Deanna Salo, Managing Principal at Cray Kaiser, shares valuable insights for business owners navigating the complex process of selling their company. She discusses the various payment structures sellers might encounter and the tax implications of each. Deanna also highlights common pitfalls that can be encountered throughout a merger or acquisition. Whether you’re beginning to explore a sale or already deep into negotiations, this video offers practical guidance to help you make informed decisions.

Transcript:

My name is Deanna Salo and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.

What are the different options for when you get paid for your business?

When a seller receives a letter of intent and is trying to understand how much money am I going to get and when am I going to get it, you know, in the current market we’ve seen a lot of private equity firms coming in and they’ve got a lot of cash to spend on new investments. And so they’ll come in and provide a full cash deal at closing. The seller looks at that and says, “Wow, that’s fantastic.” That also might indicate a lower value for your company because they’re willing to absorb that risk of what might happen after they purchase your company. We do see sometimes that in private equity deals while I might get all my cash up front, what happens if my company grows exponentially because I’m still here with maybe an employment agreement, maybe I’m helping them around the corner of maybe some existing big deals that I’ve had already in the hopper when I sold them my company. In that situation, I may want some additional cash on the on the prospect of me getting additional profits in the company and I might even want an earn out what might be some future compensation to me as the seller for me doing really great work while I’m still hanging around. So the benefit of getting all the money at closing is that the seller can turn around and reinvest that and kind of look to retirement. Some sellers want to stick around for a little longer. Some buyers need the sellers to stick around a little longer. So in that case, you’ll want to make sure that you, as the seller, have some uptick, up game, on the back end of maybe some of these deals. When private equity, excuse me, when a privately held company comes in to buy another privately held company, oftentimes we see that they don’t maybe have as much liquid cash. They may be financing it with a bank and maybe they need the seller to finance a little bit more of that. In that situation, the seller has a little bit more risk. What if I don’t get all my money at closing? I then, as the seller, am bearing the risk of maybe not getting paid the rest of my money over the set amount of time that I was told that I was going to be able to receive my money. So, in either situation, cash at close, cash at close plus earn up, or maybe the seller has to take financing on the proceeds of the sale of their company. Each one of them have different tax effects to the seller. Each one of them may adjust the value of the company because there’s a risk and reward element of timeliness of getting all my money up front versus timeliness of getting my money a little bit over time versus me having to wait as the seller for five to seven years before I get my money. We often see our sellers, our clients not wanting to wait very long for their full cash outlay of their sale of their company. But again that might also indicate a risk of the buyer that they have to come up with all the money at closing and it might affect the value of the of the company and might reduce it a little bit more too. So there’s a lot of numbers that play into a fact of do I get my money all at closing? Do I get my money at closing with some additional uptick on an earn out? And lastly, will I get some money at closing and maybe get the rest of my money over a period of time?

What is the most common mistake a business owner makes when selling their business?

A common mistake I see is going too fast. This is a process and with due care and listening to your advisors in each of the phases of a transaction is really important. If a buyer is really eager and wants to go really fast through the transaction, you as the seller might be really excited and want to go as fast with them, But we really need to be thoughtful in each phase of a transaction because it affects the future of your company, the future of your people, as well as the future of your customers and vendors that you’ve been serving for the many years you’ve been in business. So I think sometimes, you know, people want to get the deals done, they want to get the deals done quickly. There is a point of it’s taking too long versus it’s going too fast and somewhere in between is probably the right speed by which these transactions are best processed.

What red flags should you look for during the process of a merger or acquisition?

I think the red flags that companies need to look at is if you’re looking at a buyer, I would suggest that you’re looking at more than one buyer before you sign a letter of intent. If you have multiple buyers that are courting you to sell your business to them, I think that is a good position for the seller to be. If you really only have one buyer in the market for yourself, it may not be the right time to sell your company. Again, sellers get really excited because they may be done. They may be mentally, physically ready to be out of their business and they may want to go too fast, as I mentioned before, going too fast through the process. Jumping into the wrong conclusion is one of the red flags I see and that’s even on the buyer and the seller side.

What lines of communication are there during a merger or acquisition?

So, in terms of the communication and what role we play in the very large group of advisors as we talked about, the buyer is going to have its group of advisors and the seller is going to have its group of advisors and you don’t want to be tripping on one another. So, having a clear line of roles and responsibilities in the process of selling your company is really important. Somebody needs to take the lead. Sometimes Cray Kaiser is called upon to set up the data room, which is an electronic space for all the information that’s going to be shared. There’s folders set up in there so it really identifies the attorney’s lane, the accountant’s lane, maybe payroll and HR lane. And so being very organized in this process and making sure that people are communicating. At the very front of all of this, the owners are going to be overwhelmed. The sellers, our clients, are usually very overwhelmed. So we typically have weekly calls with them just to make sure that we’re on pace, information is being shared. Both the buyer and the sellers use a lot of checklists to make sure all the work is getting completed and we can have a timeline for which the transaction is supposed to transpire. So making sure you’re organized to get set up. The attorneys, they’ll talk to one another. The accountants typically are the ones talking to one another. We, Cray Kaiser, get involved. Sometimes talking to the attorneys, we’ll get drafts of the agreements as they’re getting drafted by the buyer to just make sure that it makes numerical sense. But clearly the attorneys are used to make sure that the companies are protected from any of the things that we need to be protected on in the seller’s position. So if everybody does what they’re supposed to do and communicates at a high level, stays in their lane to the extent that they are hired to do a specific task. But certainly raising their hand during the course of these conversations as well as, you know, having some memorial timeline points that we each have to come and connect on to make sure we’re moving through the transaction as efficiently as possible. So being organized, a timeline of communication, setting forth the roles and responsibilities of your advisors, the data room is super helpful.  It’s an electronic place to keep everybody organized to what they’re looking at, and, again, keeping the owners involved as much as they need to be. But also they’re relying on us as professionals to get the work done and get to the goal line.

All of this process, there’s lots of phases to this process, and at Cray Kaiser, you know, we’re here to help our clients, again, to and through their transactions at whatever point in their life cycle they’re at. And if you need any further assistance on that, please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.