Do I have to hire an M&A specialist?

April 2008

"I have a great relationship with senior people at a company that I'm sure would like to buy my business. I'd love to talk to them directly, but I've heard that big companies always want to work through M&A brokers and investment bankers. Your take?"

Mike: Yes, almost any experienced buyer will insist on dealing with a professional agent. There are always a lot of technical issues that require special expertise--but even more importantly, buyers know that selling a business can be an emotional mine field for a company founder. It's best for both sides to have an objective, dispassionate umpire in the middle.

Of course, hiring a pro costs money. You'll almost certainly recover the investment through a higher net price or more attractive terms, but acquisition prices in many industries are pretty standardized. In that case, you might offer your broker a large percentage of whatever he can negotiate above the price you could negotiate on your own. It can't hurt to ask.

What happens if an acquired company goes broke?

December 2006

"We're talking to several very small firms about acquiring them as semi-autonomous divisions. Our plan is to offer a combination of cash, our own stock (privately held), and an earnout, which would reward good performance. But what happens if an acquired business goes bust? Do the sellers still get to keep our stock?"

Mike: It depends on how you structure the earnout. Most deals are designed so that the seller gets most of the stock up front and collects the cash on a sliding scale that reflects performance during the earnout period. But if the seller's willing, you could reverse this arrangement and pay the bulk of the cash at the closing, holding back the equity for the earnout period. The risk is that the sellers may not feel that shares in a privately-held company are worth much, so they won't work as hard to make the acquisition a success.

Incidentally, be careful about handing out stock in acquisition deals, especially if sellers want to give shares to their employees. Once you have more than 500 shareholders, the SEC considers that you're a de facto public company and requires you to file all kinds of financial and legal reports.