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Buying out the Boss: How to Acquire the Company You Work For
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Buying out the Boss: How to Acquire the Company You Work For

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This presentation was delivered by Jeff Fialky of Bacon & Wilson, P.C. and Michael Vann of the Vann Group. The presentation covers the various elements of a transaction and identifies all the things …

This presentation was delivered by Jeff Fialky of Bacon & Wilson, P.C. and Michael Vann of the Vann Group. The presentation covers the various elements of a transaction and identifies all the things someone interested in buying the company they work for.

The presentation is broken down into four sections: 1) emotion; 2) knowledge; 3) strategy; and 4) tactics.

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  • When considering a deal, there are four key elements that make up a deal. Emotion, because this is the biggest financial and personal decision you will make in your life, so emotion is absolutely part of it. Knowledge, because even the simplest deals are complicated and you have got to know what you know and what you don’t know. Strategy because we are talking about key financial and personal considerations so you need to know the big picture. And, tactics because how you execute on your knowledge and leverage your strategy is all about managing the devil in the details
  • There is no more emotional decision you will make in your life than buying a business; not getting married, divorced, having children, etc. Deciding to buy a business is like opening a pandoras box of the unknown. It will try your sanity, test your skills, and push you to the limit both financially and mentally and will lead to many sleepless nights for as long as you own the business
  • Its not this guy, in fact its not a stranger or some personally you kind of know
  • Its likely someone like your mom and dad or a mentor/friend. Its someone you’ve known for a longtime and who you have a relationship with. So, while all deals have an element of emotion to them, these deals are different because its personal – these are people with who the level of emotional connection you have is very different than just a some company you came across.
  • So, even though the business side of the deal is going to be arm’s length, there is a relationship in place and it is at risk – once you go down this path, things will never be the same in this relationship. You want look at each other the same way, and if the deal goes bad or doesn’t work out, you may find that you can have a relationship with this person anymore, at least not like what you’ve had in the past.
  • Before even thinking about starting the process, you need to make sure you are prepared to risk it all. Buying a business requires you to put your money in, put your house up for collateral and guarantee lots of debt? Are you willing to sacrifice your sleep, your weekends, your job your friends, etc.
  • If you can do that great, now be prepared for the ride because dealsare a roller coaster ride. You will experience all these emotions at any given time when doing a deal and its critical that you keep your cool and remember what you are trying to accomplish
  • Lastly, remember when it comes to managing emotion, the biggest emotion to manage is ego – your job when you are buying a company is to sooth the seller’s ego and keep yours in check. Ego is the number one deal killer because everything about a deal can be related back to ego.
  • In all likelihood you’ve never bought a business before, so you have no idea what the hell your doing. Getting educated on the process, the company, financing and human nature is an absolute must if you are going to be successful in buying a business
  • Knowledge for deals comes in four areas: Valuation – what is it worth; Expectations – what does a seller truly want; Realities – undisputable facts; alternatives – creative solutions
  • Sellers sometimes wear beer goggles when looking at their business and what they see is often times going to be very different than what the buyer sees
  • Buyers and sellers are naturally not going to be aligned
  • Always remember, the primary reason anyone is selling is because they want to cash out; they need to take an asset that is illiquid and make it liquid so they can remove risk.
  • This is a bit of a simplistic way to look at the world of valuation, but it gets the point across that a buyer and seller see the world differently on value. Sellers see what they think its worth, where buyers look at it from what can they afford and get.
  • Beyond money, There are other things that matter for a seller who is contemplating a sale to an insider. Consequently, in getting a deal done its critical to understand the sellers overall expectation
  • Like the US Constitution, there are certain unalienable rights that both a buyer and seller will need to deal with when doing a deal
  • Whenever figuring out the realities of a deal, it is always important to keep in mind the biggest realities of a deal are the biggest deal killers and you need to manage these as best you can. We’ve discussed ego and emotion, and greed seems like a given, but very often when you get into a transaction its not financial greed (more dollars) that surfaces, but the greed that comes from wanting to get just a little more
  • When it comes to deals where the desire to get the deal done is there but the resources may not be, its incumbent upon the parties to look at creative solutions and alternatives to the traditional method of accomplishing a transaction
  • Any questions?
  • Transcript

    • 1. Buying Out the Boss
      How to Acquire the Company You Work For
    • 2.
    • 3.
    • 4. The Elements of a Deal
    • 5. Emotion
      Are You Prepared for the Ride?
      Emotion
      (Rollercoaster)
    • 6. Who is the Boss
      That you want to buy?
      Emotion
    • 7. Mom & Dad
      My Mentor and Friend
      Emotion
    • 8. The Looking Glass
      Once you step in, everything changes
      Emotion
    • 9. Are You Willing To Risk Everything?
      Its gut check time
      Emotion
    • 10. Experience it all in 60 Seconds or less
      Emotion
    • 11. There is no place for it in a deal
      Emotion
    • 12. Knowledge
      Knowing is more than half the battle.
      Knowledge
      (Makes Deals Work)
    • 13. Knowledge
    • 14. When it comes to valuation
      Perception is easily altered
      Knowledge
    • 15. The Typical Seller Thinks
      What the Buyer Thinks
      Business is unique; its there baby
      Inflated Sense of Value
      Wants All Cash
      Glosses Over Flaws
      Wants to be Paid for the Opportunity
      Not Interested in History
      Doesn't’t Want to Pay Market Value
      Wants Seller to Take A Lot of Paper
      Over Analyzes Weaknesses
      The typical buyer and seller start with unrealistic expectations
      Knowledge
    • 16. The Seller is Selling
      Because they want to cash out
      Knowledge
    • 17. Perceptions of Value
      The Seller Sees
      The Buyer Sees
      Knowledge
    • 18. Legacy
      Knowledge
      Continuity
      Security
      Love/Giving
      Cash Flow
    • 19. You can’t always get what you want
      But you can get what you need
      Knowledge
    • 20. What reality means
      The Nine Commandments of a Insider Deal
      What is good for the buyer is not good for the seller
      The buyer probably doesn’t have enough money to do the deal
      Seller financing (more than they want) is necessary
      Good advisors who know how to close deals are critical to success
      The sale price doesn’t matter, its all about what the seller nets out
      Numbers don’t lie, you can only do so much with them when it comes to financing
      Banks are not investors and they are not risk takers
      There is no such thing as a win/win deal
      Be wicked smart – know everything you can
      Knowledge
    • 21. Remember the deal killers
      Knowledge
    • 22. The test of a first rate intelligence is the ability to hold two opposing ideas in mind and still retain the ability to function. One should be able to see a situation as hopeless yet be determined to make it otherwise
      - F. Scott Fitzgerald
      Knowledge
    • 23. Strategy
      Without a plan there is no attack, no attack, no victory.
      Strategy
      Winning, Duh!
    • 24. Strategy
    • 25. Buyer Equity+What can be financed+Seller’s Commitmentcreative solutions=Purchase Price
      Strategy
    • 26. Stock or Asset Deal
      What is a Stock Deal
      The Buyer purchases the Seller’s stock (e.g. ownership) interest owned by Seller;
      Result: Buyer steps into shoes of Seller (as majority stockholder);
      Transaction is between selling stockholder and purchasing individual (Corp. not necessarily a party)
      Buyer acquires all assets and liabilities
      What is an Asset Deal
      Transaction between selling corp. and purchasing entity
      Buyer purchases the (discreet) assets only;
      Buyer chooses which, if any, liabilities to assume;
      Buyer elects employees to retain; and
      Buyer elects contracts to assume
      Strategy
    • 27. Generally favors the seller:
      Buyer inherits all assets (including those Buyer may not necessarily want or need);
      Buyer inherits all liabilities of the Seller entity (incl. lawsuits, debt, historical wage issues, unknown claims);
      Tax considerations:
      Buyer- basis of entity’s assets may retain their depreciated values (thus, no stepped-up basis);
      Seller- may get capital gains vs. ordinary income treatment
      Sellers like stock sales
      Because it works best for them
      Strategy
    • 28. Common stock sale situations include:
      Employee buyouts, family dealsand when contracts need to be inherited
      Strategy
    • 29. Buyers get to choose
      What they buy
      Who/what they keep
      Tax considerations:
      Seller- must pay tax on difference between tax basis of the assets sold and the Purchase Price
      The buyer gets a stepped up basis
      Greater write-offs for Buyer;
      Buyers like asset deals
      Because they work best for them
      Strategy
    • 30. Phased asset transaction
      Price may be agreed upon in advance
      May be funded with insurance
      Assets purchased into a separate entity to avoid liability
      Stepped stock transaction
      Tied to time and benchmarks
      Employee granted stock each year based on benchmarks
      Employee receives bonus comp to purchase stock
      Employee gets stock grants that vest over time
      Funded via bonuses, loans from corp or life insurance
      Continuous employment tied with termination & change of control provisions
      Put/call options essential
      Price terms agreed upon in advance
      The phased transaction
      When selling 100% isn’t possible
      Strategy
    • 31. Where do you get the money?
      Oh, let me count the ways
      Strategy
    • 32. Some places include
      Your own money, family/friends/fools, your bank, the seller, creative instruments and non-traditional sources
      Strategy
    • 33. Traditional loan relationship; borrow it, collateralize it, amortize it, pay it
      Once its paid, the lender relationship ends
      Advantages include:
      Retain maximum control over business
      Loan terms are objective and determinable;
      Early prepayment;
      The interest on debt financing may be tax deductible;
      Disadvantages include:
      Have to be bankable
      Financial covenants/reporting
      Risk of default
      Debt financing
      Other peoples money: part I
      Strategy
    • 34. Third parties provide capital in exchange for equity
      Can be institutional or family, friends and fools
      Advantages include:
      No traditional debt service; banks considers it subordinate
      Investor is a partner; incentivized to be successful
      Allows for spreading risk among multiple parties
      Disadvantages include:
      Others have a say in decision making; autonomy is affected
      Investors have a say on the board and influence
      They have stockholder rights
      Terms may be onerous
      Equity money
      Other peoples money: Part II
      Strategy
    • 35. Seller is the bank
      Secures position on assets and with personal guarantee
      Promissory note with interest at or below prime rates
      Provides an opportunity to get a better price & cash flow
      Benefits of seller financing
      Assures the seller will live up to their reps/warranties
      Demonstrates their confidence in the business/buyer
      Increases the likelihood of seller being cooperative and helpful to the buyer
      Purchaser gets a right of setoff for breaches
      Seller financing
      Because it’s a reality of a sale today
      Strategy
    • 36. Other creative solutions
      Earnouts
      Leases
      Employment/Consulting Agreements
      Extension of benefits
      Minority positions
      Life insurance
      Closing adjustments
      Rent
      Gift cards and other liabilities that will be redeemed
      Discounts for assumption of receivables
      Inventory adjustments and terms
      What else exists?
      Other financing arrangements/issues
      Strategy
    • 37. Choosing an Entity
      Types of Entities for Asset Deals
      Sole proprietorship
      General partnership
      Corporation
      S-Corp
      C-Corp
      Limited Liability Company
      Considerations
      Composition of equity structure
      Preferred tax treatment
      Nature of limitation of liability (e.g. sole prop. Versus LLC)
      Legal limitations
      Preferred stock required?
      Non-resident aliens?
      Self-employment tax exposure?
      Strategy
    • 38. Tactics
      The destination means nothing without knowing how to get there
      Tactics
      Execution Matters
    • 39. A business plan that:
      Shows you know what your talking about
      Doesn’t brag/boast
      Explains the deal and the details concisely
      Answers the questions before they are asked
      Projections that
      Are reasonable and reflective of the past
      Are complete with income statement and balance sheet
      Three years projected forward
      Are annotated with notes
      Don’t forget
      All the documents for the business and you personally
      Financing
      The ABC’s of what you need
      Tactics
    • 40. Letter of Intent
      Broadly outlines the deal
      Non-binding
      Purchase & Sale Agreement
      Is the details of the deal
      Legally binding
      Consulting Agreement
      Defines terms of how a seller will be engaged as a non-employee
      Employment Agreement
      Defines the terms of how a seller will be employed
      Non-Compete Agreement
      Restrictions on sellers post deal activities
      Promissory Note
      Terms and conditions of seller financing
      The documents
      Is where the devil lives
      Tactics
    • 41. Third party consents
      Most contracts require prior consent to assignment:
      equipment leases
      real property leases
      Sales contracts
      Failure to obtain consent invalidates agreement
      Requesting consent can (unintended) open renegotiation
      Non-Compete/Solicitation
      Prevent seller from opening competing business and calling on customers (and key employees) of purchased company;
      Must be reasonable in scope and duration
      The Devil is always in the details
      Deal considerations that make/break a deal
      Tactics
    • 42. Representations & Warranties
      Most negotiated part of a deal
      Method of obtaining disclosure from Seller;
      Assets free and clear of encumbrance
      Due authority/good standing
      Compliance with laws
      Proper payment of employees
      Basis for the indemnification obligations;
      Frame the Seller’s closing conditions
      Reps & Warranties
      Ensuring the parties do what they say
      Tactics
    • 43. Indemnification is the obligation of Seller to pay Buyer for claims, losses and damages incurred:
      Who is the indemnifying party:
      Seller entity and/or shareholders
      Nature of indemnification:
      Acts or omissions of Seller prior to sale;
      Breach of reps./warranties;
      Duration of indemnity
      Do what you say
      Indemnification is the deal enforcer
      Tactics
    • 44. Reps and warranties are true and correct
      Parties have due authority for transaction
      Transaction in accordance with applicable laws
      All third party consents received
      Any governmental approvals obtained
      Employment arrangements with employees have been finalized
      No material adverse change in assets or the business
      Getting to close
      Closing conditions to be aware of
      Tactics

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