Know your Transaction Priorities

Whether you’re a future business buyer or a business seller, one of the most important exercises you should undertake before going to market is to identify your highest transaction priorities.  Often, business sellers fail to think through what they want to achieve from a sale, other than obtaining the highest price.  Likewise, business buyers often know they want to grow through acquisitions but fail to clearly define their priorities and resource their acquisition strategy accordingly.

If obtaining the maximum value is a seller’s highest priority, it is usually advisable to hire an Investment Bank/M&A Advisor to run a broad process to create competitive tension between potential buyers. However, not all businesses and situations are well-suited to the traditional sell-side controlled auction process.

Interestingly, the most obvious buyer(s) sometimes submit a mediocre offer or decide to “pass”, and unexpected buyers sometimes submit impressive initial offers. While an unexpected buyer can cause some consternation, as they may not know what they don’t know, a broad, competitive process, helps ensure that the highest selling price is obtained.

The highest selling price, however, often comes in the form of a structured deal.  So, if the priority is to obtain the highest total enterprise value, business sellers should be prepared to accept earnouts or other contingent payouts and/or provide financing support such as equity rolls or vendor takebacks (VTB), etc.  It is important to calculate how much “cash at close” will be needed after tax and all other expenses are considered.  An equity roll or VTB demonstrates the sellers’ confidence in the future of the business and therefore it can drive valuations, or at the very least, help ensure that the best buyers submit offers.

Furthermore, many buyers will require a transitional role for owner/managers.  If “handing over the keys” and walking from the business is your highest priority, the type of sale process you engage in and the buyer universe you approach should be designed to achieve this priority.  On the other hand, perhaps you are looking for a specific ongoing role under new ownership.  Either way, defining your priorities on your potential post-transaction role, if any, is critical.
Maintaining or ceding control is also often one of the most important priorities to decide at the onset of any buy or sell process.

In some situations, selling the shares of the business (rather than the assets) may generate higher after-tax net proceeds but buyers may offer less because they may lose some potential tax benefits and assume more liability.  Sellers need to decide how important is it is to sell equity (shares) vs the assets of the business.  Also, sellers should decide how important it is for them to retain (and lease-back) or divest any real estate (if owned by the business or an affiliate) that the business utilizes.

Other important priorities to consider include the importance of the retention of the management team by any new owner, the cultural fit, the impact of a transaction on employees, customers, suppliers, and other stakeholders.  Business sellers need to think through the impact a sale to a direct competitor may have on the business and decide whether it is important the business remain as a stand-alone entity.  Is it important that the legacy of the business’s operations, brands, etc. be maintained?  In other cases, the priority may be to capture needed synergies or to facilitate needed industry consolidation to survive and thrive in the future.

For business buyers, many of the same questions need to be answered.

Rarely do acquisition or divestiture processes proceed exactly as planned.  The approach you take, however, needs to be shaped by your highest priorities.
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Take our business seller survey to help you sort through your most important transaction priorities.

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