M&A Do’s and Don’ts for Sellers

Letter of Intent (LOI)

• As noted in our previous article, the LOI is an important document that is not to be overlooked since it sets the framework for the proposed transaction. However, in our experience, a seller’s highest bargaining power is at the LOI stage prior to the completion of any due diligence. Therefore, do not underestimate the importance of a well negotiated, comprehensive and professionally written LOI. As such, doing what you can to negotiate around any of the key terms noted previously (i.e. purchase price, purchase terms, structure, working capital target, etc.) will go a long way to minimizing issues down the road as the bargaining power shifts to the buyer.
• In particular, we have seen negotiations around working capital getting left to the end (i.e. near the closing date) and this has been problematic for our clients that are looking to sell their business. Working capital is important since most transactions have a purchase price that is linked to a specific level of working capital that needs to be invested in the business. Then there is normally a mechanism to adjust the purchase price either upwards or downwards if the actual working capital at closing is in excess or deficient relative to the negotiated target. A seller will want a smaller working capital target and thus leave as little working capital in the business as possible while the purchaser will want the opposite. With this in mind, it is a fine balance between providing the purchaser with sufficient information at an early stage of the discussions to allow them to properly assess working capital but also making sure that not too much information is provided from a confidentiality perspective.

Due Diligence

• Due diligence is a phase prior to completing the transaction that is a comprehensive assessment of the subject business that is completed by the purchaser to identify any key areas of risk. Our top suggestions to sellers for the Due Diligence phase are:
  • Gather all relevant documents (i.e. key contracts, corporate records, legal agreements etc.) in an online data room early in the sale process. This will help reduce the stress of gathering all documents at one point in time.
  • Consider undertaking a “mock” due diligence with your advisors in advance of starting the sale process in order to ensure quality documents are provided to the prospective buyer along with ironing out any legal or accounting issues that may arise during the buyer’s Due Diligence process.
  • For larger transactions that are over $5 million in size, a Quality of Earnings Report (“QOE”) completed by the seller will help to expedite the Due Diligence process by reducing the amount of due diligence that would need to be completed by the buyer. While it is generally a buyer who will arrange to have a Quality of Earning Report completed, we have several situations where the seller has completed a QOE as a pre-emptive measure to manage the due diligence process on their terms.

Retain Professional Advisors

• It is highly advised on the sale of a business to retain a Charted Business Valuator (“CBV”), tax professional, and legal counsel with experience in business and corporate law before transacting.
• A CBV can provide guidance as it pertains to a business’ intrinsic value and advise on relevant tax considerations. CBV’s will provide an unbiased view of how much leverage a seller has while negotiating key aspects including the purchase price. In addition, CBV’s also provide secondary benefits which include items such as access to market comparatives and other various financial industry insights like working capital which can lead to favourable and support terms for inclusion in the purchase and share agreement.
• As it relates to different tax aspects, a tax professional can help a seller mitigate and possibly defer any future income taxes related to the proceeds from the sale. Engaging a tax professional well in advance of considering a potential transaction will generally provide the seller with the greatest opportunity of taking advantage of any tax planning strategies.
• Lawyer(s) specializing in corporate or business law will advise on the legal ramifications of the proposed transaction and providing comments pertaining to the key M&A agreements such as the LOI and share purchase agreement.

 Communication

• One should never underestimate the strength of good communication by all parties engaged in a potential transaction. Strong communication can be considered as the glue that can hold all parts of the M&A transaction together.
• Conversely, poor communication during the M&A transaction can lead to one party feeling a lack of transparency which may ultimately lead to a breakdown of trust and willingness to continue with the transaction. The bedrock of a great M&A transaction starts with trust which is often built by clear and frequent communication between all parties involved.

Deal Fatigue

• During an M&A transaction deal fatigue is the mental and emotional exhaustion that inevitably sets in as the deal negotiation for the transaction stretches on. Deal fatigue can lead to either the buyer or seller shutting down due to frustration and irritation with a lack of progress thereby intensifying existing barriers and possibly creating new barriers for completing the transaction. The causes of deal fatigue can be wide ranging, but the most common scenarios are:

1. 1. Timeline extensions – Set the expectation that most M&A transactions often take anywhere from 6 to 12 months from start to the ultimate closing.
   2. Lack of preparation – When a vendor is not prepared for a transaction (i.e. has not gathered the necessary documents for due diligence) then delays can be created with the inability to respond to requests on a timely basis. The lack of timeliness not only creates frustration but the failure to respond timely to certain requests will also provide purchasers with concerns regarding the ability to obtain and have quality information after closing.
2. Significant alterations to the initial offer – Changes to the terms included in the initial offer are often seen as a source of frustration and can lead to further delays and increased resistance by either party. This can be mitigated by negotiating a robust LOI during the initial phases of the transaction.

These are just a few of our top tips as it relates to entertaining a possible sale transaction. For more information contact our team and we will help guide you to understand the best approach as it relates to your M&A transaction.