The Importance of the Term Sheet
The value of the term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.
What is a Term Sheet?
Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”
Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?
Creating the Right Environment
A good term sheet can help keep negotiations on target and everyone focused on what is important. Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics. The main goal should be to maintain a “win-win” environment.
At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment. Using the information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.
Make Sure Your Term Sheet Has the Right Components
In the end, a term sheet is basically a preliminary proposal containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.
Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.
Copyright: Business Brokerage Press, Inc.
Read MoreYour Deal is Almost Done, Then Again, Maybe Not
Having a letter of intent signed by both the buyer and the seller can be a very good feeling. Everything can seem as though it is moving along just fine, but the due diligence process must still be completed. It is during due diligence that a seller decides whether he or she is going to finalize the deal. Much depends on what is discovered during this important process, so remember the deal isn’t done until it is truly finalized.
In his book, The Art of M&A, Stanley Forster Reed noted that the purpose of due diligence is to “Assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased.”
Summed up another way, due diligence is quite comprehensive. It probably comes as no surprise that this is when deals often fall apart. Before diving in, it is critically important that you meet with such key people as appraisers, accountants, lawyers, a marketing team and other key people.
Let’s take a look at some of the main items that both buyers and sellers should have on their respective checklists.
Industry Structure
You should determine the percentage of sales by product line. Additionally, take the time to review pricing policies, product warranties and check against industry guidelines.
Human Resources
Review your key people and determine what kind of employee turnover is likely.
Manufacturing
If your business is involved in manufacturing then every aspect of the manufacturing process must be evaluated. Is the facility efficient? How old is the equipment? What is the equipment worth? Who are the key suppliers? How reliable will those suppliers be in the future?
Trademarks, Patents and Copyrights
Trademarks, patents and copyrights are intangible assets and it is important to know if those assets will be transferred. Intangible assets can be the key assets of a business.
Operations
Operations is key, so you’ll want to review all current financial statements and compare those statements to the budget. You’ll also want to check all incoming sales and at the same time analyze both the backlog and the prospects for future sales.
Environmental Issues
Environmental issues are often overlooked, but they can be very problematic. Issues such as lead paint and asbestos as well as ground and water contamination can all lead to time-consuming and costly fixes.
Marketing
Have a list of major customers ready. You’ll want to have a sales breakdown by region and country as well. If possible, you’ll want to compare your company’s market share with that of the competition.
The Balance Sheet
Accounts receivable will want to check for who is paying and who isn’t. If there is bad debt, it is vital to find that debt. Inventory should also be checked for work-in-progress as well as finished goods. Non-usable inventory, the policy for returns and the policy for write-offs should all be documented.
Finally, when buying or selling a business, it is vital that you understand what is for sale, what is not for sale and what is included whether it is machinery or intangible assets such as intellectual property. Understanding the barriers to entry, the company’s competitive advantage and what key agreements with employees and suppliers are already in place, will help ensure a smooth and stable transition. There are many important questions that must be answered during the due diligence process. Working closely with a business broker helps to ensure that none of these vital questions are overlooked.
Copyright: Business Brokerage Press, Inc.
Read MoreGearing Up for the U.S. Economic Census
Every five years, the U.S. Census Bureau collects extensive statistics about businesses that are essential to understanding the American economy. This official count, better known as the Economic Census, serves as the foundation for the measurement of U.S. businesses and their economic impact.
This is free data you can use for your business.
As part of the Census Bureau’s mission to provide timely information on the health of the U.S. economy, this “business” census serves as the most extensive collection of data related to business activity. Nearly 4 million businesses, large, medium and small, covering most industries and all geographic areas of the United States will receive surveys tailored to their primary business activity.
The data produced from the Economic Census are important for your industry, your community and your business:
- Statistics from the Economic Census provide policymakers with the evidence based information used to make sound programmatic decisions.
- Federal agencies rely on the data as the basis for key measures of economic activity, such as the Gross Domestic Product (GDP), National Income and Product Accounts (NIPAs), and the Producer Price Index (PPI).
- Trade and Business associations, along with Chambers of Commerce, rely on Economic Census data to measure key business facts they can use to gauge organizational structure and product trends.
- Individual businesses use the data from the Economic Census to make decisions about operating sites, capital investments, and product development.
The extensive and comprehensive data products include over 950 detailed industries across 18 industrial sectors classified using the North American Industry Classification System (NAICS). Geographic Area Series reports containing general statistics will be produced for nearly 21,000 geographic areas including the U.S. Territories. Additionally, over 7900 goods and services products will be released for the first time on the new North American Product Classification System (NAPCS) basis.
The key statistics produced for the Economic Census include Total Number of Establishments; Value of Sales, Shipments, Receipts, Revenue; Primary Business Activity; Total Number of Employees; Total Annual Payroll; Total First Quarter Payroll; and industry specific statistics.
Starting with this Economic Census, respondents will use an online, secure portal to respond making filing easier while at the same time improving data quality and reducing costs. Small companies located in the U.S. territories will have a paper option available, including a Spanish version for Puerto Rico.
To find out more about the Economic Census and how you can use Census data for your business, visit the U.S. Census Bureau’s Economic Census page.
Three Easy & Effective Ways to Negotiate
Far too many prospective business buyers and sellers overlook just how important negotiations can be. But they can also be tricky. In general, there are three approaches to negotiations. Thinking through your negotiation strategies well before the time to buy or sell is a savvy and prudent move.
Negotiation Tactic #1 Take It or Just Leave It
In this negotiating tactic, the buyer makes an offer and the seller makes a counter-offer, then both sides leave it there. If the deal works fine. If it doesn’t work, that’s fine too.
It is usually smart to step back and ask yourself if you are comfortable with this approach. Sometimes a small degree of flexibility can go a long way towards turning a proposed deal into a reality.
Negotiation Tactic #2 Maybe Consider Splitting the Difference
Another negotiating tactic is to simply offer to split the difference. This tactic is pretty straightforward and it demonstrates a good deal of flexibility; however, the financials may not always make sense for both sides.
As always, it is important to think about all the factors involved in allowing a deal to fall apart, such as how much time will it take to find another buyer or another business to buy? Showing a willingness to split the difference is often seen as a goodwill offer that can facilitate further negotiations within an environment of lower emotional intensity.
Remember, as long as the two sides are talking, a deal may be reached. But when communication ceases, then the deal is definitely finished and not in a good way.
Negotiation Tactic #3 Negotiation from What is Most Important to Each Party
Understanding what is most important to both parties is usually critical for a successful deal. Important areas can range from allowing a relative to stay with the business to moving the business to a new location. Not all key points are directly linked to money, and it is vital to understand this all-important negotiating fact.
Negotiation Tactic #4 Bring in a Pro
In negotiations there is an old adage, “Never negotiate your own deal.” Emotions can run high when it comes to buying or selling a business and then there is the problem of perspective. Buyers and sellers are often lack the perspective that an outsider can bring.
Opting for help and guidance from someone who buys and sells businesses for a living, can be a huge step in the right direction. Through a professional business broker, it is possible to not only establish a fair price but also address the array of intangibles that can go into buying and selling a business.
At the end of the day, deals are put together piece by piece, and skill is involved in the process. Working with others is at the heart of successful negotiation, and that means taking into consideration what the other side wants and what the other side needs.
Copyright: Business Brokerage Press, Inc.
Read MoreJudy Mims Joins GABB Board
Judy J. Mims, the Qualifying Broker for Childcare Properties, LLC, has joined the board of the Georgia Association of Business Brokers, the state’s only organization for professionals who facilitate the purchase and sale of businesses and franchises.
In her capacity on the board, Ms. Mims will work on broker licensing issues with the Georgia Real Estate Commission.
Ms. Mims formed Childcare Properties in 2014 to provide the highest levels of integrity, experience and service for the childcare industry in the greater Atlanta metro area. Childcare Properties, LLC focuses exclusively on the sale of childcare facilities, preschools, Montessori and private schools.
Judy received her real estate license in 2004 and her Broker’s license in 2011. She is an active member of the Atlanta Commercial Board of Realtors (ACBR), the National Association of Realtors (NAR), the Georgia Child Care Association (GCCA), the National Association for the Education of Young Children (NAEYC), and the Southern Early Childhood Association (SECA).
Judy is a member of the Atlanta Commercial Board Million Dollar Club with more than $5 million in sales in 2016 and 2018, and member of the GABB’s Multi-Million Dollar Club in 2017.
Prior to her career in commercial real estate, Judy worked as an independent publisher’s representative, selling advertising space in various trade magazines.
Judy holds a Bachelor of Arts degree in history from Scripps College, Claremont, CA. She is married to Hugh Mims, lives in Brookhaven, and has three grown children and seven grandchildren.
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