As the owner and possible seller of a growing Pest Control business sometimes we run into situations where there seems to be a good deal on the horizon and the idea of purchasing a competitor is appealing. And depending on what stage you are in life, from an M&A seller perspective selling your firm might also be appealing. But how is it done? As in any large decision no matter who you ask, they’ll have an opinion.
Problem: If those opinions don’t come from qualified professionals, they can be drastically wrong and end up costing you a lot of money in terms of the purchase price, payouts and or taxes.
Solution: You need to consult a good lawyer or CPA who specializes in merger and acquisition structuring. These professionals can be expensive, so we recommend you familiarize yourself with the process so you can communicate your vision before you seek out this advice.
Let’s do a run-down of how the process works:
PCO M&A Buyer’s Perspective
Confidentiality Agreement / Info Request
- Avoid the risk of competitors trying to steal the deal or driving up the price if it became known that Seller was selling the business
- Need to know more information about the seller’s business strengths & weaknesses, (e.g. personnel, customers, equipment)
Letter of Intent / Due Diligence (D/D)
- Agree on major deal points such as price and structure of proposed deal (stock or asset purchase transaction)
- Verify the accuracy of Seller’s financial and non-financial information about the business
- Timing, access to records, cost and proper talent to conduct D/D
Financing the Deal
- Smallest down payment as possible to reduce risk of loss
- Pay balance due seller over a long period (3-5 years) at a low interest rate
- Use bank and/or investor money
- Use future earnings of Seller’s business to pay balance due Seller
Purchase and Sale Contract
- Want as many representations and warranties as to all aspects of the business being purchased
- Want Seller to retain all liabilities prior to closing the deal
- Want to eliminate any chance of risk for items not discovered during D/D
- Want to withhold 10-20% of the purchase price in escrow for the first 12-24 months after closing the deal
Other Considerations
- Any employees not being retained
- Is the Seller’s office lease being assumed
Closing the Deal
- Ensure any open issues are satisfied free/clear title to business is conveyed
PCO M&A Seller Perspective
Confidentiality Agreement / Info Request
- Ensure trade secrets and customer lists are protected and not stolen by Buyer
- Give as little information as possible other than positive aspects of business
- Keep lawyer and accountant fees in check given deal may not proceed
Letter of Intent / Due Diligence (D/D)
- Agree on major deal points (same as Buyer)
- Posture business for the highest valuation
- Negotiate and minimize the volume of business records to provide under D/D
- Give Buyer a short window to do D/D
- Seek break-up fee from Buyer if LOI is terminated by Buyer after D/D process
Financing the Deal
- Largest cash down payment as possible in case business stalls after selling
- Obtain guarantees and collateral to secure any purchase price being paid over time
- Do not act as the bank for the Buyer but if so then short period and high rate of interest
Purchase and Sale Contract
- Give few representations and warranties about the business and make them precise and narrow in scope
- Make the sale of assets on “AS IS” basis
- Provide as little indemnification as possible on potential contract breaches
- Reduce or eliminate any proposed escrow holdback from the purchase price
- Shift as many business liabilities to Seller post-closing
Other Considerations
- Negotiate a long-term employment agreement
- Employee liability for any terminated
Closing the Deal
- Ensure Buyer cannot terminate deal before closing, get the money
Conclusion:
Expanding your firm through acquisition or selling your firm to harvest the fruits of a lifetime of work can be a difficult decision with all kinds of roadblocks and risks. Prior to embarking on a large decision such as this, the PCO business professional should understand the elements of how a purchase or sale is crafted then consult a qualified CPA and attorney to help guide them through the process in order to minimize the tax consequences, legal issues and help negotiate the best deal.
