At Osage Advisors, we talk a lot about what goes into constructing a deal – valuing a business, building relationships, and hiring the right advisor. But, we also address things that can get in the way, and ultimately, kill a deal.
Time Can Kill a Deal
You may be familiar with the saying, “time is on your side,” but in the case of making a deal, time is not your friend. Once you sign the Letter of Intent (LOI), you’ll want to immediately begin working with your advisor on the next step — preparing for the due diligence process. If you do not prepare for this phase, you could potentially end up in the pitfall of losing valuable time. And, losing time can sidetrack the deal … or kill it.
A common misconception is that once the LOI is in hand, both parties can relax. This is never the case. The due diligence process is rigorous including financial statement reviews, personnel negotiations, customer negotiations and more.
The Environmental Study
One of the most critical areas of due diligence often lies in the review of environmental studies on the business. This is a key area that must be prepared for, and at Osage Advisors, we make an effort to inform our clients to review their records and even obtain an up-to-date environmental study prior to the LOI. Here’s why:
A Phase I environmental study is conducted by a third-party company. If this has not been done in several years, you may need to schedule one, which could take 4 to 6 weeks to complete. Remember, we mentioned time is not your friend. The 4 to 6 week study can seem like an eternity, and if the Phase I results require a Phase II study or an environmental clean-up, you can be stuck in the due diligence process for months. So, if your deal was originally scheduled to close in 60 days, now it could be 120 days or more.
And while you’re waiting for the environmental study to be completed, something else can come up. For example, a key customer may reduce their business by 40%, or an unforeseen challenge suddenly comes into play. Perhaps the potential buyer found a better deal elsewhere. Anything can happen, so it’s important to always be one step ahead of the game.
Personnel Negotiations
Personnel negotiations is another area that must be carefully managed during the due diligence process. Often when getting to the LOI phase, some key employees, such as managers, may not have any idea that the company is for sale. Th may need to be disclosed during the due diligence phase to ensure that the employees stay on because they are a valued asset. However, there are times when a key employee’s interests are not in line with the new buyer, or the employee(s) are not interested in staying on with new management. This is where we recommend planning stay-on bonuses and agreements to retain personnel. The bonuses show that you not only value their service, but you also want them to experience how it would be to work under new ownership.
Don’t forget…typically, these are family businesses or the company has been a second family to them. So, this is a big transition for employees as well. From an owner’s perspective, you’re ready to sell and want to move forward, but you can’t forget about the other pieces, including ensuring employees remain happy.
You can easily see how time is a critical element in both of these potential pitfalls. The longer the environmental study takes, the longer the employee negotiations take, providing an opportunity for the buyer to get distracted. If it takes too much time for a deal to close, you can experience sellers’ remorse, buyers losing interest, and other issues that can put your deal at a standstill.
At the end of the day, you want to be prepared well in advance of walking down the path of selling your company. At Osage Advisors, our job is to guide you and persistently push the deal along so that you are confident and satisfied at the end of your transaction.