HOW TO AVOID BEING CHIPPED
The key priority of any seller would be to prevent the buyer chipping the price at the last minute. To mitigate this risk, there are a variety of strategies you can adopt, many of which lie in the handling of pre-sale due diligence:
Employ M&A accounting experts to carry out pre-sale financial due diligence based on the sustainability of sales, structured working capital and financial responsibilities. In the latter phases of the operation, seller due diligence will help to minimise surprises during the sale as well as the risk of price chipping.
The quality and authenticity of the data room records is often checked by these experts. When evaluating the value drivers, their emphasis also changes to provide input on the contract agreements; prepare fund flow statements, perform balance sheet closing date or working capital analyses; and help define improvements in purchase price.
Be well prepared
If you have prepared well to collate the data early, in order to present it cleanly and effectively by collaborating with your advisors, then you can free up management time to concentrate on running the company and reduce operational disruption. Consider instructing your advisors to prepare sell-side due diligence. This gives you control over how the company is presented and enables you to focus on running things smoothly.
Build in safeguards
Require the buyer on a weekly basis to issue written price confirmation with the penalty that exclusivity automatically terminates, as well as this, set a timeline of targets to be achieved by the buyer, under which the seller has the opportunity to withdraw exclusivity once again.
Once heads are signed, instil urgency into the process and do not presume that once you have shaken hands on the amount, the deal is done.
Fix issues early
Identify possible due diligence problems early and attempt to resolve them. If they cannot be resolved, carefully present them in order to ensure that the buyer does not complain unfairly that they should revisit the price.
Reveal problems early in the process, but not until bids and valuations for the first stage have been submitted, first get a feel for the valuation, so that the effect of a problem can be properly calculated.
Offer alternative protections to an upfront price adjustment to the buyer, such as compensation cover (on conditions that the seller retains the activities of the issue) with an escrow so that the buyer has confidence that if a claim arises, he has recourse.
Overall, an ill-prepared seller will be open to prospective buyers finding skeletons in the closet or glaring issues in the business, which is certainly a scary prospect. The keys to surviving and avoiding a price chip lie in careful preparation and strategic planning.
Venture Corporate Finance is a middle-market M&A advisory firm for clients planning to sell their businesses, raise capital, restructure, or grow with acquisitions. We provide independent advice and bespoke transaction solutions to meet their specific objectives.
For more information on corporate finance and M&A services, contact Venture Corporate Finance.