This is the third installment in our series on universal advice for sellers: the recommendations we find ourselves repeating to the owners we work with throughout a sale. This advice is not only universal, it is timeless. Part one covered Phase I of the process and part two covered Phases II through IV. Here is more guidance that applies across Phases II through IV.
The management presentation is a two-way street
It is a chance for the seller to interview the buyer as much as to present the company. Beyond price and terms, sellers want to know the buyer will preserve the legacy and values the business was built on, take care of the employees, and keep the company a great place to work after the sale. If the owner plans to stay on, they also need to know they and their team can work with the buyer. The presentation is a litmus test of fit, and both sides have to agree they are well suited to work together.
Part of the banker's job is making sure the buyer shows up with the money
Owners often see the investment banker's role in the abstract, until they do a deal with one. A key part of that role is vetting the right buyer: confirming they are motivated, knowledgeable, and have the resources to close. That is the third leg of the three-legged stool. Buyers need enough financing to complete the transaction and the resources afterward to carry out the business plan, so a real part of the banker's job is confirming the buyer has the means, whether cash on the balance sheet, in-place credit facilities, or the ability to arrange capital, before a letter of intent is signed.
Neither side should make money on the working capital adjustment
The purchase price assumes an appropriate level of working capital at closing to run the company in the ordinary course. If working capital is depleted before closing, intentionally or not, the buyer bears a real cost to replenish it. A working capital adjustment, built into most deals, keeps this neutral. The parties negotiate a representative target; if closing working capital comes in below target, the seller pays the difference back, and if it comes in above, the buyer owes the seller. Set fairly, the result is neutral to both.
Buyers should offer references from every company they have bought
Just as a buyer does extensive diligence on the company, the seller should do reverse diligence on the buyer to confirm they are who they claim to be and that their track record matches their pitch. Ask for references from recent and older transactions, not just the most flattering ones. Beware buyers who cherry-pick references, and make sure you are getting the whole story before moving forward.
The banker can say things to the buyer that the seller cannot
If the owner is going to stay on after closing, the relationship with the buyer has to be preserved with diplomacy throughout the deal and beyond. The stakes are lower for the banker, who can be more candid with the buyer and can deliver terms or wishes on the seller's behalf that might be contentious for the seller to raise directly.
We call this universal advice because these are the points we find ourselves repeating to clients year after year. Part of our role is to dispense thoughtful, useful guidance to the owners we work with, and on occasion, to serve as a sounding board too.
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