Summary While recording episodes 26 and 27 of the In/organic Podcast, Ayelet and Christian delved into a small rabbit hole, discussing buyer and seller dynamics in transactions involving unsophisticated buyers and sellers - a term commonly used in the industry. We clarify in the video that unsophisticated really means buyers who do not do a lot of acquiring or sellers who are usually selling their company for the first time and do not have good M&A counsel.
We did not get into the details in this recording, but the key takaways are:
If you are a first time seller: 1) Be Informed: Retain experienced M&A counsel - that is an attorney who specializes in M&A (which is different from a business lawyer who touches M&A, but is not a transactional lawyer by trade). Most M&A lawyers are already in your network and are willing to offer 1-2 hours of off-book time to help with key considerations before getting too far along in the process. 2) Ask the sellers questions. If you don't understand terms or if there is anything that is unclear, go ahead and ask. For example, if you are offered $10 million for your business, is that all cash, a closing, or something else? If it includes stock in the sellers company, you have a right to ask for some information from the acquiring company ("reverse diligence") in order to qualify the value of the stock in the company relative to the value you are exchanging.
If you are an unsophisticated buyer: 1) Get Ahead of Legal: Don't let the lawyers be the first ones to bring forward terms that will economically impact the deal without having spoken about it first. Example things are escrow, reps & warranties insurance, special indemnities, discounts to EBITDA derived from quality of earnings analysis. When you are 5 steps ahead of key negotiating items in legal, it builds trust and keeps legal costs under control. 2) Agree on the earnout structure and compensation before going to LOI or drafting definitive agreements. This is basic, but the intent is that the seller is a part of the creation of the construct versus a recipient. Even if there is not a lot of room for flexibility, its much better to preview and ask for input than throw over the fence and have lawyers negotiate the terms.
Enjoy!
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