RSM Resources

When it comes to selling your company, it often pays to get outside perspective. Executives involved in day-to-day operations of a company know what their business has to offer, but often can’t spot subtleties that may raise red flags for buyers.

Merger-and-acquisition (M&A) professionals cite numerous deal breakers common when selling a business. These problems can be grouped into three basic categories:

• Overselling. Promising more to potential buyers than your company can deliver in an effort to raise the perceived value of the company.
• Emotional attachment. The inability to let go of the company or to leave your employees at the mercy of a new owner. Even when it makes economic sense, selling can be a hard step to take for the executive who built the business.
• Hidden liabilities. Financial concerns stemming from the company’s history and business practices — and sometimes from the practices and policies of the potential buyer. Seemingly small issues can push both parties to the brink.

Of the three, hidden liabilities demand the most attention, since these are most likely to surface late in the selling-buying process. They are also, by nature, the hardest to spot.

Benefit burdens

Employee benefit plans can be complex and can throw a wrench into the selling process. Consider the plight of legacy airlines with post-retirement medical plans. With health care costs rising and retired employees living longer, the cost of these plans has spiraled upwards — jeopardizing the long-term financial future and value of the companies.

According to John Dorey of RSM EquiCo, buyers will look carefully at the benefits you offer your employees. Larger buyers may have more costly benefit plans that will apply to your employees — in such cases, the buyer may weigh the additional cost of its benefits against the value of your company and adjust its offer accordingly.

"It’s possible that a buyer may take into account the cost of benefits you don’t even offer, because applying those benefits to your employees will affect the buyer’s bottom line," Dorey says. "Sellers must be informed on the details of the benefits they offer and be prepared to negotiate if benefits affect the company’s value."

Product liabilities

If your company has had issues with allegedly defective products or recalls, or has extended warranties on products, buyers may look twice during the due-diligence process. Long-term warranties look great to your customers, but are also a source of potential losses due to refunds, repairs or replacement. The same holds true for recalls — and defective products can be a source of legal action and expense.

Environmental issues

Environmental problems, including contamination and waste-storage issues, can also be a source of potential liability and expense for a buyer. Be sure you are aware of all such potential problems and understand the underlying cost of addressing them.

In some cases, it may be desirable for the buyer to exclude contaminated property from the purchase of the company and lease the real estate from the seller instead. This enables you to avoid the expense and responsibility of environmental cleanup. Be aware that, depending on the nature of your organization, you could be taxed twice on property removed from your corporation and sold.

Intellectual property problems

For engineering or manufacturing companies and other businesses that profit from intellectual property, patents are key assets. When purchasing a company with significant intellectual-property assets protected by patents, be sure they’re held in the company’s name so that you own them after the purchase.

If the seller doesn’t own the patents, the buyer has to purchase them from the actual owner or risk losing that portion of the business in the future. Either scenario drives down the price the buyer is likely to pay for the company.

Liens, lawsuits and the ways we do business

Any number of other factors can influence a buyer’s view of your company and its value — from outstanding liens to pending lawsuits; maintenance policies to bookkeeping procedures. Issues you’ve been dealing with for years are fresh problems to a prospective buyer — so don’t be surprised if questions are raised.

"When potential liabilities are uncovered during due diligence, buyers typically want to set money aside to offset those liabilities and will adjust their offer accordingly," says Dorey. "Again, it pays to be prepared so these issues can be addressed quickly, before they threaten the deal."

Accounting. Perhaps your books tell you everything you need to know about your company’s performance — that doesn’t mean they’ll make sense to the uninitiated. Getting a clear understanding for what the buyer needs to know and being prepared to show them in the format they understand will go a long way to avoiding a deal-breaking misunderstanding.

Long-term contracts. It may have made sense at the time to lock in long-term contracts with your suppliers at a fixed price. Such contracts involve risk, however — if prices fall you could be stuck paying more than necessary. Buyers weigh that risk differently than you do, so be prepared with contract details and market trends to bolster your company’s position.

Maintenance and safety. Buyers want to know what they’re getting into, and even on-site visits make it difficult to gauge the state of equipment and the procedures that keep people safe. Keep a close eye on maintenance and safety reports for equipment and employees at all locations, and be prepared to share that information with your prospective buyer and answer any questions they may have.

Due diligence checklist

"Many sellers don’t realize the sensitivity of such a deal," Dorey says. "The owner has been in the business for 20 years and knows all the reasons the company is a great investment forward and backward. But for the buyer, it’s the great unknown — and the buyer has the responsibility for due diligence."

Experts agree that due diligence done well will uncover most concerns. To get the most money for your company and ensure the success of the sale, put yourself in your buyer’s shoes — take advantage of the numerous articles and checklists available for buyers and see what they’ll be looking for.

In short, buyers and sellers alike should be sure to:

• Do it by the book. Be sure the right people are at the table to make the deal, and that any and all bylaws or policies are being followed.
• Take stakeholders into account. Review a list of shareholders or partners, and any special rights, restrictions or pledges that exist regarding assets or stock.
• Analyze financials. Check all financial documents including bank statements, audited financial reports, and all bank and financing agreements.
• Look closely at assets. Physically inspect all key assets and properties for hidden issues or concerns.

Too close for comfort

Of course, with so much invested in a company, seeing your business through third-party eyes is not easy. According to Dorey, long-term owners or executives can be so tied up in their business that they are blind to the buyer’s perspective.

With an offer on the table and due diligence underway, sellers sometimes kill the deal, realizing they don’t want to retire, see the company reconfigured or abandon their employees. While in general sellers are not penalized for pulling out of an agreement, it may make things difficult should the seller attempt to divest later.

It is also common for sellers to be perfectly willing to divest, but to set the bar for the company’s performance too high during the sale process. Keep in mind that due diligence takes months. If revenue or profits come in low during that period, financing may fall through and the deal may need to be renegotiated at a lower value. It may pay to take a step back from aggressive projections that maximize the value of your company. Better to surprise the buyer with stronger-than-expected numbers than jeopardize the deal with lower-than-expected results.

And remember: Prospective buyers will have professionals guiding them through the process of evaluating your company. Don’t be afraid to do the same — that outside perspective may be the key to sealing the deal and getting top dollar for your business.