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Selling Your Company: Six Common Pitfalls
By: George Spilka
Posted: May 1, 2008, from the May 2008 issue of GCI Magazine.
page 2 of 5Prudence dictates that the seller plans and times the sale to maximize the transaction price. As part of the planning process, all factors defined in previous points are evaluated, and suggestions are made to strengthen the business foundation. The solidifying of the business foundation will increase the transaction price. In addition, the planning of the sale will enable a company to be prepared to go to market at the appropriate time to generate the maximum price. It also enables an owner to be capable of responding intelligently to the unsolicited interest of a prospective acquirer.
The deal is fundamentally completed when a preliminary price is established at the letter of intent (LOI).
In fact, the execution of an LOI is merely the start of the negotiating process. Unless a seller has a sophisticated, experienced advisory firm that has a strong personality and the ability to control the deal, it is not unusual for an acquirer to demand a price reduction between the LOI and the closing. It is in the seller’s best interest to see to it that an acquirer knows these demands will never be productive.
The negotiation of the definitive purchase agreement (DPA) is a difficult, confrontational and time-consuming process. The DPA includes all the critical representations, warranties and indemnifications that are of potentially equal financial importance to the deal price itself. If they are not negotiated to provide the seller maximum protection, it can give the acquirer a post-closing opportunity to recover a considerable portion of a seller’s deal proceeds.
Owners should only sell near the end of their careers.