As originally posted in the Boerne Business Monthly, September 2020.
Have you ever wondered how the deals on NBC's hit series Shark Tank work out? As a professional who works with businesses every day, I've been drawn to the show and others like it. It's easier than you'd think, to get pulled into the pitch. A budding entrepreneur walks onto the floor and makes an audacious pitch to a panel of prospective investors known as the sharks. The sharks pick the business apart and gather as much data as they can in the short amount of time that they have available. Ultimately, a deal is either negotiated on-air with the entrepreneur, or the entrepreneur is shown the door. Even after the show is over, the deal is not complete. A preliminary agreement has been reached but many more details of the transaction remain to be hashed out. In 2016, Forbes magazine conducted interviews of 237 businesses that accepted deals on air during the first seven seasons of the show and found that 43% of the deals fell apart and another 30% of the deals were completed with changed terms. That leaves only 27% of deals worked out as negotiated on-air. Interestingly, based on my own experience, these findings are not outside of the norm for business transactions as the transactions can be highly complex and present any number of unknown challenges. As a business owner looking to buy or sell an enterprise, statistics like this can be nerve-wracking. But given the right planning, you can easily navigate the deal making process and minimize the likelihood that your deal goes awry.
As a buyer, due diligence is vital. Once you have a target in mind and are ready to execute a letter of intent, be sure to include provisions to allow adequate access and time for due diligence procedures to be completed. As part of your due diligence, you'll want to make sure you have a thorough understanding of the business' history, its corporate structure, ownership, its financial history, financial projections, customer mix, vendor relationships, and the legal and tax implications of the current deal structure. The main goal of the buy-side due diligence is to minimize the likelihood that you encounter any unwelcome surprises after closing.
As a seller, those same buy-side factors, detailed above, are key as you'll want to be aware of the various strengths and weaknesses of your business so you are in a strong position to negotiate the transaction. Knowing this information may also help you strengthen your business before marketing it for sale. Moreover, the sell-side due diligence process could be especially crucial as you may need to evaluate the prospective buyer's means to finance the purchase and their ability to run the business going forward. After all, an earnout paid subsequent to the sale is no good to you if the buyer cannot keep the business running.
Our team of professionals at Akin, Doherty, Klein & Feuge, P.C. has extensive experience working with businesses across a wide array of industries and has access to financial resources and publications that we can be used to help benchmark your business against the competition. This puts us in an excellent position to help you avoid some of the many potential pitfalls entrepreneurs encounter in these complex business transactions. If you are currently working through a business sale or if you are contemplating buying or selling a business in the future, please do not hesitate to reach out to us for assistance.