“Time Has Come Today” – Late 1960’s Hit by The Chambers Brothers

I saw a recent article in the NY Times where owners were lamenting their inability to buy out their partners.  As one who has dealt with entrepreneurs for many years, I really empathized with some of these cases.  It was particularly disappointing to hear of Partners who really could not work with each other but neither could afford to buy the other out. Perhaps the worst was the owner who gave substantial ownership to two Partners for some advice and connections in the early going.  Now years later, while their contribution was a distant memory, their ownership remained. To me, this was not really a buyout problem but an unfortunate use of equity.  I have probably blogged on this subject more than any other and it is painful to address it.

So, as your business grows, it is difficult to finance what I call the Big Three; namely increasing working capital needs, acquisitions and shareholder retirement. In fact of the three, financing sources despise the last item. In the first two, the money is hopefully acquiring something of value; not just going out the door to previous owners. In addition, the related accounting is usually just as bad; reducing the book value of the business. Talk about a double whammy.

Many (as this article did) suggest bringing in private equity and I have been involved in dozens of these transactions. It certainly is an alternative but it is naïve to think it does not come at an economic and times emotional cost. In many cases, dealing with your “new” partner is a lot different from dealing with the partner you are buying out. Please do not think of this in any way as an easy alternative. So what to do?

The best place to start is at the beginning with the old adage “don’t get into a deal unless you know how you are going to get out.”  Think of the exit before you sign the deal and along with it succession.  What happens under various scenarios?  Start with the worst first; what happens if a partner dies; do you want to be in business with that partner’s heirs?  Life insurance and non – voting stock are options that can be used to ameliorate this risk.

What about disability and who covers what that partner does?  Again insurances and appropriate provisions can protect the company going forward.  Pure liquidity for a partner who leaves remains as the issue.  I am not a fan of providing liquidity and you can finance the buyout with a long term note (I have seen 10 -15 years) but there always has to be the provision that note payments cannot kill” the goose that laid the golden egg.” Selling basically becomes the other option and we are seeing that option in more agreements if terms of a purchase cannot be worked out.  Price is also an issue and you can define it all you like; the only thing that works on basically all fronts is fair value.

So, this NY Times article would have had a much different tone had the owners considered their liquidity alternatives at formation. For the rest of you, the time has come today to address this before it is too late.


Ten Reasons Sale Transactions Fail

Comicus : “Dopus; I almost had the money in my hand”  – dialogue from the movie History of the World Part I

As followers of this blog know, I am a devout fan of Mel Brooks.  I have found his

spontaneous comments on bits such as the 2000 Year Old Man both intriguing

and perceptive.  And, many contain life lessons; garlic as the ultimate weapon against

the angel of death; fear to motivate singing; dancing to avoid someone kicking you.

While I have not experienced as much as he has, I have seen more than

my share of failed sale transactions so I decided to assemble my list of the top

ten reasons sale transactions fail.


In reverse order they are:

  1. Waiting until next year. You believe you will always do better, show improved results and be worth more. As I write this blog, I do not think there has been a better time in my business career to sell a business. And if you wait until you have captured it all and there is no more growth left, your value fades.
  1. Forgetting it’s a process. You have to give it a chance to work. Every transaction has emotional highs and lows and entrepreneurs are loathe to wait it out. You need patience and trust in the process.
  1. Eliminating a logical buyer. With all the consolidation in our profession, my mantra is “today competitors; tomorrow colleagues.” Don’t overlook those who know your industry best.
  1. Too much focus on the past. Buyers are only interested in the past as an indicator of the future. If all you had was historical operations and it was all in cash on your balance sheet, all  anyone would pay you is the value of that cash dollar for dollar.
  1. Poor deal structure. Please let the professionals handle this. It is what you get at the end that counts; not just the price.
  1. Doing the deal yourself. You probably wouldn’t sell your own house; why do you think you can sell your business? Get a qualified, knowledgeable agent.
  1. Ignoring your warts. Perform due diligence on yourself and make sure you understand what is good and not so good about your business. Then develop a plan to address the concerns.
  1. The wrong deal team. This is the transaction of a lifetime. Surround yourself with the best.
  1. Sellers’ remorse. I have blogged about this before. You won’t sell if you do not have something to go to. Make sure you do or do not start the process

1. Unrealistic price expectations. I know; you have the most beautiful baby in the world, but when you sell your company, everything has a price and there is a professional way to understand what yours is. Please do not relegate what may be the most important decision of your life to some friend’s belief in what you should get for your business.


So, there you have it. I am not going to promise you will be able to sell your business for

what you want. But, if you can avoid some of these pitfalls, your chance of success will

be a whole lot higher. Good luck!

Letter of Intent Basics – LOI; IOI; E-I-E- I-O

Marcus Vindictus: “Don’t you know your right flank from your left flank?”

Captain Mucus: “I flunked flank.” 

Dialogue from the movie “History of the World- Part 1.”

I hate playing the acronym game – where certain people toss around terms they are sure others don’t understand. I guess it makes them feel smart. Having recently been involved in a few transactions, I have come to realize that a good number of the non-professionals involved in a deal do not understand what a Letter of Intent or LOI is. So, I thought it might be helpful to provide a layman’s view on the basics regarding this often-used and just-as-often-misunderstood instrument. This is, by no means, an in-depth analysis of all the components; just some education for entrepreneurs and their teams.

First, to begin to understand an LOI, it is important to have some knowledge of the sales process and where the LOI comes in. In the ideal transaction, you assemble a deal team, prepare an offering memorandum (OM) and circulate the same to potential buyers and then receive back an LOI.  In some deals, there are two intervening steps; one is the seller may decide to perform their own due diligence and make that part of the OM and the other is obtaining an Indication of Interest (IOI) as a precursor to an LOI.

An IOI is a brief document that indicates a potential buyer’s desire to proceed further with the seller and may contain some basic outline of what a deal and related structure might look like. After further discussion, the potential purchaser usually generates an LOI. An LOI is a non-binding document between a potential buyer and seller. They key point is that it is non-binding so it is not a contract. The contract for a sale is usually called a Purchase Agreement and it is binding. So why have this non-binding document? The LOI can be a very valuable instrument and is recognized in the deal world as a milestone in moving from the “I think I have an interest in buying you” phase to the “I would like to buy you and here is what a deal would look like” phase. Let’s look closer at some of the key components (and here I am assuming this is a solid LOI.)

First, it should lay out the basic terms of the deal. The purchase price, structure (stock vs. assets), financing (including any contingency) and other terms should be outlined. While it may be subject to due diligence, it should provide a solid outline of deal basics.

Second, it should lay out overall timing – how long the offer will remain open, the timing of due diligence as well as the date to finalize a Purchase Agreement.

Next, it should allow for due diligence and cover non- disclosure / confidentiality. The LOI is often used as the benchmark for letting someone see what is “behind the numbers.”

Finally, there is usually an exclusivity period – the time the seller gives the potential buyer an exclusive right to complete diligence and negotiate a deal.

A well-written and negotiated LOI can become the basis for drafting a solid Purchase Agreement which is why it takes time to negotiate and sign. But as Yogi says, “it ain’t over till it’s over” and so nothing is a deal until the Purchase Agreement is signed. That being said, a solid LOI is a major step in completing a transaction.