S3:E7 – The Transaction Timeline: The 5 Stages of Selling Your Business
Tune in as CRI Capital Advisors’ Partners Paul Evans, Joel Sikes, and Brandon Maddox discuss the five stages of selling a business for maximum value. Listeners will learn everything from the discovery of premarket company value to the due diligence and closing processes. The successful sale of a business requires special care and attention to overcome the challenges faced along the way.
From Carr, Riggs & Ingram, this is It Figures: The CRI Podcast, an accounting, advisory, and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.
Thanks for everyone joining us for another episode. This is Paul Evans from CRI Capital Advisors, one of the partners here, and we’re going to be covering the transaction timeline. It’s five stages to selling your business. Sometimes when it comes to selling the business, it seems like it should be easy, it should be almost as simple as putting a sign in the front yard of your house, and it’s selling just in a matter of weeks. But that’s not the way it works. So I’m joined today by two of the partners, Joel Sikes, and also Brandon Maddox, here at CRI Capital Advisors. And each one of them are going to introduce themselves. Joel, if you would, go ahead.
Sure. Thank you, Paul. My name is Joel Sikes and I’m the partner in charge and Managing Director for the group here at CRI Capital Advisors. And in addition to being lead on some of the transactions, I support all the transactions, as we all do. It’s definitely a team effort and any transaction that comes onto our radar, we all apply all of our talents to it. But I am technically in charge and have oversight over the entire process.
Yeah. Name’s Brandon Maddox. I’m also a partner here at Capital Advisors. As Joel mentioned, we all kind of get involved in a little bit of everything here, which is nice and helps our clients achieve success. But I would say more often than not, I’m focusing on process, making sure that all the small details of each deal are being taken care of and handled in the way they need to.
And again, I’m Paul Evans. I’m one of the partners here. I’ll be moderating today and my background is being an owner or a partner in seven additional businesses. And usually I’m in the front lines, having conversations with a business owner, just determining what the fit is, what the next step is, making sure that they’re ready to go to market. So when it comes to the transaction timeline and these five phases, before we get there, we want to talk a little bit about the stages pre-transaction. So some of the aspects to be thinking about as a business owner, as a professional, certainly are different elements even before you get to the transaction itself. And there’s going to be four elements that we talk about, professional finances, value factors, ultimate goal of the future, and even the type of sale. So let’s begin with Joel. When it comes to professional financials, how important is that to a deal?
I think it’s a really important point to talk about. We often have very sophisticated buyers come to the table for our transaction and the more detailed, the more professional the financial statements are, the better. Having said that, we don’t require audited financial statements or even reviewed financial statements to take a company to market. But it’s really, really helpful to have CPA prepared financials, whether that’s a compilation or just having your CPA review, not technically review, but go through your financial statements and have those organized in a way that a well funded buyer would like to see. After that, we apply some additional criteria to sort of reformat and normalize those financial statements in a way that professional buyers are going to want to see that information. So I think getting out in front of that, having professionally prepared financial statements at whatever level you deem appropriate, whether that’s just CPA compiled or reviewed or audited, I do think it’s a very helpful part of the process to go ahead and have that done before going to market.
Yeah, there’s so many buyers that are going to come in and take that apart. And without it really being done by a professional, it can raise some question marks and some red flags. Brandon, when it comes to some value factors that owners need to be thinking about?
Yeah. And when we talk about value, kind of back to that old statement, beauty’s in the eye of the beholder. Well, value is also in the eye of the beholder. So as a business owner, you’ve likely got things that you’re looking at that you think are of value, but it’s really helpful to try to put yourself in the mindset of a potential buyer. What’s going to be valuable to them? What things are they going to be looking at? And a lot of that centers around risk. And the increase in risk, value’s typically going to go down. Decrease in risk, value’s going to go up. So from that standpoint, we look a lot at concentrations and those can be things like customer concentration. Are all of your sales coming from essentially one place? Or it could be products. Is your entire business built on one single product or service? Likewise, you could also say with employees, do you have one key person, maybe that’s the business owner, who if they were to go, the business wouldn’t exist anymore.
A buyer’s going to come in and they’re going to take a look at that and immediately discount value because they see an increased risk from something happening with one of those elements that’s so concentrated in the business. So there’s a lot of value factors that you could look at and a lot of things to tweak. As Joel mentioned, having your financials in order, having your operational statistics ready to go. Just all kind of your ducks in a row from a documentation standpoint, to where you can go and really tell the story to a potential buyer, because even though they might be in your industry, they don’t really have the first clue about how you run your business. So being able to really articulate that and really have a strong story there is going to be a huge boost in value.
And so when they get the value factors in play and they realize they’re going to be looked at from the perspective of the buyer, those are some technical aspects, but there’s also the aspect of understanding what the ultimate goal is and what future they desire after the deal.
That’s so true. And a lot of times we joke here internally, a lot of times we end up playing counselor more than anything. Because you think about a business owner who’s spent the past 30 or 40 years of their life, just blood, sweat, and tears, building a business and investing everything they’ve got into it. And now they’ve come to the end of that and they’re contemplating potentially not being that business owner, not being the one who their employees are looking to, not being the decision maker. So really thinking through what they want life to look like after being a business owner is really helpful, because not only does it help them think through the reasons why they might want to go through a transaction, but it also can help us structure the deal in such a way that helps them to be able to achieve those goals.
Some business owners really don’t want to go anywhere. They want to continue running the business. Well, maybe they just need to sell a minority position. Or maybe if we sell a majority, there’s some elements written in under which they continue to run the business, but they have a partner that helps them not have all of the financial burden solely on them. So just kind of understanding personal goals, what you want your roles to be going forward, can be really helpful.
You mentioned that structure, that’s a critical element. Joel, dive in a little bit to the types of structures or the types of sales that can actually take place. Sometimes we just think that it’s 100% sale, but there are a lot of different options.
Yeah, there are several different options and a lot of nuance goes into each of those options. If you get really nerdy about it, you can talk about reverse triangular mergers and all sorts of fancy structures, but really what our clients are most concerned about is the net proceeds of a transaction, and often the tax implications and the post-closing risk associated with a transaction. So we’re often coaching our clients through a couple of major decisions. And number one, that could be, are we targeting a stock sale or an asset sale? And there are advantages to both. A stock sale can achieve capital gains treatment, which may be more favorable than ordinary income treatment on an asset sale. And so we work with the client and normally their CPA to determine what structure is most advantageous.
And then as we go through the process of selling that company, if the buyer prefers a less advantageous structure to our seller, there needs to be an offset for that in value. So the highest number doesn’t always necessarily win. An asset sale versus a stock sale can make a very big difference in the net proceeds to the seller, so we look for that. On the flip side of the coin, there is, we go back to sort of the what’s the ultimate goal for the seller? Do they want a complete walk away scenario? After closing, do they want an ultra brief transition period and kind of hand the company over to the acquirer? That’s one type of buyer and that could be a strategic buyer or a private equity backed strategic buyer, meaning that it’s a company that’s in that same industry or a very similar industry, who can just take our client’s company and run with it. They don’t need a CEO to stay and actually run the company.
There’s also a private equity or a family office transaction, and those are financial professional investors. They’re interested in the financial aspects of the company, and they probably don’t know very much at all about how to run our client’s company. So in that case, there may be a longer term employment agreement with our seller. And oftentimes that’s what our client is looking for. We do transactions with people very early in their careers. They may be in their late forties, early to mid fifties, and they have plenty of years and plenty of energy left to work, but they want to take some chips off the table, or they want to change sort of their personal financial risk profile. A private equity group or a family office may be the right fit in that scenario if our seller says, “Hey, I really want to monetize my business. I want to secure my financial future, but I’d really like a partner moving forward in growing the business and I have five or eight or ten years left to work.”
So as part of the transaction planning and the pre-transaction discussions, we really try to help our clients understand what their own goals are and then what the transaction looks like that’s most likely to hit those targets for them.
A lot of great insight in that, and you can see that there’s so many elements to be considered even before you decide to sell or go to market. We’re about to hit these five stages, very high level, very quickly. We’re more than happy to have a phone call with you and dive into these further and really see how they’re going to apply to your particular situation. Also, we have a PDF. At the end of today’s episode, I’ll give you a web address, an email address, and a phone number that you can call if you’d like a copy of that PDF. It’s going to lay everything out when it comes to the timeline and the elements involved within. So stage one is the assessment. You decide you’re ready to go to market. You’re ready to have this transaction. And within the assessment, sometimes people feel like, well, I’m just going to get me a business valuation done and whatever the valuation comes back as, that’s the value of my business. Joel, what are some things to be considering with that and how does a market assessment differ from a business valuation?
Yeah, that’s a great question and there are some key differences, and let’s start with what a business valuation is. A business valuation is a very technical exercise that is normally done by a credentialed valuation professional. And there are a lot of advantages to that in certain situations, and we have quite a few certified valuation analysts or certified business appraisers within the CRI firm. And so in those situations that require a technical business valuation, we have some really great partners that we can hand that off to. But a business valuation is really an exercise a business owner would go through if they are doing estate planning and want to gift shares to a family member or something like that. Or in the case of a partnership dispute, or a buy sell agreement, or considering key man insurance, things like that. Even in the unfortunate circumstances of a dissolution of marriage proceeding, you need a very technical business valuation that’s going to hold up in court, literally in court, before a judge.
So definitely there’s a place for a technical business valuation and the firm has some great professionals who can provide that. That’s not always relevant in the scenario of selling your company, and often a technical business valuation does not truly capture the market value of the company if you were to sell it. Business valuation professionals consider the market approach in their valuation work. What we look at in a market assessment is truly focused on, what do we believe this company is going to sell for? There’s a very technical element to that. We look at comparable transactions, we spread out the financial statements, we do a lot of deep analysis. We’re looking at value enhancers and value detractors.
So an assessment is not technical, but there is sort of this softer piece to it. There is a bit of art to it as well, where we kind of probe the relevant market for the sale of that business. And we look at, okay, here’s the technical data. Here are all the indicators. Here are the unique facets of this individual business that help us arrive at an appropriate assessment of market price. So a business valuation is going to focus on the very technical valuation of the business. We are going to focus on market price and what we believe we can sell the company for. And this enables the seller, our client, to make a well informed decision about whether those numbers match their goals or not.
Let’s think about somebody who comes to us and they say, “Hey, we want to get a market assessment completed. We realize that we need to know what we might possibly sell for if we go to market.” Brandon, how would they go about that? What type of information do we need to receive to be able to do one of those?
Yeah, it’s really just some high level information. So some things that you would likely expect, probably five years of financial statements in whatever form those are, as we mentioned before, if those are reviewed or audited statements, that’s great. But if it’s just internal QuickBooks reports, that works as well. We can also do that with tax returns. Having some understanding of sales and how sales breakdown across products and geographies, and really just trying to get a high level understanding of the earnings potential of the business and what that’s looked like back through time. And then really understanding what the business does at a high level, so that we can properly place it in the right channel in the market when we’re looking for things like multiples or comps.
And if you’re interested in getting a market assessment done, if you want to email us at [email protected], [email protected], we can start an assessment today to help you discover what you might bring if you go to market. So stage one is the assessment. Stage two is the engagement and underwriting phase. So when it comes to an engagement, what its purpose is and what is involved in that, Joel, what are some of the aspects that a seller needs to be looking for?
Right. So we are registered with the Securities Exchange Commission and we’re governed by FINRA, so we are required to have an engagement in place between us and our clients before we represent them for the sale of their company. So there are some technical things that go into an engagement letter, but for the most part, it’s really just an agreement between us and our client as to what we can and cannot do for them. So we certainly delineate the services that we’ll be providing in our engagement letter. Obviously there’s an agreement on the fee for the transaction that we’re able to facilitate for our sellers, but there’s also the delineation of some things we can’t do in our engagement. We’re not attorneys, and so our engagement often stipulates you’re going to… The seller’s going to find a competent mergers and acquisitions attorney to help handle all the legal aspects of the deal.
We are not CPAs. Many of our partners, in fact, most of our partners in the firm are CPAs, but we are not. So in terms of detailed tax analysis and things like that, we ask the seller to commit to providing their own CPA or working with their CPA and not relying on us to help them figure out the tax burden, the technical tax burden on a particular type of transaction. So it’s really just through the engagement, we’re really just sort of setting down the ground rules and setting expectations. Our engagement is a fairly short document. I think it’s four or five pages. Most of it really is there to delineate services and protect the client. And from there, those are the terms under which we would go forward with our client. And it’s really a client friendly engagement. In our engagement, the seller has the right to accept or reject any offer up to the point of closing.
So we could set a targeted evaluation, we could sort of make that roadmap toward the ideal outcome for our client, and we could deliver the value and deliver the terms that we had all talked about in the pre-transaction stage. And the seller could just say, “You know what? I don’t like this particular buyer that we’re working with. Here’s a red flag that I’ve seen. Or I just don’t have a good feeling about this.” So we really try to work with our clients to help them maintain as much control as possible over the transaction, while enabling our team to do the professional work that we do that drives the transaction forward.
Great. And that covers the engagement side at a very high level. Brandon, when it comes to underwriting, why is that important? Why is it a critical step of going to market?
Yeah, so you can kind of contrast this with the information that we would’ve asked for to do a market assessment. This is kind of the next layer down. So the underwriting process is really just us further understanding your business, and it’s with a couple of end goals in mind. So it’s going to be a deeper dive for sure than what we did at the assessment level, but they’re again, all things that you probably would anticipate that we would be asking for. But the purpose of underwriting is really for us to fully understand your business and for us to be able to have initial conversations with buyers to kind of shield the business owner from having to talk to 50 or 60 potential buyers. We can have those conversations on their behalf and really just I guess closer to the end of marketing, bring the ones who actually are going to make an offer to the table and they can have conversations with them. So that takes that burden off of them.
Another reason for underwriting is, and we’ll get into this in the next stage, but it’s really to help us to be able to have the information we need to prepare the marketing documents that we’re going to use really throughout the process.
You mentioned that about being able to have those conversations with possible buyers, and that does bring us to the marketing and to the LOI stage, which is stage three. So marketing has several components. If you were to just think about the top three components of the marketing phase, what would you consider those to be and what do they mean to a potential seller?
Yeah. So marketing is there again, as Paul mentioned earlier, think about putting a sign in the yard. That’s when we’re putting it out on the market. It’s not going to be that wide open. It’s definitely a confidential process that we run, so your neighbor’s not going to know that you’re selling your business, but it is the time where we start having those conversations. Some key points or some key elements, there’s a buyer list that potential or that our clients will get to review. Those vary in size depending on what the outcome is, depending on what the business is, frankly. Those can be several hundred or they can be maybe less than a hundred, depending on how focused we want to be and how targeted that needs to be.
There’s going to be private equity, there’s going to be family offices, there’s going to be other companies in the industry, strategically aligned companies who are not in the business of buying companies, but are making acquisitions to further augment what they’re able to provide. But like I said, our clients get to review that ahead of time. And because there may be somebody on that list that they’d rather us not reach out to, and there may be some that are not on the list that have reached out to them, and we try to pick their brain a little bit and make sure that we’re making the best use of that particular tool.
Others, as I mentioned before, are the documents. There’s a couple of documents that are key in this stage. One is the blind profile or the teaser. It’s essentially a one page document that’s completely blind. It doesn’t say the company name, really doesn’t say exactly where they’re located at. It gives some high level financial details, tells generally the industry that they’re in. And the purpose of that really is just to give a buyer enough information to say, “Yeah, I’d probably be interested in looking at that or not.”
If they are interested, they sign an NDA, we get those on file, and then they get the larger document, which is the confidential information memorandum, CIM, or summary overview. You’ll hear those terms kind of used interchangeably. And that’s really the full layout of what the company is, the performance over time, maybe some growth prospects that they have, employee information, really just a full overview of what the company is and what they have to offer. Speaking of offers, that’s kind of the end goal of marketing, is to get offers. Those will come in a few different forms. There may be an indication of interest or an LOI. And I know, I think Joel’s going to get into some of that next, but that’s really some of the high level elements to look for in this stage.
All of those components allow the company to be launched into the market and then certainly as the offers come in, some of those are going to be serious. Some of those are going to be seriously hilarious at how terrible they come in. So we’re making sure that all of that is shielded as much as possible from the owner and the best offers are taken to him or her. So finally, when someone is interested, they’re going to put forth an LOI. And so when we’re looking at that, Joel, what are some of the components of the LOI? What does an LOI actually mean? And what are some of the red flags that you look for?
Sure. So LOI stands for a letter of intent, and it’s really just an expression from the buyer, “Hey, we’d like to acquire your company and here are the general terms under which we propose to acquire it.” So something that’s very important for our clients to remember is that a letter of intent is not a binding agreement, and almost always, a letter of intent will state, “Other than confidentiality and exclusivity, this is a non-binding agreement.” So the terms are subject to change. The buyer could potentially back out if they have a reason to change their minds or if they become concerned about some element they discover about the business. So other than confidentiality and exclusivity, a letter of intent is almost always non-binding. And by exclusivity, we mean the acquirer is proposing to purchase the company and they’re proposing to deploy some fairly significant financial and human resources to make the purchase.
So they want to be sure that we and our client don’t sell the company out from under them after they’re 60, 90 days down the road, having spent money on attorneys and lawyers to try to make the acquisition. So an LOI does normally call for a period of exclusivity in which we would terminate all discussions with all other buyers and focus on that one buyer whose offer has been accepted. So some of the elements in a letter of intent are going to include obviously purchase price and structure and working capital requirements, non-compete agreements, and all these would be laid out in very high level terms. An LOI often includes one page or two of the acquirer telling us how awesome they are and why they’re the only ones that should ever be permitted to acquire our client’s company. Other than that, an LOI can range from three to maybe eight or ten pages in length, depending on how detailed the buyer chooses to make that. Contrast that with a purchase agreement that today we sometimes see 70 to 100 page purchase agreements.
So the letter of intent is fairly high level compared to the level of documentation that’s going to be required for the actual purchase agreement. However, we do prefer detailed LOIs for our clients. The two or three page letter of intent often leaves a lot of very key details open for discussion, or perhaps even argument down the road. And those would be some of the red flags that we would be concerned about. We don’t want a 20 or 30 or 40 page letter of intent, but we do want sufficient detail to make sure that the big items are covered and that we’re not arguing over really silly things that should have been discovered or discussed in the very early stages of this offer phase of the process. So some of the key red flags that we’re looking for are lack of information, lack of detail in a letter of intent.
And I mentioned working capital. Depending on the size of the business, working capital is an issue that could involve a few million dollars. And so within an LOI, if an acquirer says, “We expect a normal level of working capital.” Well, what does that mean? What we consider to be normal, they may not consider to be normal at all. So we normally try to qualify that with, is normal an average of the last three months or the last six months? Or let’s apply some mathematical formula to what we all think normal is so that two days before closing, we don’t find out that our seller is actually getting a million dollars more or less than he or she expected. I guess the million dollars more would be a pleasant surprise, but the million dollars less would not be okay. We want to settle some of those key details up front.
So we’re looking for details. We consider if there’s a financing contingency built in to a letter of intent, and that’s not necessarily a bad thing, but it is a contingency. The buyer would basically be saying, “We want to purchase your company for X amount of dollars under X terms and conditions, and all that’s subject to whether or not a bank will loan us enough money to do the transaction.” Again, not a bad thing. A lot of transactions are financed by third parties these days. It’s not odd at all. But if you’re looking at two essentially equal offers and one has to go to third party funding sources and raise the capital and the other says, “Hey, we have the money in hand, or we have the credit facility already arranged so there’s not a contingency related to the funding of the deal.”
One is obviously better than the other, all other things being equal. So those are some of the details and some of the red flags that we would be looking for in an LOI. And we have to keep in mind, an LOI is really just an agreement to agree and there’s a lot of work to be done post LOI.
I think just that overview makes it pretty clear why representation is critical. So much to be considered when it comes to the shaping of the deal, the structure of the deal, and all the components that have to be negotiated during the deal. And that brings us to stage four. After the LOI is signed, they’re going to enter into diligence. How long does diligence usually last and what is the buyer’s goal with diligence, Joel?
Normally we see, within the LOI, we see acquirers ask for generally a 90 day closing period. Sometimes they propose something a little shorter, sometimes a little longer, but that 60 to 120 days from LOI to closing is normally the proposal that we see. They may stipulate, okay, we want 90 days to close and 60 days of that is going to be our due diligence period. But in reality, they’re doing due diligence all the way up to the day of closing. We’re providing updated financial statements to them and they’re certainly reviewing those and asking questions about the updated financial data that’s flowing. So diligence from the buyer’s perspective is never really done until the transaction is closed. And what the buyer is really looking for, a quality buyer is really looking to make sure they’re getting what they’re paying for.
So they will test your revenue and make sure, all right, we’re going to look at receivables and we’re going to make sure that invoice went from invoice to receivable to money received and that money made its way all the way into the bank. So just to make sure they are getting everything they’re entitled to within the confines of the transaction. We don’t see the entirety of the buyer’s diligence process and the reports that are generated for them, but it really, from the seller’s perspective, it really does look and feel a little bit like a financial audit. Oftentimes an acquirer will bring in a third party accounting firm to do the financial diligence and do a quality of earnings report to make sure, “Hey, I see the financial statements that the seller provided. We have to test those and make sure they’re accurate to make sure we are paying an appropriate price for the company.”
Now, a bad buyer, which we’re going to try to avoid, they’re looking for a discount. They’re looking for any little thing they can pick apart to try to lower their offer. We’re listening very careful in that pre letter of intent stage to make sure we’re dealing with a buyer who wants this company, has a strategic reason to buy this company, and is not in this just to throw out sort of a gaudy offer number and then dial that back through the diligence process. We really want to deal with acquirers that consider diligence confirmatory and not necessarily exploratory, the difference being I want to confirm what you’ve shown me is accurate and I fully expect it to be, versus let’s go down every rabbit trail possible and see what we can find to reduce the value of this company. We definitely want to avoid that latter scenario. We work really hard to do that.
Great insight. Brandon, we talked a few minutes ago about the marketing stage. And at that stage, a firm like ours is highly involved on the activity side. The owner is certainly kept up to date, but a lot of the weight is on us. When it comes to diligence, how involved is the owner at this stage? And what are some of the warnings that might need to be given?
Yeah, and this is an element that we will hit early and often with our discussions with owners, because it can’t be overstated that it’s just a lot. So think about, it’s kind of a progression from what was asked for at the assessment stage, what was asked for at the underwriting stage. What’s asked for at the diligence stage makes the others really pale in comparison, because it’s such a deep dive into, as Joel mentioned, they’ve got an end goal of making sure that what they think they’re purchasing is actually what they’re getting. And in order to do that, they’ve got to go really to the absolute depths to find out. And that’s not only from a financial side, but think from tax, they’re going to dig in there. They’re going to dig in on insurance. They’re going to dig in, in some cases, depending on the business and if there’s real estate involved, they may do environmental studies.
And all of those work streams are going along simultaneously. So think about, it’s not just going to be one person asking you a question or questions coming from just one group. A buyer is going to bring third party providers in to do things like quality of earnings. That’s going to go on likely at the same time as maybe someone who comes in to assess what benefits look like and how those can be transitioned and how those compare to what the buyer might propose to do. So there’s just a lot of different workflows that go along at the same time. Maybe some warnings. Understandably so, owners a lot of time want to keep things really close to themselves. And sometimes that means up until this point in the process, maybe they’ve done everything themselves, maybe every report that we’ve asked for, they’ve been the one to pull it. Maybe every question that’s been asked, they’ve been the one to sit down and think about it and answer it.
And if that’s the way they want to continue, that’s okay. We’ve got one that’s going to close here hopefully in the next couple of days, and that’s absolutely been the case. That business owner has been the point person throughout, and it has taken its toll. If there are additional team members that can be brought in, at least at some level, that can be helpful for a business owner, just because of the sheer volume there. As we’ve mentioned before, we’re going to be there the entire time, but there’s going to be some things that we just don’t have access to from a data standpoint. So it can be really helpful for them to have some additional hands to help with that burden.
It’s always good to know what’s coming, how heavy the lifting is. And like Brandon said, it’s mentioned all along the way, but it’s really difficult verbally to say just how challenging this stage can be. And then the final stage is closing. Actually, it’s the purchase agreement and closing. We’ve already spoken a little bit about the purchase agreement. It is the binding document. From that point on, there’s actually going to be a closing. And when it comes to closing, a few years ago, it could take hours. There were dozens of pages that had to be signed. Joel, how’s that changed? And then how does an owner actually receive the payout today?
The closing process really has changed over the last several years. I’ve been doing this long enough to remember when you did travel to one of the attorneys’ offices and you got there, and either when you arrived or shortly after you arrived, there were these huge stacks of paper on a giant conference table and multiple blue pens for everybody to sign in blue ink. And you went and you closed in person and then you had a closing dinner afterwards and it was handshakes and high fives and all that. Now it’s pretty much always electronic. And normally our clients are going to be signing a set of signature pages that will be held in escrow by their attorney or attorneys. And only upon their attorney’s advice and when everyone agree that the transaction is ready to close, those signature pages that may have been signed two or three days or two or three weeks ago, those will be released and the transaction will be deemed to have closed.
And it’s a little anticlimactic after the diligence process that Brandon just described and after the months of preparation and marketing and negotiation. And it’s still a great day. It’s still a high point often for our clients. But it’s a little bit like if you remember the movie Apollo 13, when they launched the rocket, it’s a little bit like one orchestrator saying, okay. Insurance, are we good? Yeah, we’re good. Banking, are we good? Yeah, we’re good. Environmental, are we good? Yeah, we’re good. They run down the checklist and everybody agrees that the transaction is closed. And often that’s not done, like I said, face to face. So the electronic communications have actually made it a little easier and a little quicker, but it’s also a little less climactic for us.
Money almost always is distributed via electronic transfer, direct wire transfer to various bank accounts. So the attorneys will do a settlement statement much like on a… I’d say much like a real estate transaction. It’s much more complicated than that, but there’ll be gross purchase price and all the sources and uses of funds, all the ins and the outs. And then there’ll be a list of wires to be initiated to the various accounts. Sometimes our clients have multiple accounts. They may have trust accounts that they want this money dispersed across. So it’s always done via wire transfer. We’re always pushing to get it done before the wire cutoff time on that particular day. It always seems like even if we start in the very early morning, it always seems like we’re hustling to make the wire cut off for that day. But the wire transfers ensure that the exact amounts are distributed into the exact right places for the closing.
And so those are the five different stages when it comes to the transaction timeline. And yet there’s more, because there’s life after the deal and sometimes the owners not think about that and what it’s actually going to look like. Brandon, let’s think about the owner who’s still holding equity and staying on for a few years with a partner. What are some of the things that they might expect?
Yeah, I would say they need to expect things to be different. Anytime you bring additional voices into a conversation, anytime you bring partners in who maybe haven’t been there the whole time, they’re going to have a different perspective on it. And that’s not necessarily a negative thing. It could be very positive. It could help take the company in a completely new direction, to places it’s never been. But it’s going to be different and it can be a little bit jarring for a business owner who has been driving the ship for 30 years and they have to now suddenly say, “Oh, well, I’m not the only decision maker. I’m not the only one that has a voice.”
Especially in the case of that they’re holding equity, so they definitely have a vested interest in the company continue doing well, but also if they’re going to be staying on and actually running it, they’re going to have to check in with some people from time to time. And that varies depending on the type of buyer. Some buyers want to be very involved in operations. Others are really just, “Hey, let’s have a call once a month or once a quarter and let me get your financial updates. And if everything’s going well, then really no need to continue talking. Keep carrying on and doing what you’re doing.”
Then on the opposite side of that, those who aren’t holding equity but they do 100% exit, they’re thinking retirement. That group, what are some of the aspects, Joel, that you’ve noticed through the years that tend to happen to that person thinking, I’m riding off into the sunset? Does everybody do that?
Yeah. It really depends on the individual. Of course, we’ve seen people take the full retirement option and they really were able to separate themselves from the business. They had plans. We see people with travel plans or with recreational vehicles. They’re just ready for a new phase in their life and they realized, “Hey, that was the first 30 or 40 years of my professional career and that’s finished. And I’m really looking forward to traveling with my spouse or to spending time with my grandkids.” And they’re able to completely let it go. Others really struggle with the transition. They kind of keep tabs on that business and in their minds and in their hearts, they’re still, they’re getting feedback from some of the employees they’re close to. And they’re they thinking, “Oh, I wouldn’t do it that way. I would do it differently, or I would go down this avenue for growth. I wouldn’t go in that direction.”
So we see some different perspectives and it’s really driven by the seller’s personality. We try to recognize that early in the process. We try to set expectations for what this is going to look like. There are some middle ground solutions that can be applied depending on what our sellers are looking for. There’s everything from, “I want to get completely out of this. I really don’t want to be tied to the business in any way after we close.” And then there’s, “Hey, we don’t need you to stay as Chief Executive Officer or as the senior executive, but you know so much about the business. You are so prominent in the industry. Would you consider a consulting engagement under which we just kind of call you on an as needed basis? Or maybe you come to our quarterly board meetings and help with oversight from that level.”
We see quite a few transactions where the seller is retained for a certain number of years to continue to drive the company forward. And that’s more often a situation where the seller realizes, “Hey, I’m approaching retirement. I’m not quite finished yet. I’ve got several more years that I would like to work.” So in that way, they are able to stay very directly engaged in the business and really have some influence over the business directly. So we really try to talk with our clients up front and really map out, what is that ideal outcome that you’re looking for? And those are the clues that we need to decide, how do we market this company? What does the buyer universe look like, given that desired outcome?
So many good insights to that, and Brandon and Joel, thank you both for taking the time today to share that insight, to share that expertise as we’ve covered these five different stages. And listeners, if you would like a PDF of the transaction timeline that maps this journey out, just email us at [email protected], [email protected], or call 334-328-0988. 334-328-0988. To get more of these episodes, visit cricpa.com, cricpa.com. And to learn more about selling your business, visit us online, criadv.com. Thank you so much for listening.
If you want more CRI insights or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures: The CRI Podcast. You can subscribe to It Figures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.
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