The Minneapolis/St. Paul Business Journal (MSPBJ) has published a “Table of Experts” panel discussion on the topic of mergers and acquisitions, featuring Hellmuth & Johnson attorney Alec Sherod.
When asked what advice can offer for preparing before and/or after a sale for a business owner, Sherod responded, “It is organization on a couple of different levels, and it sounds trite or easy, but it is knowing your financials, knowing your business, and being organized. General organization of contracts, knowing where they all stand, or where you stand with all your suppliers and customers, and knowing your issues. No sophisticated buyer is going to come in and expect a business to be spot-free; every business has issues. Instead of being defensive, having an answer for those issues is the best way to go. My diligence theorem is: disclose everything but have a plan to explain the issues.”
When asked about valuation gaps between buyer and seller, Sherod shared, “ I think those gaps are going to become more prevalent, because with tightening diligence and markets, people are expecting X and getting Y. The typical ones that we have all heard about, earnouts, seller financing, will become more common. Even in deals that have earnouts, as a seller, you don’t really want it to be a huge percentage of your purchase price. The ideal purchase price is that which gets paid at closing, but the construction of earnouts is very important, as that’s the main solution for valuation gaps. EBITDA is kind of the typical measure, but if you can get one on revenue as a seller, that’s ideal, because it’s very easily calculable. As an attorney, I have to focus on making sure that the EBITDA definition in the purchase agreement correct. But seeing deals with 50 percent of the purchase price contingent on earnouts is not a thing anymore. It is usually 10, 20 percent at the most. It is important but sellers are not living and dying on it.