Mar 23

Buy-Side M&A - Seller Employment

Donald Grava March 23, 2016

Buy-Side M&A - Seller Employment

With regard to buy-side M&A, when purchasing a company, it is important to make an objective assessment of the seller as a potential employee. Typically, these “employees” carry particularly high risk. Unless the seller is truly essential to the running of the company, it is usually better to remove them from the company as soon as possible. If a seller is retained at the company needlessly, they will often be an obstruction to the future running of the business.

The reason that sellers often make poor employees is that it is difficult for them to remember that it is no longer their company. They are accustomed to doing things their own way, working independently, and in some cases, they may have personal relationships with former customers that prevent them from effectively dealing with new clients that might be competitors of their old “friends.” These types of events undermine the buyer’s ability to lead employees and take the newly purchased company in a new direction. The buyer’s role must be unambiguous; therefore, employing a seller is a risk that should only be taken when it is necessary to do so.

If a seller has a vested interest in a business’ success, any continuing relationship between them and the company after closing is usually outlined in the sales agreement. Of course, the nature of that relationship must match the nature of their interests, for example, performance based earnout payments, consulting agreements, etc.

Employment of the seller is not always the best way to enable the seller to monitor the status of their vested interest. There are better ways to accomplish this task by sending the seller monthly or quarterly financial statements, providing audit reports, granting the seller rights to “audit” results, etc.

If employing the seller for an extended period of time is unavoidable, it is important to help him or her prepare for their new role. It is quite common for sellers to unintentionally find themselves filling their former role. For the buyer to be successful, this must be avoided. Some ways to gracefully usher the former owner aside include:

Having the new CEO move into the seller’s office. As the employees are accustomed to the person in charge being there, this will also make it easier for them to see the buyer as that person.

Suggesting that the seller not take the lead in decision-making, and instead adopting a back-seat role.

Asking that the seller to redirect staff questions to the new CEO.

Use the seller as a source of advice, but demanding that the staff go to the new CEO when they need recommendations or decisions made.

Asking that the seller use the pronoun "we" when he or she talks to customers.

Giving the seller plenty of time off, especially during the transitional period immediately following the closing of the transaction.

However positive the buyer’s relationship with the seller is, he or she will eventually need to be removed from the company. Very likely, the seller will be looking forward to this day as well, so it is useful to plan ahead when the buyer is preparing the consulting or employment agreement. Thus, on the buy-side of MA, being stuck with a seller as an employee can be a major obstacle in the running of the business, so unless you have no choice, try to get them out as soon as you possibly can.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987. More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

March 23, 2016

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Mar 17

M&A Selling Memorandum

Donald Grava March 17, 2016

M&A Selling Memorandum

m&a selling memorandum

M&A Selling or Offering Memorandum

When selling a business, it is important to think about the best way to present the business to potential buyers. A key step is to make sure that the presentations and documents that are used are tailored to the audience, i.e., the buyers or investors. An M&A Selling Memorandum that goes into too many technological details, for example, will not interest potential suitors. People who are thinking about investing money in a company will be more likely to consider a company with a document that addresses their various concerns.

The best way to inform buyers about a business that is for sale is via an M&A Selling Memorandum, which is usually called an Offering Memorandum or Confidential Information Memorandum (“CIM”). This document should outline all of the basic information about the seller’s company, especially the unique selling points. However, despite the fact that buyers will execute a Non-Disclosure Agreement (“NDA”) to receive the information, it is important not to give out confidential information that could be used by competitors. Highly confidential information should be shared with the buyer during due diligence and should not be included in the selling memorandum. At the risk of being redundant on this point, it is important to have potential buyers sign a Non-Disclosure Agreement before they receive the selling memorandum. And, the selling memorandum should include a copyright notice, as well as a note stating that the reader is subject to the terms and conditions of the NDA.

A quality selling memorandum will answer basic questions about the company, e.g., where it’s located, who owns it, a description of the products or services, customer information, number of employees, location and cost of facilities, etc. It will also explain why it is a good investment. Furthermore, it will include information about the company’s history and growth potential, and explain why the business is being sold. In conclusion, the importance of this document should not be underestimated. It is the seller’s best chance to generate interest in the business and help buyers understand the company’s potential.

It is obviously crucial to focus on the best aspects of the business, but it is equally important not to leave out any potentially negative features. Everything needs to be true and verifiable, and buyers will lose interest if they discover hidden problems further down the line. Of course, there may also be benefits that are not immediately obvious from the financial information. Revealing both the good and the bad demonstrates the benefits of purchasing the company while also demonstrating to the buyer that the seller is trustworthy and that there will not be any surprises later on.

The selling memorandum should be prepared by a well-experience M&A advisor. This way, the seller can make sure that its selling memorandum conveys all the information a buyer will need to make an offer that will excite the seller.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

March 17, 2016

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Mar 07

Importance of Due Diligence

Donald Grava March 7, 2016

Importance of Due Diligence

Due diligence is a critical part of any deal. However, this is not just a time for the buyer to research the seller. It is equally important that the seller research the buyer. If a deal falls through because of problems with the buyer performing, e.g., a lack of funding, the seller will have wasted both time and money.

Typically, due diligence is performed after a Letter of Intent (“LOI”) has been executed by both buyer and seller. This process usually takes 30-60 days or sometimes longer if there are complicating factors. This is a time for the buyer to ensure that the company they are buying meets the standards the seller claims it does, i.e., that it matches what is stated in the selling memorandum and subsequent management meeting(s). If the information does not match, the buyer may negotiate a lower price, attach extra conditions to the sale, or pull out altogether.

It is in the seller’s best interest to ensure that due diligence is completed as soon as possible. Delays extend the transaction and could ruin the deal entirely. Therefore, it is important to answer promptly any information requests from the buyer. It is usually helpful to give the buyer access to the company’s CPA firm and attorney. Most of the time, the selling company’s information is loaded into a virtual data room for the buyer’s review. Sensitive documents should be coded so that they can only be reviewed, not copied or printed. The most organized sellers set up the virtual data room before executing the LOI to save time.

Any negative information about the company should obviously not be emphasized. At the same time, it shouldn’t be hidden. The seller always makes a mistake when they assume the buyer won’t discover some weakness. That’s the classical mistake of underestimating your opponent. The seller should always assume that the buyer will discover this information during due diligence and will wonder what else the seller is hiding. That usually slows the transaction down and results in the buyer increasing the size of the escrow or adding onerous terms to the Definitive Agreement. Even if the information remains hidden, it will likely come out after closing, and that will cause the buyer to withhold payment of the escrow or other deferred payments based on the grounds that the business was misrepresented. Instead, the seller should be upfront with any problems the company has and should indicate potential solutions. A well-qualified financial advisor will know how to present this type of information. Let’s face it, 10Ks and many other documents contain negative information that is presented in such a way that it’s not enough of a problem to dissuade someone from investing. This is the same issue.

To avoid wasting time and before executing a LOI, it is the seller’s responsibility to make sure that the buyer has the financial wherewithal to purchase their business. Additionally, the seller should ensure that the buyer will be able to run the business once they have purchased it. If there are red flags, the seller should adjust the payment structure accordingly, to make sure they are getting the best deal possible. Both the buyer and the seller need to do their due diligence to make sure the transaction closes on or close to the scheduled timing. That way, both buyer and seller achieve success, which is the ultimate goal.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

March 7, 2016

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