After the Deal – Earn Outs and Lock Ins

Posted by Chris on August 10th, 2009

It may be possible to sell a business and walk away from it the day after completion but it depends on a number of factors e.g. How involved you are in the business – and it is often not possible to do so without considerably devaluing the business and reducing the price.

As we discussed earlier it is very important to have worked out very early in the process who wants to leave and who wants to stay and the purchaser will have stated quite clearly by now who they want to remain and for how long and who they don’t. This will depend on, for example, who they have and don’t have. They may not need your Financial Director or Sales and Marketing Director for example.

More than likely the key stages after Exchange of Contracts and any initial payments will be Completion Accounts, production of the Annual Accounts, first quarter numbers and then first and subsequent earn-out targets. This is where you have agreed stage payments for the business, after the initial purchase price and completion account payments, related to the performance of the business over a number of years.

It is possible that earn-outs are avoided but it is a great comfort factor  ( and therefore of value ) to the purchaser to know that he has key management personnel around for a couple of years.

One of the advantages for the business is that it has a very clear and well thought through business plan for the next few years( It is well thought through because it should be achievable ). This is always very powerful and gives clear direction to the whole company.

Often, as far as the employees are concerned, very little has changed ( and this may be a surprise to them ! ) except for a couple of the Directors and the fact that they are part of a bigger company.

Of course there can be circumstances where the acquirer wants to make more changes to the business. There certainly have been instances where acquirers have made changes that result in disruption, change and loss of jobs and sometimes, sadly and stupidly they end up destroying the value of the company.

However the whole point of going through this process is that you find the right purchaser and the right purchaser would have enough knowledge and experience to integrate an acquired business in a way that maintains and enhances it’s value and does not demoralise or destroy in any way one of it’s key assets – it’s people !!


This blog post is a part of a series of posts describing The Sales Process – you can access the other parts of the series from the links below:

Contracts – The Sale and Purchase Agreement

Posted by Chris on August 10th, 2009

As we have said although you might work on Heads of Terms with a couple of companies at some stage you are going to enter exclusivity with one and then proceed to agreeing the detail of the Sale and Purchase  Agreement ( SPA ) with them.

The detail of the SPA is not something that we will go into here but you and your advisers ( M & A and Legal ) will be involved in these discussions with the prospective purchasers advisers.

Depending on the particular scenario it is probable that the draft SPA will need to be reviewed by key shareholders and investors in the purchasers company and also any funders that they may be using i.e. banks, venture capital funds or private equity funds.

Hence you can see why this process may take some time as everyone involved checks that they are protected and getting what they should be getting.

The purchaser and their advisers may be negotiating with you and your advisers on the one hand and with their banks, shareholders and investors on the other. They will be very busy ! Remember – patience is a virtue !


This blog post is a part of a series of posts describing The Sales Process – you can access the other parts of the series from the links below:

Due Diligence

Posted by Chris on August 10th, 2009

The prospective buyer will, more than likely, want to look at your companies books and records in some detail. You are only going to give this valuable opportunity to those buyers who have provided an acceptable indicative offer and who you think you can work with.

Typically the M & A Adviser will establish what is known as a “ data room “ at their premises. This is a room or rooms where copies of all your key books and records are held.

You do not want prospective buyers walking all around your business premises at this stage – unsettling employees for what may be no reason. This is why you do the presentations and meetings off-site and why you also establish a data room offsite.

The prospective buyer and their advisers – usually, mainly accountants – are given access to the data room on agreed dates and at agreed times. This will enable them to verify that they key aspects of your business are as you have indicated in your Teaser, Sales Proposal and Presentations.

As this process progresses your Adviser will also be advancing discussions on the Heads of Terms agreement.
As things progress it is likely that the prospective purchaser is going to seek “ exclusivity “. This means that they are the company leading the race to purchase you at that time and you are only giving exclusivity to the company that you believe is the right one and is capable of following through on their offer.

This means that you and your adviser must do “ Due Diligence “ on the prospective purchaser. You want to know if their financial situation is as they say it is. Again, this is a very complex and often sensitive area. Often prospective purchasers are happy to trawl through your books and records asking ever more detailed questions but they are not so happy when you start doing the same to them ! You must do it though because a possible outcome is that you are “ bought “ by a company that cannot actually raise the money to complete or even bought by a company that subsequently goes bust. Make no mistake about it – this can happen and it is a legal, financial and emotional nightmare. Emotionally it is absolutely devastating to believe that you have sold your company to a solid company only to find out later that they are basically insolvent.

Typically sellers of businesses do want to get a good price for their business but they also want it to
“ go to a good home “. You will have many loyal employees, some of whom will have been there from the beginning of your business and you want them to be protected and happy as you hand over your business to someone else. Again, if you sell your business to someone who subsequently fails you will be unhappy for them aswell as yourself.

In all likelihood there will be a phase where you are juggling a small number of very serious prospective buyers who are all pushing for exclusivity while you are trying to get Heads of Terms and progress on the Sale and Purchase Agreement with the most suitable. Again, you need a very experienced M & A Adviser at this stage.


This blog post is a part of a series of posts describing The Sales Process – you can access the other parts of the series from the links below:

Negotiations and Heads of Terms

Posted by Chris on August 10th, 2009

An M & A Adviser can say things to your potential future boss that you probably could say but probably don’t want to !! Remember this !!

Earlier on we mentioned that ideally your M & A Adviser should be a good salesperson and a good negotiator. They are laying out the key dates of the process to prospective buyers and cajoling and encouraging them to keep to the process. The threat of competition is, subtly, ever present. Not rammed down people’s throats but always there.

Your Adviser has a sensitive and complex role. It takes practise to manage multiple buyers ( perhaps with intelligent buying teams – perhaps not ! ) and you.

You do not want to be going through a learning curve in negotiating and handling multiple buyers whilst trying to achieve the best outcome for the sale of your business.  Although in general M.D.’s of companies are good salespeople and good negotiators that does not mean that they are good sellers of companies.

When the offers come in they will come in in a range of formats and a range of actual offers. An experienced M & A Adviser will help you analyse them and compare them. Again you will be amazed at the variations that come in. Potential buyers almost never value the opportunity in the same way and to the same value.

As discussions progress your M & A Adviser will seek a “ Heads of Terms Agreement “ from the potential buyer. This is a development on from the Indicative offer and a firm step towards the “ Sale and  Purchase Agreement “.


This blog post is a part of a series of posts describing The Sales Process – you can access the other parts of the series from the links below:


Posted by Chris on August 10th, 2009

So the sales proposal has gone out to your list of prospects and has been followed up by your M & A Adviser who has discussed the opportunity and registered the response and level of interest.

The next stage is to invite in the companies that have expressed serious interest. You will present the opportunity to them on designated days with designated time slots. They will also be given the opportunity to present to you but as with the M & A Adviser Beauty Parade you may want to give them the opportunity to present back to you at a second designated date and time.

Remember this is very much a two way process, you are selling the opportunity to them but they are also selling themselves to you. ( they know that they are probably not the only potential buyer- because they know that you are running a process that will identify multiple potential buyers ).

The actual content of the presentation will be discussed elsewhere but it will include the key points highlighted previously in the sales proposal.

The M.D. will typically lead the presentations and probably the only people attending from your company at this stage will be the M.D. and the F.D. The M & A Advisers will also attend but take a backseat role.

From the prospective purchaser you would expect to see the key decision makers attending – ideally all of them. Again the fact that they know that they are in a competition usually makes them field their best team. If they don’t then you may question their commitment.

These presentations are a really great opportunity for the prospective purchasers team and you to get to know one another. Remember people buy ( companies ) from people. Relationships made at this stage will likely determine the outcome of the process.

Either at this presentation or a second one you will want to see indicative offers from the buyer.


This blog post is a part of a series of posts describing The Sales Process – you can access the other parts of the series from the links below:

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