout the marketing process. For example, there is more perceived risk with strategic buyers since information regarding customers, vendors, pricing and personnel may be shared. These risks are limited if the marketing process is managed correctly.

What are the factors that drive differences in value between buyers and sellers?

A disconnect is created if there is a difference in:

  • The expected future cash flows.
  • The perceived risk and required rate of return for the investment.

The value of any potential synergies and whether the buyer is willing to pay for some portion of those potential benefits may also drive differences in value.

Sellers know their business better than anyone else, but they’re only one side of the equation. Considering both the buyer’s and seller’s perspectives offers a more accurate picture of the company’s value.

Insights Accounting & Consulting is brought to you by Skoda Minotti

A look at how to preserve insurance assets in a corporate transaction

Liability insurance is an important component of risk management for most businesses, but insurance policies are often overlooked in the sale of a business. Both the current liability policies in place at the time of the transaction, as well as the historical policies issued for prior time periods are valuable assets. Steps should be taken to preserve these assets, whether for the seller if it will remain a viable entity going forward, or the acquiring company.

Smart Business spoke with Keven Drummond Eiber, Attorney at Law, OSBA Certified Specialist — Insurance Coverage Law, at Brouse McDowell, about preserving valuable insurance assets.

How does a merger or acquisition affect the preservation of insurance assets?

When a company is acquired in a stock purchase, no change of corporate form occurs. The acquired corporation remains the same entity, but with different owners, or shareholders. It is neither a successor nor a predecessor of the company that acquired its stock and it will continue to have all of its rights to coverage under its current and past liability policies.

When a merger takes place, typically, the acquired corporation is merged into its new owner. The surviving corporation will be considered the ‘successor’ and, pursuant to state statute, will inherit all of the rights and obligations, including rights to insurance policies, of the merged company.

The real challenge to preserving insurance assets, particularly from the standpoint of the acquiring company, arises in the context of an asset purchase. When an asset purchase takes place, some or all of the assets of a company are sold or transferred. Liabilities may or may not be transferred as well. The new owner of the assets is not a ‘successor’ of the company from which the assets were acquired.

How does the acquiring company identify all of the insurance assets?

The first step is to obtain all of the necessary information about the target company’s insurance program. The search should not be limited to the current liability policies, because prior policies can provide valuable coverage for future claims, especially for so-called long tail claims. Obtain actual complete copies of the policies because they will contain provisions that will be important to analyze and understand in order to ensure they remain available going forward. The due diligence period prior to closing affords the best, and perhaps the only opportunity to obtain this information.

The second step is to analyze and understand the insurance policies. Are they claims-made policies or occurrence-based policies? Do they define the ‘insured’ to include subsidiaries? Do they contain anti-assignment provisions? Do they require that the insurer be given notice of certain corporate transactions or other events, such as a sale of substantially all of the assets of the company? Are there historical claims? Have the limits been eroded by payment of claims? Are the insurers still in existence?

In Ohio, when a covered occurrence under an insurance policy occurs before liability is transferred to an acquiring company, coverage does not also transfer to that company automatically just because the liability was assumed. However, Ohio law does generally permit a party to affirmatively assign its right to be indemnified by insurance for past occurrences, regardless of the consent of the insurer. Otherwise, Ohio law will give effect to an anti-assignment provision in a policy, particularly when the nature of the insurer’s risk that it bargained for is altered by the transaction.

So what can the parties do to preserve the continued availability of liability insurance?

Include specific provisions in the transaction documents related to the retention or assumption of liabilities and indemnification with insurance in mind. Explicitly transfer the right to insurance proceeds for pre-acquisition occurrences (a ‘chose in action’), whether or not known, as an identified asset in the transaction. Assign all past liability insurance policies, not just the ones for the current policy period. Provide notice of the assignments to insurance companies. To the greatest extent possible, obtain the insurers’ consent to the assignments. If the seller is retaining all rights to insurance, obtain endorsements to reflect any company name changes going forward. And, work with your broker who can serve as a valuable resource throughout the process.

Insights Legal Affairs is brought to you by Brouse McDowell

Smart Business Aspire Conference: A day for dealmakers

There’s no doubt about it — Northeast Ohio is a dealmaking town. Tracing its roots back to the days of John D. Rockefeller, the region’s legacy of big industry, banking and venture capital continues to this day.

In a nod to the past — and as we look forward to the future — on May 18, 2016, Smart Business will present the inaugural ASPIRE Conference in Cleveland, Ohio. We’ll bring together entrepreneurs, business owners, and top leaders with deal-makers, investors and advisers for a daylong conference to discuss issues in the M&A and business investment world. Together, we’ll aspire to make Northeast Ohio a stronger business region.


The Cleveland ASPIRE Conference features keynote presentations from successful entrepreneur Nicholas Howley, founder and CEO of TransDigm, and savvy financial business leader Walter Bettinger, president and CEO of Charles Schwab. Both will share lessons learned.

This will be a different kind conference than Northeast Ohio has previously seen as the entire dealmaking community has come together to bring ASPIRE to life. It will present exciting keynote speakers, informative breakout sessions, and opportunities throughout the day to network while focusing on four key areas that any entrepreneur thinking about jumping into the M&A or dealmaking world needs to understand:

  • Buying a business: Do you know what it takes to effectively buy a business? Have you thought about valuations, the importance of a strong management team, and why market share and competitive differentiation matters? You’ll hear from experts and business leaders who have grown through acquisition.
  • Selling a business: When is a good time to sell? Do you understand how private equity values your business? Have you made those critical checklists of what to prepare? You’ll learn from entrepreneurs who have divested assets or sold their company and the experts who have helped them.
  • Raising capital: Where does the money come from? We’ll discuss ways to finance your business — from friends and family to angel investors and early-round finance, we’ll explore options such as bank financing, venture capital and private equity. You’ll hear from those who have raised capital and others who have provided it.
  • Liquidity events: What happens once you’ve taken money off the table? We’ll dive deep into the subject and discuss how to spark these all-important events, plus what comes next after the deal is done.

Join us at the ASPIRE Conference. Learn more or register for the May 18 event today at

How to take advantage of the accelerating M&A market

As the M&A market for small businesses continues to recover after the recession, now is the time for potential sellers to begin planning. After all, business owners who sell their business without a well-defined exit plan typically sell for too little.

“To maximize value, minimize cost and make for an efficient sale, the business owner must seriously review legal, financial and business operations before going to market,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Your lawyer, accountant and/or a good business consultant can help with this evaluation.”

Smart Business spoke with Smith about the M&A market and how to create an effective exit plan strategy.

What are some indicators that the M&A market is heating up? reports that sales of small businesses have for the first time reached pre-recession levels. We’ve seen this in our own practice as well with increased deal flow and increased multiples.

What is driving the increase?

A variety of factors: improving small business performance, increased capital availability, more add-on acquisitions for venture capital portfolio companies, more sellers who waited out the post-recession recovery in order to regain lost value, and more buyers willing to take on debt and risk to grow.

Currently, there are many potential sellers in the market with viable businesses. Many restructured during the recession, so expenses were reduced and their EBITDA and profits have now increased. At the same time, banks have relaxed underwriting criteria and are more willing to finance buyers who are interested in making strategic acquisitions. Finally, there is a lot of pent-up demand, both among small businesses that see acquisition as a way to grow, and venture capital firms that are looking to expand their holdings through add-on acquisitions that provide synergy with their existing portfolio.

According to a survey of brokers, the strong M&A market is expected to continue throughout 2014 and we see nothing on the horizon that should cause a decline in deal activity.

What should potential sellers be thinking about in this market?

They should be thinking about exit planning — How can I position my business for maximum value and a clean, quick sale? They should be reviewing their entire company from the perspective of a buyer. This is not how most business people usually view their companies.

What are some examples of things to consider when exit planning?

Among other things, the business owner should ask:

  • Are financial systems and controls in place and adequate? Are financial statements presentable and in accordance with standard accounting principles? The business owner should consider having the financial statements reviewed or audited, if they are not already.
  • Can the business owner identify the best ways to increase EBIDTA? This is the biggest driver of value in your business.
  • Are employment agreements in place for key employees? Do all sales employees have non-competes?
  • Do key customers and vendors have contracts? Is there any guarantee of recurring revenue?
  • Does the business have title to all of its assets? Can it prove this in writing?
  • Does the company have title to all of its intellectual property? Without contracts, this is unclear.
  • Are all key contracts assignable? The business owner should know who can hold up their deal.
  • Is the business qualified in all states in which it does business? Has it filed tax returns in all of the appropriate states?

How far in advance of an anticipated sale should exit planning occur?

The longer the lead time the better. Planning should occur at least a year in advance of going to market. Ideally, it would be two to three years before a sale as it’s important to have the financial statements and tax returns in place as part of due diligence.

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

How to minimize the risk in M&A transactions

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

Companies spend more than $2 trillion on acquisitions every year, according to an article in Harvard Business Review. Yet studies frequently cite failure rates of mergers and acquisitions (M&A) between 70 and 90 percent.

David E. Shaffer, a director in the Audit & Accounting practice at Kreischer Miller, says problems are often the result of poor planning. Companies are enticed by the opportunity to create synergies or boost performance and fail to consider all ramifications of an acquisition.

Smart Business spoke with Shaffer about ways to mitigate the risk and ensure a successful transaction.

Why is the M&A failure rate so high?

Many companies don’t establish a clear business strategy for mergers and acquisitions. Some questions that need to be answered include:

  • What are the goals of the merger or acquisition?
  • Do you want to leverage existing resources or create a new business unit?
  • What is the maximum price you are willing to pay?
  • Must the seller agree to some holdback of the price?
  • What happens to administrative functions and management of the target company?
  • Must key employees sign agreements to stay?
  • Will you negotiate between an asset purchase and a stock purchase?
  • Is culture important?

You should be proactive in identifying candidates for acquisition. Companies that have done many acquisitions tend to ignore requests for proposals because the sellers in such situations usually go with the highest price. They reason that the law of averages is against them and at least one competitor will overpay.

Instead, companies involved in many acquisitions prefer to target entities and establish a relationship before that stage in order to avoid a bidding war.

How should the due diligence process be conducted?

It’s important that you don’t take shortcuts in your due diligence. Hire professionals who are knowledgeable about the industry; they can negotiate better deals for you because they are not emotionally attached and can push harder for seller concessions.

Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability — employees, processes, patents, etc.

The more risk present, the more you should ask for holdback in the selling price. For instance, if much of the profit is derived from a few contracts, require that the contracts be renewed under similar terms if the seller is to receive the full purchase price.

M&A failures often result because buyers concentrate too much on cost synergies and lose focus on retaining and/or creating revenue. Client retention at service organizations is at significant risk following a merger or acquisition, according to a 2008 article from McKinsey & Company. Clients will receive misinformation, so it’s important that the acquiring firm step in quickly to assure clients that service levels will equal or exceed what they have been accustomed to expect.

What needs to be done post-acquisition?

It’s important to have a clear post-acquisition plan, including financial goals, with as much detail as possible. The quicker value is created by the acquisition, the better the result for the buyer.

Key post-acquisition steps to ensure a successful integration include:

  • Developing the organizational structure.
  • Developing sales expectations.
  • Identifying what processes and systems will change, and when.
  • Developing performance measures.

Finally, you also need to hold key management responsible for producing results.

David E. Shaffer is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

Social Media: To keep in touch with Kreischer Miller, find us on Twitter: @KreischerMiller.

Insights Accounting & Consulting is brought to you by Kreischer Miller


Business Pulse: Domestic M&A value swells

Aggregate value of domestic M&A transactions continues to swell despite a reduced number of announced deals, with dollars committed in May surpassing last year’s pace, supported by several billion-dollar-plus strategic buys.

Strategic buyers are actively pursuing acquisitions, incentivized by a slow organic growth environment and abundant cash reserves. S&P 500 companies are sitting on $1.7 trillion in cash and need to put money to work in higher earning assets. Competition for quality acquisition opportunities remains fierce, with industry buyers showing an increased willingness to pay premium valuations for growth and quantifiable synergies.

May highlights support a healthy strategic buyer appetite:

A. Schulman Inc. announced it was acquiring Akron-based Network Polymers Inc., a niche compounder of thermoplastic resins and alloys, bringing complementary business in specialty engineered plastics ABS and ASA. The deal is expected to strengthen its U.S. market presence by increasing penetration in key end markets such as building and construction, agricultural products and lawn and garden, as well as expand its distribution business. Schulman intends to continue an aggressive bolt-on acquisition strategy in its specialty plastics business, as well as other opportunities for transformational acquisitions.

The Timken Co. acquired Standard Machine Ltd., its fifth acquisition in 2013. The Saskatoon, Saskatchewan, Canada-based company provides new gearboxes, gearbox service and repair, open gearing, large fabrication, machining, and field technical services to the mining, oil and gas, and pulp and paper markets. The acquisition will expand Timken’s industrial services capabilities.

TransDigm Group Inc. announced it was acquiring Arkwin Industries Inc., a Westbury, New York-based manufacturer of hydraulic and fuel system components for commercial and military aircraft, helicopters and other specialty applications. Arkwin is TransDigm’s second acquisition this year, following Aerosonic Corp. in April, a Clearwater, Florida-based manufacturer of proprietary air data sensing, test and display components for use primarily in the business jet, helicopter and military markets. Both transactions were completed in June.

PolyOne Corp. completed the sale of its vinyl dispersion, blending and suspension resin assets to Mexichem SAB de CV. Assets acquired include manufacturing plants in Pedricktown, New Jersey; Henry, Illinois; and a resin research facility in Avon Lake, Ohio.


Deal of the Month

Its second major strategic partnership in the last four months, Cincinnati’s Catholic Health Partners announced an agreement with Kaiser Permanente of Ohio to acquire its existing health plan, medical group practice and care delivery operations in Northeast Ohio, which services more than 80,000 members. The transaction follows CHP’s February purchase of a minority ownership stake in Akron’s Summa Health System Inc., one of the largest integrated health care delivery systems in Ohio.

CHP is the largest health system in Ohio, serving the metropolitan markets of Cincinnati, Toledo, Youngstown, Lima, Lorain, Springfield, and Tiffin. Through its integrated health care delivery network, comprised of hospitals, long-term care facilities, home health agencies, wellness centers, and hospice programs, the company is estimated to service 38 percent of Ohio’s residents throughout 28 counties.


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]

How to prevent deal-breaking mistakes when selling your business

Brian Reed, partner, Transaction Advisory Services, Weaver

Brian Reed, partner, Transaction Advisory Services, Weaver

Selling a business is challenging. From vetting potential buyers to preparing financial statements to keeping negotiations on track — all while running your company — there’s a lot that can go wrong. In fact, almost no detail is too big or too small to affect the eventual outcome of merger and acquisition (M&A) deals. However, you can reduce the odds of a mistake by knowing where similar transactions have gone astray.

“It’s important to talk to owners who have successfully completed sale transactions and to work with experienced M&A advisers,” says Brian Reed, partner in Transaction Advisory Services at Weaver.

Smart Business spoke with Reed about common M&A mistakes and key items to resolve before closing a deal.

How might sellers hurt their chances before putting their business on the market?

You risk a letdown when you make overly optimistic future earnings projections or put too much weight on variable measurements, such as the sale prices of similar companies in stronger M&A markets. If you won’t budge from an unrealistic sale price, you could drive away an appealing buyer.

Work with a professional adviser to assess your company’s value as well as estimate an offering price the market can support. The two may not match because the price depends on contemporary economic, M&A market and sector conditions.

Where does timing factor into this?

Other critical seller mistakes revolve around timing, whether internal or external. For example, selling at the wrong time, at the end of a market cycle, could mean fewer buyers and possibly lower offers. If your sector has experienced a recent wave of M&A deals, the buyer base could be depleted, and you may want to hold off.

Sometimes sales are spurred by internal circumstances, such as the retirement of a founding owner, but these situations shouldn’t rush the sale. If your company is not ready for the market, consider appointing an interim head to make preparations and screen potential buyers.

Sellers, particularly those selling for the first time, often greatly underestimate the amount of work and hours it takes to prepare for sale. Have you allocated enough time to implement strategies to maximize your sale’s value? Is your company ready to promptly and accurately respond to hundreds of specific buyer requests? If you haven’t assembled a team with the time and resources to handle these requests, it could bring your potential deal to a standstill and deter otherwise interested buyers.

How might housekeeping impact deals?

Housekeeping issues aren’t trivial. They include essential tasks such as ensuring that contracts and legal obligations are in order. Some items that can trip companies up are:
• Poor accounting. If your financial statements and records are not properly organized and presented, it reflects poorly on your management, and the due diligence process will likely take longer. Sloppy accounting errors could mean tax or legal issues after the deal closes.
• Neglecting key players. Buyers want to know that key employees will stay onboard once the sale is completed. Make sure your top performers are offered financial and other incentives to stay.
• Locking in contracts. Don’t renew an expensive vendor contract as you’re about to transfer ownership. Buyers don’t like long-term contracts they didn’t negotiate, particularly if they’ll be penalized for breaking them. Negotiate short-term contracts or push for favorable terms.

What are some common loose ends to watch for and resolve?

Leaving loose ends hanging won’t endear you to your buyer, as they could hinder integration and future profitability. Some common unresolved internal issues involve:
• Minority interests. Buying out minority investors or shareholders before a sale means the buyer won’t need to deal with their demands later.
• Employee controversies. An integration team doesn’t want to deal with open legal issues, for example, while trying to build a new culture.
• Copyright confusion. Make sure all patents, copyrights, trademarks and other intellectual property holdings are in order. If you’ve failed to verify and document ownership, you may risk the deal’s value.

Brian Reed is a partner in Transaction Advisory Services at Weaver. Reach him at (972) 448-6936 or [email protected]

Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.

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