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Once companies find suitable partners for mergers or acquisitions, it may seem like the hardest parts of their business deals are done. In fact, the challenges have only just begun.
The next big step involves negotiation, a fine art that should never be undertaken alone. When it’s time to actually make the deal, you need two new best friends: your accountant and your attorney. Your accountant is essential because the biggest driver in almost every acquisition is the Internal Revenue Service. The structure and timing of any deal has huge tax implications. Using a great accountant, tax attorney, or certified public accountant is a must, since they can help structure the deal with the most favorable tax treatment possible. It’s important to hire this person early, especially before any letter of intent gets signed. That letter outlines the potential deal expected to be formalized so each party has transparency into the structure.
Your other best friend is your attorney, who will help drive the negotiations in your best interest. It’s important to focus not only on the purchase price, but all the nuances involved in the deal, such as staggering out payouts to ensure business continuity. I like structuring an earn-out (a future payment based on company performance) in every deal since it keeps both sellers and buyers motivated to transition ownership smoothly.
Once these key players are in place, the parties can help you negotiate the best deal for you. One of my clients, who came to me too late, was adamant about keeping his deal simple. Paying $525,000 for an assisted living facility, he wanted only a purchase price payout at closing and did not consult experts. But while he negotiated the purchase agreement, the company’s working capital tanked. So, the buyer had to inject another $200,000 into the business to keep it running, essentially making the purchase price $725,000. Had the buyer structured the deal more carefully, this could have been avoided. He hired me and an accountant shortly thereafter, and the next three acquisitions went smoothly.
Often, I think about John F. Kennedy’s 1961 inaugural address discussing negotiations. “Let us never negotiate out of fear,” he said. “But let us never fear to negotiate.” I always warn my clients not to be afraid to ask for what they want. Indeed, they should ask for more than they want. Part of negotiation is discovering what each party is willing to give up and what they are not. The back and forth needs to be conducted with emotional intelligence, that is using emotions to empathize with others, overcome challenges, and defuse conflict. When I had a client selling her bath-bomb business to a larger company, I talked with her a lot about the potential buyer and figured out how we could use his motivations to our advantage. When we discovered the buyer cared more about eliminating his competitor than the proposed business plan, I figured out a way to help the seller make more money.
Indeed, getting all the details right about negotiating and deal structures can make a huge difference to the bottom line. With proper preparation, buyers and sellers can make sure they won’t leave hundreds of thousands of dollars on the table.
Amy Morrissey is a partner at Bowditch & Dewey, a corporate law firm based in Worcester handling challenging litigation and complex regulatory issues. A specialist in mergers and acquisitions, Morrissey has negotiated high-value deals up to $200 million.
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