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CEO Advisor® Newsletter
October 2018
Critical Issues in M & A Transactions
There are several critical issues that should be addressed early on (at the Letter of Intent (LOI) stage or as soon as possible after the execution of a LOI) when negotiating a merger or acquisition transaction. The seller and the acquiring company should consider the following issues when contemplating a transaction.

These issues should be discussed with the buyer's or seller's team of advisors, which should consist of an M&A advisor, corporate/transaction attorney and tax advisor. This team of advisors will benefit any party in a transaction by hundreds of thousands to millions of dollars depending on the size and complexity of the transaction.

5 Critical Merger and Acquisition Transaction Issues

1. Cash vs. Earn Out vs. Seller Financing vs. Equity

The method of payment for a transaction, whether in cash or non-cash methods, may be a determining factor for both parties in consummating a transaction. The following are key factors to determine:

Cash. Cash is the most desired, most liquid and least risky method from the seller's side of the transaction. Cash tends to be the buyer's strongest position and should pre-empt rival bids better than equity or other methods. A strong seller can expect 50% - 70% cash in most cases, but don't count on 100% cash in a great majority of sales.

Earn Out. Since a company is a living, ever changing entity, most acquiring companies want to both incentivize and gain some assurance that the seller has a strong on-going concern and that the seller should be able to achieve its forecast in the future.  An Earn Out involves quarterly or annual cash payments to the seller for achieving Revenue and/or Net Profit goals, as well as, other goals in some cases for a one to five year period. There are typically stipulations to achieving the Earn Out payments such as the founder(s) staying employed with the acquirer or other criteria.

Seller Financing. For most sellers, seller financing is far more favorable than an Earn Out, but most transactions do not include seller financing.  In some circumstances, seller financing for a minor portion of the transaction can be more beneficial to the seller than the risk of an Earn Out and may suit both the seller and acquirer.

Equity. Equity involves the payment of the acquiring company's stock, issued to the stockholders of the seller, at a value relative to the seller's value. There are transaction costs and risk, as well as, tax implications to receiving stock as part of a transaction so both your M&A advisor and tax advisor should be consulted early in the process of the negotiations. The issuance of equity will generally provide more flexible deal structures and can be very lucrative to the seller in an up market.

2. Deal Structure

There are basically three methods for structuring a transaction:
A) Stock sale, B) Asset sale, and C) Merger. The seller and the acquirer have competing interests.

Primary issues relating to the deal structure are: 

(i) Limitation of liability, (ii) Third party consent requirements, (iii) Shareholder approval, and (iv) Tax consequences. You should work closely with your M&A advisor, attorney and tax advisor when discussing the best method of each transaction early in the sale process. Typically, privately-held companies are acquired as an Asset purchase.

Limitation of Liability. Unless negotiated otherwise, with a Stock sale, the seller's liabilities are transferred to the buyer as part of the transaction. Similarly, the surviving entity in a Merger will assume all liabilities of the other entity. With an Asset sale, only those liabilities that are designated as assumed liabilities are assigned to the acquirer, while the balance of the liabilities remain as an obligation of the seller.

Third Party Consents. To the extent that the seller's existing contracts have a provision against an assignment, a pre-closing consent to assignment must be obtained. No consent requirement exists for a Stock sale or Merger unless the contracts contain specific provisions against assignment upon a change of control.

Tax Consequences. A transaction can be taxable or tax-free depending upon the deal structure. Asset sales and Stock sales have immediate tax consequences for both parties. However, certain Mergers can be structured such that at least a portion of the sale proceeds can receive tax deferred treatment.

A) An Asset sale is most desirable to an acquirer, because a "step up" in tax basis of the assets occurs for the acquirer equal to the purchase price, which is typically the fair market value. This enables the acquirer to significantly depreciate the assets and improve profitability post-closing.

B) With a Stock sale, the selling shareholders pay long-term capital gains provided they owned the stock for at least a year. Additionally, the acquirer would have a cost basis in the stock purchased and not the assets, which would remain unchanged and cause an unfavorable result provided the fair market value is higher.

C) With a Merger, there is an opportunity to defer some (or possibly all with a merger of equals) of the tax liability whereby the value remains tax free until its eventual future sale.

Shareholder Approval. Selling shareholders are required to grant approval of a Stock sale. In most states, non-consenting shareholders of an Asset sale or Merger shall be entitled to exercise appraisal rights if they question the value of the deal and its terms.

3. Working Capital Adjustments

M&A transactions typically include a working capital adjustment as a component of the purchase price. The buyer wants to insure that it acquires a target with adequate working capital to meet the requirements of the business post-closing, including obligations to customers and creditors.
The seller wants to receive consideration for its assets that enabled the business to operate and generate profits. In terms of measuring the working capital, the agreement will include a method that compares the actual working capital at the closing against a target level established in the non-binding Letter of Intent.

4. Representations and Warranties

Both parties will be required to make certain negotiated representations and warranties about the business and the process of fulfilling the transaction. These representations and warranties should be taken seriously as any missteps in the post-closing period will result in the other party referring back to these provisions of the agreement with real consequences. Only promise what you can live up to. Gaining guidance from your M&A advisor and attorney will be extremely helpful.

5. Closing Conditions

A section of the transaction agreement will include a list of closing conditions which must be met in order for the parties to close the transaction. These are often negotiated at the time of the definitive legal agreement (although sometimes a detailed list will be included in the Letter of Intent).

These conditions may include, Board approval, the absence of any material adverse change in the seller's business or financial conditions, the absence of litigation, the delivery of a legal opinion from seller's attorney and shareholder approval. Additional provisions that are key to a transaction for an acquirer are non-competes and non-solicitation of employees and customers.

Well in advance of commencing the sale process, assemble your team of a seasoned M&A advisor, corporate/transaction attorney and tax advisor. Contact CEO Advisor, Inc., an M&A advisory firm with over 35 years of M&A experience.

Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520,by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for a no cost, no obligation initial consultation today.
Source: Excerpt from the Philadelphia Business Journal, Aug 9, 2018
I'm a big believer in career advisors. For one thing, they help drive measurable and positive outcomes. That's clear from a wide range of studies over many years on the subject. Advisors, coaches, mentors - however you label them - have been found to improve competitiveness and leadership development.
A review of 25 years' worth of research on mentoring, published in the Journal of Vocational Behavior, found mentors "improve career outcomes for individuals. My own experience confirms all these findings." 
The type of relationship or counsel you are looking for also evolves over time. Ironically, many people abandon these sorts of partnerships as they climb the corporate ladder. They feel they can go it alone, but I am a firm believer in leadership under advisement. 
Early on in my career, I sought out coaches or mentors. As I rose through the executive ranks, and especially as a CEO, the stakes became higher and I sought out trusted advisors - individuals who sat outside of the organization that I could safely and confidentially bounce ideas off of and get insights from, in addition to my management team. These people continue to round out my thinking and help me navigate through challenging situations, prioritize opportunities, and improve performance.
When it comes to advisors, the duration of the relationship is an important factor. There can be people in your professional life who make a distinct impression. A great orator, a wise elder, or a paid consultant that gives you sound advice.
But, in my experience, when it comes to making an indelible mark on your career, finding a person who you implicitly trust, who truly understands your strengths and weaknesses, who pushes you to be accountable, who you are willing to take constructive feedback from, and who can be a thought partner - well, that doesn't happen overnight. That builds gradually and requires investing time and energy and deliberation. It's a relationship where there is no agenda other than making you the best you can be and reinforcing it through remarkable results.
I've been fortunate to have several long-time advisors. One of them has been working with me for many years as an executive coach. His role at that time was to help us think through executive leadership, transformation, and value-driven outcomes. I remember one of the first things that struck me that he was a "strategy guy," with strong business acumen and a hard drive for accountability and results. 
He asked thought-provoking questions, always pushed for more, challenged the status quo and was all about partnering to achieve the best outcomes for the organization. As a senior executive in the company, I quickly came to value him as a resource to help think through some of the complex issues we were facing. The relationship evolved to trusted advisor.
His experience is diverse. He was a Marine Captain and has worked for a range of Fortune 100 companies, such as Pepsi, GE and Citigroup, as well as smaller companies, including a recent one in the medical devices industry where he led the build-out of a top-tier domestic and international organization. His vast experience across a variety of highly competitive industries informs his keen insights, intuition and advice on business and cultural issues - all of which have been invaluable to me. 
While nothing fully prepares you for the challenges of being a chief executive, having a business advisor when the going gets tough or to just to be a thought partner is an enormous plus. Our always-evolving, never-ending agenda is building "a remarkable organization" and keeping it remarkable as dynamics change. 
Very few companies consistently outperform over long periods, so setting out to do so means you have to strategically beat the odds. It's a fluid and complex process - you have to get the right team and culture in place, set forth a clear strategy that the team can execute against, establish goals with measurable outcomes, and learn how to navigate and best serve a diverse group of stakeholders with different agendas. 
As time goes on and new opportunities and challenges constantly present themselves, organizations and cultures need to be rethought and assessed. It's important to have someone who is not ingrained with the day-to-day team, that you trust, to help you think through these issues, challenge you, and provide critical insight.
I'm enormously grateful for the impact my business advisor has made - and continues to make - in my professional growth as a trusted confidante. I now take elements I have learned from him and use it with others who are looking to grow as leaders. Whatever stage you're at in your career, make the time to cultivate a trusted advisor. 
CEO Advisor, Inc. has 38 years of advising some of the most successful CEOs and business owners of companies in the Southern California area. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520,by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for a no cost, no obligation initial consultation today.
7 Ways CEOs Can Continuously Improve Their Performance 
Continuous improvement is vital to performing optimally as a CEO. The best ones make time for it, because they see it as an investment in themselves and their company that will pay off in real dollars now and down the line. So what specifically can you do as a CEO to improve your skills and performance? Here are 7 ways. 
1) Attend Training Programs: For the past several years I have given an annual seminar on the CEO position. The biggest excuse I hear from CEOs for not attending is that they don't have time. From my experience the CEOs who do attend are typically the ones who are already better than most. Because of this, they know how to make time to improve their skills. If you think you don't have time to get better at your job, then you are not doing your job properly.
2) Read Books: CEOs who take the time to read about the experiences of other chief executives and other business leaders have an advantage. While the advice may not be perfect for every situation, I can tell you that I almost always come away from reading a top-rated business book with a couple of ideas that make a difference in my businesses.
3) Write Some Content: Writing forces you to clarify your thoughts in a way that is highly beneficial for future action. Taking the time to write a regular email to your company explaining your thoughts and actions can do a lot to improve your thinking as well as align the team with your vision. Many CEOs have begun a regular blog to comment on issues they find interesting. Formalizing your writing schedule will pay big dividends as a CEO.
4) Meet with Wise People: As a CEO it is part of your job to find people from outside your company who can bring knowledge and experience to bear on your problems. Make an effort to get to know people in your community who have relevant experience. Seek out the other leaders in your industry to establish relationships. Many times the relationships I formed within my industry provided tremendous value to the company.
5) Study Yourself: Learning about yourself, how you think and react, is critical to developing as a CEO and overcoming your internal biases. There are many different self-assessments tools available - from Myers-Briggs to Marcus Buckingham and Donald O. Clifton's strengths-based assessment. Many firms specialize in this area and may offer a free interpretation of your results. If you find one you like, extend it to your employees so you have a common language to address personality issues across your entire team.
6) Gather Feedback: If you are not getting feedback about your performance, then you have a problem. It is not enough to just ask for feedback and hope it comes to you. You should actively solicit feedback both from your employees as well as your board or outside advisors. Getting feedback from employees will often require an anonymous feedback mechanism or third-party gatherer. Feedback from your board should be both informal and formal as well as on a regular schedule.
7) Seek out Mentors and Advisors: Reach out to those who have gone before you to gain from their expertise and experience. The CEO job is unique, so make sure you have people in your circle who have been in the chair and know the challenges of the job. Avoiding lost time and missteps converts to big dollars in your pocket.
If you are not improving your knowledge and experience, you are letting the company down. Don't be the CEO who keeps doing the same things over and over and wonders why he/she doesn't get different results.
To learn how to achieve better results, accelerate sales, increase profits and increase shareholder value, call Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520 for a no cost initial consultation. 
How to Optimize the Value of Your Company and
Sell Your Business at the Highest Price

Your company is likely to be your most valuable asset. Preparing to sell, optimizing your company's value and effectively and efficiently selling your business for the best price and terms is paramount for every CEO, President and business owner.

CEO Advisor, Inc. is offering an exclusive, one-on-one M&A consultation at no cost. Take advantage of this opportunity to discuss the value of your business and an optimal exit strategy with our expert, Mark Hartsell, MBA, President. This discussion will include all critical aspects of selling your business for the highest price and best terms.

Call Mark Hartsell, MBA, President at (949) 629-2520 today for a no cost initial consultation.

Mark Hartsell's Credentials:

  • Certified in Mergers & Acquisitions, Wharton Business School, University of Pennsylvania
  • Master's Degree in Business, Loyola University; University of Maryland Undergraduate, Business Admin.
  • 38 Years of Experience in Senior Management Positions, Mergers and Acquisitions, Business Consulting and Fund Raising
  • Founded, Funded, Grew and Sold a SaaS (Cloud-based) Software Company to a NASDAQ Company (DRIV) in 2003
  • President of CEO Advisor, Inc. (Business Consulting, Fund Raising, Mergers & Acquisitions) for the Past 15 Years; Have raised many millions of dollars of growth capital for clients, successfully bought and sold many businesses, and grown our client's sales, profits and value tremendously.

Points of discussion in the Mergers & Acquisitions consultation will include:

    • Formulating an Exit Strategy
    • Valuing Your Company
    • The Sale Process
    • Letters of Intent and Due Diligence
    • Questions to Ask Before Selling Your Company
    • Do the Numbers Add Up for You
    • Indicators of the Best Time to Sell

About CEO Advisor, Inc.

CEO Advisor provides business consulting, growth capital and mergers and acquisitions advisory services affordably and effectively to meet the specific needs of CEOs and business owners of small to mid-size companies in a wide range of industries, including software, technology, media, professional service firms, healthcare, manufacturing and more.

CEO Advisor's mission is to advise CEOs, presidents, business owners and principal executives with the needed expertise and focus, coupled with hands-on advice and work performed to grow your business to the next level or realize your life's dream through a successful exit.

Call Mark Hartsell, MBA, President at (949) 629-2520 or email MHartsell@CEOAdvisor.com today for a no cost initial consultation.

Testimonial 


"I've worked with Mark on multiple client engagements over the last several years. We have worked on transactions including a technology asset acquisition, preparing an operating business for sale and the turnaround of a distressed business. Mark provides his clients with expert advice and counseling. He is great at developing a big-picture plan, and doing the work and providing the direction to implement it. Mark is a good communicator, very responsive and easy to work with."


Corporate and Transaction Attorney

"As a President of a mid-size technology company, I have been very pleased with the services provided by CEO Advisor®. He contributed in many areas, but identified marketing and sales as our primary need. His guidance and contributions have been invaluable in establishing and maintaining a meaningful marketing and sales program for the company. He is a knowledgeable business advisor and a pleasure to work with."
CEO/President, Engineering Services/Manufacturing Company


Whether it is growing a business to the next level, turning a distressed company around or preparing a company for an exit, Mark's firm, CEO Advisor, Inc, provides a broad range of services and Mark is there for the CEO every step of the way."

 


Partner

Haynes & Boone, LLP

Words of Wisdom



"A smart man makes a mistake, learns from it, and never makes that mistake again. But a wise man finds a smart man and learns from him how to avoid the mistake altogether."


Roy H. Miller
Author