News & Resources

Part 1: Five Things I Learned From Selling My Business

Tony Richardson, Managing Director  

For the first 25 years of my career, I worked in a variety of consulting and implementation roles primarily related to helping customers adopt new technologies. From various roles at Microsoft in different product groups and services organizations, with the majority of that time spent in Microsoft Consulting Services. In 2005 I took the lessons learned at Microsoft and founded Xtreme Consulting Group, Inc. Over the next 12+ years of operating my business I learned the intricacies of the industry, and through a combination of organic growth and acquisitions we were able to grow Xtreme to a peak of $84M in revenue. 

Upon selling my business, I entered the world of mergers and acquisitions; since then, I have served as an M&A advisor to many other entrepreneurs going through the same journey. Some of my expertise has come from my own first-hand experience buying businesses and selling my company, and some I have acquired during the past six years as an investment banker.  

This week I’ll be sharing the top five things I learned about M&A through the sale of my own business. Next week, I’ll continue this post with the top five things I’ve learned as an investment banker advising other entrepreneurs and business owners. These are important considerations for any entrepreneur considering a sale, or partial sale, of their business.  

  1. Cash-free / debt-free – not as simple as it sounds. Most M&A transactions are negotiated on a cash-free and debt-free basis. This means that the seller keeps all cash and pays off all debt at the time of the sale. However, it is never that simple. Cash and debt issues are often identified later in the transaction and negotiated in the purchase agreement. It is important to have competent M&A attorneys and investment bankers negotiating on your behalf.  
  2. Working Capital peg – a negotiation sticking point. While sellers intend to sweep excess cash from their business at the time of close, they must leave enough money in the company’s bank account to allow the business to operate normally. This amount is called the working capital peg, and the precise amount is negotiated between the buyer and seller, preferably with the assistance of a competent advisory team. The peg is typically determined by taking an average of a normalized or adjusted net working capital for the last twelve months or, in some cases, a shorter period. A higher or lower working capital peg has a direct impact on the amount of cash a seller takes home. 
  3. Representation and Warranty Insurance – Is it necessary? Who pays for it? Rep and warranty insurance is becoming increasingly common in private transactions, especially in transactions of reasonable size or complexity. It is estimated that it is used in 20-25% of US private transactions. Commonly, the buyer will implement a policy that provides them a source of recovery in the event of a breach, while also reducing the seller’s escrow and exposure to rep and warranty claims.  
  4. Asset sale vs. stock sale – which is best? As a general rule, buyers prefer asset sales and sellers prefer stock sales. When a company is sold via an asset sale, the buyer purchases individual assets, while the seller frequently maintains longer-term liability obligations. When a company is sold via a stock sale, the seller typically experiences tax advantages and no longer maintains liabilities. Prior to considering an offer under either scenario, you should have a tax professional calculate your net proceeds and any potential long-term liabilities.  
  5. Investment bankers / brokers are not fiduciaries. Attorneys, Accountants, RIA’s, etc. are fiduciaries. Investment bankers and business brokers are not. Make sure you find someone you trust and has your best interest in mind. To the right investment banker, your life’s work will not be “just another transaction”.

At Alexander Hutton, we help business owners work through these considerations every day. If you are considering a full or partial sale of your business and you’d like to discuss your options with professionals who have been in your shoes, our team is happy to help.   

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