The M&A Guide To Help Sell A Business Services Company

Most business owners are experts in running their business, but that doesn’t make them experts when selling it. Selling a business is a nuanced and challenging process that can involve careful consideration for laws and regulations. The larger or more complex a company is, the more involved the sale process will be. 

This is where an M&A Advisor comes in. A broker work with lower middle-market companies for sale and provide fully managed service from when you decide to sell your company until the deal is complete. An M&A Advisor most commonly works with large corporations on regional or national deals, but they work with lower middle-market businesses for sale, too. 

An M&A broker is also an expert source for complex businesses with valuations that are tricky to determine. A broker will carefully consider the competitive advantages and intellectual property of your company and ensure that your business's valuation accounts for the things that make your business special. 

Buyer Analysis - Qualifying Potential Buyers

The selling of any business is unique, and potential buyers can include everyone from your competition to current employees, Private Equity Groups, strategic, synergistic, or corporate investors. M&A Brokers can work with any combination of potential buyers to deliver a sale that’s beneficial to all parties. 

One of the many challenges facing business owners when selling their business is understanding and qualifying their prospects. Often, owners end up divulging proprietary information to competitors as a show of good faith, only for the deal to fall through. When negotiating with former or current employees, owners often let their familiarity and fondness for that person cloud their negotiating strategy. 

Each potential buyer brings negotiation challenges to the table, which means challenges when managing California businesses for sale. M&A Advisors help to shield ownership from potential negotiating problems, and they serve as a trusted advisor as they navigate selling your service business for the best price possible. 

Exit Plan

One of the first steps a M&A Advisor will take is to develop the M&A exit strategy for the service business. This plan acts as a framework for navigating the process whenever there are small and mid-market companies for sale. 

First, you will sit down with your M&A Broker to formulate a strategy for putting your business on the market. This strategy will detail where to plan on promoting the sale, the potential buyers you are targeting, and what you will do to market the business. 

As the exit plan is being put in place, this is also when you’ll work to arrive at a firm valuation for your business. A qualified M&A Advisor will be able to accurately approximate business value while also setting proper expectations as you move through the sale process. 

Once the business is on the market, your M&A Advisor will market the business for sale and begin keeping a shortlist of interested buyers. Once there is a pool of interested parties to pull from, ownership and the M&A Advisor will rank potential buyers and start the process of engaging with the potential suitors that can provide the best value for your business. 

Deal Origination

Once you’ve amassed a pool of potential buyers, the deal origination process begins. 

Deal origination, or deal sourcing, is the process of marketing the sale of a business to potential buyers. M&A brokers with lower middle-market businesses for sale leverage their network of contacts and use various tools to promote a sale and begin the process of striking a deal. 

With large publicly traded corporations, deal origination is handled from Wall Street. In the case of mid-market companies for sale, the process is a bit more grassroots, with MA& Brokers relying on a combination of the contacts in their network, their websites, and M&A networks which serve as databases that show all the active mandates a M&A Broker has, on either the buy or sell side M&A. 

In many cases, an M&A Broker's best source of new leads is the cold outreach efforts they engage in within their network. M&A Advisors maintain a carefully curated contact list of former and current clients, and they will send regular messages to keep them up to date with the various mid-market businesses for sale they are brokering.

These advisors also conduct business from their websites, and a quality website can serve as a dot connector between buyers and sellers. Those in the market to buy or sell a business have no doubt engaged in some due diligence to learn more about the area’s M&A Brokers as they search for a suitor that offers a strong fit to their needs. 

M&A Brokers also use M&A deal platforms to promote sales. These platforms are essentially databases that provide a detailed list of available deals and the relevant information necessary to follow up with the appropriate parties.

With your M&A Advisor actively engaged in marketing your business for sale, it’s a matter of time before qualified offers begin coming in. All the while, your M&A Advisor will continue to build and leverage relationships as you search for the most lucrative opportunity. 

Once the offers are in, you’ll work with your M&A Broker to perform a careful market analysis to determine which offer provides the best opportunity for your business. With the most lucrative opportunity identified, it’s time to begin the process of negotiating the deal. 

Negotiating the Deal

As the buyer and seller enter the negotiation process, the first step is to draft a Letter Of Intent (LOI) that outlines the points of the deal that must be negotiated, protects both the buyer and seller, and clarifies the nature of the agreement (i.e., merger, partnership, sale). 

Since an LOI precedes the actual negotiation process, a Letter Of Intent is almost always written as a non-binding agreement. But, it does set certain expectations and provides necessary protections for both parties. For example, an LOI typically includes a Non-Disclosure Agreement that protects both parties' privacy as they begin the negotiations. 

Once a Letter Of Intent is in place to establish what must be negotiated, the buyer and seller begin ironing out any sticking points present, and the buyer starts the process of due diligence. 

Buyer Due Diligence 

When it comes to a financial agreement or any agreement between two parties, it’s critical that due diligence is being performed to ensure that the representations being made are acceptable for all parties. 

For the buyer, conducting due diligence amounts to doing thorough research into every aspect of the company they are negotiating to acquire. When it comes to mergers and acquisitions, a M&A Broker working on behalf of the buyer will conduct hard and soft forms of due diligence. 

Hard due diligence requires the study of costs, structure, assets, liabilities, and benefits associated with a business. This form of due diligence relates to the hard numbers and legal implications of the sale. 

Beyond the numbers behind a company, there is another less-tangible driver of the business's success, and that’s the human capital that propels the business forward. Auditing this aspect of the business is known as soft due diligence. 

Soft due diligence is the study of a business's corporate culture, employee relationships, and leadership. In many companies, the employees are what drive the continued success of the business. In other cases, a fractured culture and questionable leadership can be a significant red flag for an otherwise promising-looking deal. 

Buyers should practice both forms of due diligence to ensure that all parties are fully aware of the acquisition's terms and characteristics. 

Due Diligence Checklist For Selling a Business

While the onus is on the buyer to perform due diligence on the company they’re negotiating with, it’s in the seller's best interest to make this process as straightforward as possible. This helps avoid the appearance of impropriety and sets the stage for an open and mutually-beneficial negotiation process. 

As the business owner, you should expect prospective buyers to have questions they’ll need to be answered before they agree. This checklist covers most critical documents and essential questions a seller will have when evaluating California businesses for sale. 

1. Income statements
2. Records of Accounts Receivable and Accounts Payable
3. Balance sheets and Tax Returns from the last 3-5 years (including activity statements)
4. Profit and loss records 
5. Reconciled cash deposit and payment accounts
6. Utility accounts
7. Banks loans and lines or Letters Of Credit
8. Minutes of management meetings
9. Audit paper files 
10. The seller’s claims about the business (i.e., why they’re selling, the business’s reputation)
11. Privacy details of employees, partners, and customers
12. Stock information
13. Details about facilities, equipment, vehicles, and fixtures that are to be included in the sale
14. Intellectual assets including intellectual property, trademarks, and patents
15. Existing contracts with customers and employees
16. Partnership agreements
17. Lease agreements
18. Automated financial system details
19. Details of credit and historical searches relating to the business
20. An independent valuation of the business

Warning Signs for the Buyer

Many red flags can arise during the negotiation process on both sides of the table. These are the most common issues for buyers that can signal your negotiating partner isn’t operating in good faith. 

The seller won’t disclose information related to their reasons for the sale, financial statements, contracts, and more

• Seller doesn’t provide ample time to conduct due diligence
• They won’t introduce you to key business partners like supplies or landlords
• The business is embroiled in legal proceedings
• The seller is looking to close the deal quickly
• The seller has a questionable track record or credit history

M&A Brokers advocating for the seller must eliminate these warning signs to facilitate a deal. It’s common for one or more of these signs to be present during negotiations. They typically indicate that the seller is having a hard time parting with something they’ve worked so hard to build, which is a normal response to a business's sale. 

It’s up to the M&A Broker to acknowledge any pain points and work through them to keep negotiations moving in the right direction. 

Negotiating the Deal - Buy-Sell Agreement

Buy-sell agreements are useful documentation that can help guide a business through its sale if there are two or more partners with ownership in the business.  A buy-sell agreement can help resolve any potential disputes before they arise especially if one owner wants to sell and the other does not want to sell.  

Negotiating the Definitive Purchase Agreement

Offering middle-market businesses for sale involves several steps. The M&A Advisor works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it completely represents the legal wishes of each party. 

A good M&A Definitive Agreement is the lynchpin of a good transaction. Both seller and buyer exchange a large amount of information from different sources.  This is often over many months of conversations.  These exchanges are then condensed, with their individual interests, as best as possible into the Purchase Agreement.  

Items a typical Definitive Purchase Agreement may include:

1. Treatment of Shares, Options, and any other Securities; if appropriate to the transaction
2. Representations and Warranties
3. Covenants
4. Solicitation (“No Shop” clause)
5. Financing
6. Termination Fee (or “Break-Up Fee”)
7. Indemnification
8. Material Adverse Change (MAC) and Material Adverse Effect (MAE) Clauses
9. Closing Conditions

The Definitive Purchase Agreement can have potential pitfalls, so your M&A Advisor needs to keep the communication open with the Buyer and their Deal Team as well as the Seller and their Deal Team.

The M&A Definitive Purchase Agreement also needs to include details about tax obligations and consequences, especially if shareholders are involved.

Avoiding Pitfalls if you have a Buy-Sell Agreement

What if the seller is two or more individuals?

Many businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not have any interest in selling the business at all or may want something specific most buyers will not be willing to agree. If this is the case, hopefully there is a Buy-Sell Agreement in place as this will outline what each shareholder needs to do.  A few years previously I had a transaction with 9 shareholders.  One shareholder with a minority interest initially refused to sell.  Eventually they changed their mind but it was stressful while this played out.

If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, the pressure to decide the future direction of the business may be challenging.  This article provides additional information for an owner or shareholder with how to avoid buy-sell agreement pitfalls. To help their clients, M&A Advisors should understand the importance of assumption of liability, so their buyers and sellers know who is responsible for any lingering claims. 

The agreement also needs to have information about indemnity clauses regarding operations. For Business Services Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement. 

Buy-sell agreements can be confusing, so it is helpful to learn how to understand buy-sell agreements and how a buy-sell agreement can save a business.

The Legal Intricacies of Buying and Selling a Business in California

With lower middle-market businesses for sale, there are many legal intricacies that are far beyond the understanding of the buyer and seller negotiating the transaction. While a M&A Broker or M&A advisor is critical to the successful sale of a business, it’s almost always in the best interests of all parties to retain attorneys as well. 

When selling a service business in California, the legal implications of a sale extend far beyond the basics of who is selling what to who. An attorney who specializes in the sale of businesses will be able to draft all necessary forms, including term sheets, Letters Of Intent, or Purchase Agreements. 

An attorney will also help navigate other industry or location-specific requirements, such as licensing, escrow, and tax implications. Having an attorney also ensures thorough due diligence and lessens the likelihood of future litigation or state audit  arising from misunderstandings with the sale.

Final Negotiations

With all due diligence completed, and both parties eager to reach an agreement, all parties must engage in final negotiations. At this time, any additional sticking points will be addressed in the Definitive Purchase Agreement and negotiated until both parties can reach an acceptable solution. 

Once all parties agree on any remaining concerns or stipulations, a formal contract is finalized, and the closing process begins. 

Closing

With the terms successfully negotiated, it’s now time to facilitate the transaction by signing off on any required contracts and begin the process of transferring ownership of the business to the buyer. 

It’s common for the seller to stay on with the business in some capacity to ensure that the transition is smooth. It’s common for a former owner to continue to be involved with the company for several more years, usually in a higher-level advisory capacity. This arrangement helps to ensure that business can continue unimpeded through the ownership transition. 

Mistakes to Avoid When Selling a Service Business in California 

When it comes to California service businesses for sale, there are a few common mistakes that can dramatically impact your business's sale. 

• Too dependent on a small customer base
• No strategy for sustained growth
• Cash flow issues
• Commoditization in your industry
• No recurring revenue
• The business owner is the sole reason for success

Thankfully, these are all issues you can overcome to successfully sell your service business for the right price. But, it’s virtually impossible to take control and remedy these issues without a competent M&A Advisor in your corner. 

As a seller, working with an M&A broker can help you avoid many of the pitfalls associated with a sale. They can also help remedy any issues that will prevent your business from achieving its full value in a deal. 

When you sit down with an M&A Advisor, you’ll be able to lay everything on the table and create a tailored plan that will help you address any issues that could prevent a sale or depress the value of your service business.