The Best View of Closely Held Business Transactions: It's a Process

What You Need to Know

When it comes to the ideal sale and purchase process, everything starts with due diligence.
Another point of emphasis is that teamwork is key, and nobody can navigate the process alone.
It’s important to avoid assuming that only the worst-case scenario is possible in bankruptcy.

Monique Hayes, a partner for DGIM Law and an adjunct professor for the University of Miami School of Law, says that people often assume that the due diligence process ahead of a business sale or a similar liquidity event is of significantly more importance for the buyer than the seller.

After all, buyers put up a pile of cash or other valuable assets to gain ownership of the business, from which they hope to derive commensurate value over the long term. Sellers, on the other hand, get to walk away from the deal having monetized years or even decades of hard work — perhaps entering retirement or simply moving on to the next big thing.

The reality, as Hayes told attendees on a recent ThinkAdvisor webinar hosted in partnership with the Investments and Wealth Institute, looks a lot different. In some big ways, she said, the presale due diligence process is equally or more important on the sell-side as it is on the buy-side.

Hayes, who was joined in the discussion by Andrew Crowell, vice chairman of Wealth Management for D.A. Davidson, urged attendees to view the closely held business sale and purchase process as exactly that — a process, not a one-time event. Crowell agreed, arguing this is one area where the adage of “start with the end in mind” holds a lot of water.

According to the pair, advisors and attorneys who can effectively collaborate and coach their clients through the sale or acquisition process are worth their weight in gold. Alternatively, those who fail to give the process its proper consideration can lead a client astray, jeopardizing or destroying significant and hard-earned enterprise value.

Here are five insights that Hayes and Crowell shared on the webinar.

Step 1? Due Diligence

“When it comes to the ideal sale and purchase process, for me, everything starts with due diligence,” Hayes said. “If you’re on the buy side or on the sale side, it’s critical to get an understanding of the current situation for the business. Where assets are there? Where are the revenues coming from? What documents are in place proving and supporting ownership? Also the key info about the client base and the company’s full resource pool. All of this needs to be clearly delineated.”

As noted, this isn’t just something for the buy side.

“There also needs to be a full due diligence process if you’re on the sell-side,” Hayes emphasized. “This will allow you to identify and respond to any vulnerabilities or weaknesses in the business. You need to know these things before you go to market, either so that you price yourself accordingly or, ideally, so that you can get ahead of any issues and make those needed adjustments to be best positioned to optimize the business value.”

The same thing is true for buyers, of course.

“If you’re coming in as the buyer, things look a little different,” Hayes said. “You need to look at the business in an objective context, and you can’t get swept up in any hype that might be swirling around a potential sale — whether it’s about fancy new technology or whatever.”

On Tech in Business Transactions

Hayes explained that technology considerations inform many, if not most, transactions on which she consults. A key part of securing a positive outcome, she said, is being clear-eyed and intentional about what technology one is really buying — or not buying.

“When technology is a central factor in the transaction, you really need to delve into what the actual functional technology is that is driving the business forward,” Hayes said. “You need to understand, for example, who actually owns it? What type of intellectual property issues might be at play? Is the ownership and the creation of the technology properly documented, proven and renewed over time? You need to know that what you think you are buying is what you are really getting at closing.”

Revenue Considerations

From there, an ideal transaction process moves into the assessment of current drivers of revenue.

“Key questions to ask include, is there potential for growth that is untapped?” Hayes said. “Once again, this is something people so commonly overlook on the sell side. It’s not just a buy-side thing.”

One or both parties will often identify untapped opportunity in an organization that could be of immense value to the acquirer, and that can factor into the negotiations and the sale price.