Prepping non-brokered seller for hypothetical deal hiccups

September 03, 2021

by a searcher from Harvard University in Boulder, CO, USA

I'd like to prep a business owner for hypothetical deal hiccups in advance because no broker is involved. Eg: "the price may change if there are adjustments to EBITDA during QOE," "we may need to hold some of the purchase price in escrow," etc.

Since there isn't a broker, I want to be sure that the seller has a good sense of the process to come as well as future potential sticking points so they don't feel misled if I change the terms later on. In addition, this particular seller seems to have a strong moral code where they would react particularly negatively if they felt someone was pulling a "bait and switch."

Any tips for common deal modifications or sticking points post-LOI, where it'd be helpful to give someone a heads up?

Examples/what I have so far:

- Adjustments to EBITDA could affect valuation

- Escrow / seller note to mitigate risks

- Calculating net working capital

- Accrual accounting impacting revenue/profit if they currently use cash

- <somehow previewing tax implications for the seller>

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

Best practice in my experience is to get the deal under LOI asap and then address issues later once the seller has hired professional advisors. Recommend the following: 1. Never talk about potential price reductions pre-LOI, 2. Escrow: Mention customary indemnification and escrow terms in the LOI. Address the amount later or work with the seller to purchase RWI insurance, 3: Mention average amount of net working capital in the LOI. Tell the seller that the exact amount will be determined based on the QofE results, 4: Accrual accounting is a difficult topic that I would not bring up pre-LOI. You may decide to look past small differences if the company's cash flow checks out, 5: Put your anticipated tax structure in the LOI, but I wouldn't proactively point out potential negative consequences to the seller (not your problem). If this becomes an issue, you can trade it for something else.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

- Adjustments to EBITDA could affect valuation (milder version:: my offer is based on EBITDA you shared with me.

- Escrow / seller note to mitigate risks [Just say my offer will be cash plus (smaller?) seller note. Avoid escrow scare))].

- Calculating net working capital (Price includes seller leaving adequate working capital in the business. seller will keep cash and non-operating assets.)

- Accrual accounting impacting revenue/profit if they currently use cash (Not needed early in the game. If the seller has not changed accounting method, and if the business has grown, buyer is worse off with accrual.)

- somehow previewing tax implications for the seller (Clarify you are doing an asset purchase unless you are open to stock. Don't leave this hanging.)

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