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