Dr Jeff Cornwall

Kauffman’s eVenturing site just posted a new collection of articles and tools related to exit planning.
Let me frame all of the excellent technical information available at this site in the context of the reality of the sale process. It is a rocky road, even at its best. When we got prepared to start the process I was lucky enough to have an attorney who gave me a strong dose of reality about how many deals fail along the way. It helped keep me grounded in what can be one of the most emotional rides of your life.
It all usually starts with a letter of inquiry. The first time you get one, the temptation is to start counting all the money you are about to get. But, hold on to your hats. This stage is about as serious as a smile and a wink at a singles bar. Any company in an acquisition mode will be spreading these around all over the place trying to get a bite. About 90% of the time these inquiries go nowhere.
If the flirtation process of the inquiry moves ahead, next will often come some sort of letter of intent. This is kind of like a promise to go steady. Both parties agree that they are seriously interested in seeing if this can move ahead. Often there is a promise of exclusivity required, but most sellers try to avoid this to keep the buyer honest and hopefully drive up the selling price with a little good old competition. More often than not, the buyer prevails in this and the seller has to promise not to entertain other offers, at least for a little while. Somewhere in this stage the basic form of the deal starts to take place. There are confidentiality agreements that allow the buyer to get enough information to float a trial offer. Remember, the deal almost never gets better for the seller past this point, so this is where you need to negotiate hard. About 50% of the deals that get to the inquiry and deal formation stage fail to make it any further. (If you are keeping score, we are now down to 5% of those initial inquiries still being active).
Next comes due diligence. This is like the stage when he or she gets to meet your parents, find out what you really keep in your sock drawer, learn what you actually make and what you spend your money on, and decide which family you are going to spend Thanksgiving with each year. The buyer will want the right to go through all of your contracts, all of your personnel records, all of your corporate minutes, and do anything else they can possible think of to dig stuff up about your business. It is an intrusive process to say the least. At this point you will likely have to share with your employees and customers that you are thinking of selling, if you haven’t told them already. And the worst part is that your employees and customers may get all concerned over nothing, as about 50% of deals fail during due diligence. (We are now down to about 2.5% of the deals still being alive at this point).
Finally, if you make it through due diligence, comes the closing preparation. This is kind of like the final preparation before going to the alter, including negotiating a prenuptial agreement. Remember the old saying “the devil is in the details”? This has never been more true than in the closing process of selling a business. This is where the lawyers from both sides kick into overtime, fighting over the specific terms of the sale. Of course at this point you are ready to say, just get it over with! But, those details that your lawyer wants you to focus on and pay attention to really matter. Why? Because the deal is not really over at closing. There are hold-backs of money, warranties, and sometimes earn-outs that all can lead to major problems post sale if you are not careful during preparation of the closing documents. When your attorney says to pay attention, be patient and listen, you better pay attention, be patient and listen. If the sale of your business is not handled properly, the next stage is litigation, where all of that money you made selling the business can still be at risk. (Another large chunk of deals can fail during the closing process, leaving only about 1-2% that make if from initial inquiry to a final closing).
The moral of this tale is to be realistic, be informed, and be prepared when you enter into the exit stage of your business. And remember that while falling in love is great, it is a long way to the alter.