Sellers: Three simple tips for keeping more of the sales proceeds!
Last year, GA was counsel in more than 40 transactions, representing sellers in a significant number of them. For sellers that want to maximize sales proceeds at closing, we urge them to keep three things in mind:
Spend time on the LOI. The letter of intent is crucial and should spell out details of the purchase price and how the seller might have to give it back. All too often, the parties will sign an LOI stating that the transaction will be on “customary terms and conditions” without specifics. Sellers can press the buyer to define which representations and warranties are most “fundamental,” how long they will survive, and what dollar holdback escrows will be established. Sellers have the most leverage before an LOI is signed and the process kicks off—and they should use it. For buyers, more specificity can avoid deal risk and fundamental misunderstandings before documents are drafted.
Consider Structure Upfront. Typically and for a variety of tax and corporate reasons, buyers like to buy assets and sellers like to sell equity. Sellers should consult their accounting and legal advisors in advance to assess the impact of transaction structure before an LOI is signed. Can a seller take advantage of 1202 of the Internal Revenue Code providing for the exclusion of capital gains on the sale of small business stock? What are the tax implications if a buyer agrees to a stock purchase but wants to make a “338(h)(10) election? Whether key contracts, licenses, and relationships can be transferred without consent also will factor into the overall decisions on structure.
Think about R&W Insurance. Depending on the size of the transaction, sellers can ask the buyer to purchase an insurance policy to be the source of recovery for the breach of any seller representations and warranties. That can allow the parties to eliminate haggling over indemnity escrows and survival periods and also give the seller more certainty over the amount to be paid at closing. This too should be considered and included as appropriate at the LOI stage.
More time spent at the LOI stage can reduce friction and conflict as the deal process moves forward.