Keys to Completing a Successful Transaction

December 15, 2017

Family and closely held business owners consistently rate succession planning as one of their top challenges.  These owners are expert in running profitable companies, but determining the best exit strategy to choose is another matter entirely.  This is one reason why only 30 percent of all family or closely held businesses survive to another generation of owners.

The initial challenge is determining whether family members or key employees are interested in owning the business and, more importantly, whether they are capable of managing and operating the business profitably.  This is a crucial determination because, in almost every transfer to family members or key employees, the new owners must be successful in order for the former owner to receive the full value of their business.  It is imperative to make this determination well in advance, because if no family member or key employee can take over, the owner must shift the exit strategy and find the right strategic buyer or private equity group to buy the company.

So when is the right time to start planning for a transition and to whom can you turn for initial advice?  Owners that we have represented will tell you to begin the process at least two to three years in advance of a transaction.  All too often, an owner decides to sell and then hires the advisors to “close” the deal.  Our experience in these situations is that it leads the sophisticated buyer to take advantage during the due diligence process in order to obtain a lower purchase price.

Assembling an Expert Transaction Team

Many business owners have been very successful in controlling all aspects of their business.  However, the same qualities that make them successful in business can be detrimental when it comes to deciding how and to whom to sell their businesses.  There are too many tough non-business decisions to make alone.  Entrepreneurs need key outside advisors who have expertise in succession planning and in mergers and acquisitions.  Selling a family or closely held business entails developing the right structure, and to do that, advisors must have experience and sophisticated knowledge in structuring, financing, and negotiating mergers and acquisitions deals.  In addition, for family or closely held businesses especially, advisors must have a complete understanding of gift, estate, corporate, partnership, and personal income taxes.  In our view, the CPA and the lawyer are the most qualified to help the sale of the business go smoothly.

The owner’s inclination to rely on existing CPA and legal advisors may seem best. It is important, however, to consider whether the current advisors have adequate experience with succession planning or with mergers and acquisitions transactions, and whether they are able to collaborate or negotiate effectively and efficiently with other advisors and adversaries.  Finding advisors with the appropriate experience and skills is crucial, as they will be the most adept at helping you prepare your business for sale and guiding you through the complicated and potentially risky process of succession planning.

To highlight the types of issues and topics involved in such transactions, Prince Lobel’s Corporate Practice Group chair Bob Maloney and Richard O’Connor, CPA Partner of Johnson O’Connor, answered the top three questions advisors should address when dealing with the sale of a business.

  1. Do you work on a regular basis with clients on succession planning and can you describe your approach and timeframe with succession planning?

Richard: Ideally, two or three years prior to your succession, you’ve started your planning. Your CPA should be looking at tax consequences and what your personal net worth is going to be in order to support your cash flow after the sale. They should also look at estate and tax planning, as in some cases, restructuring a company can have a significant impact on the tax results.  Within your business, a thorough review of the Key Performance Indicators (KPIs) should be completed in order to try to improve your EBITDA.  The potential purchaser will want to review KPIs to get to know the business and compare your business to industry standards.  Your CPA should be able to help with this.

Bob: I meet with my clients frequently and often I am the one challenging clients to confront succession planning issues.  Clients prefer discussing their business opportunities rather than who will succeed them in ownership.  The key is to provide alternatives to the client and allow them to determine the best options for them, their partners, or their family members. Succession should be carefully considered, so this process should, and often does, take several years.

  1. Have you ever done any quality of earnings studies for a buyer or a seller?

Richard: A buyer is going to require a quality of earnings study to confirm the numbers that you have provided.  A quality of earnings study, however, goes well beyond financial statements.  It looks at leases, contracts, and various other commitments.  It may consider the stability of your customer base or workforce, employment issues, and employee benefit plans.  All employee handbooks, accounting manuals, and other relevant documents should be up to date.  You should also consider doing a review of contingent liabilities such as lawsuits, guarantees, and any underlying warranties.  These will all come out in a quality of earnings study and should be reviewed ahead of time.  The more you have looked at this information in advance, the easier the transaction will be.

Bob: I have recommended quality of earning studies in some, but not all cases.  It depends on the particular circumstances and comfort level the owners have in their financial and overall business risks.  It is an expensive service, but it can speed up the due diligence process and avoid the renegotiating of key points.

  1. Do I need GAAP financials?

 Richard: Although some businesses are sold without GAAP financial statements, or any financial statements for that matter, there is a need for GAAP financials.  EBITDA is the common factor by which most businesses sell.  The purchaser is going to want to know what your GAAP EBITDA is and will likely prefer to have two to three years of financial statements on a GAAP basis.  If the purchaser does not have this, they are going to do this themselves and the view of EBITDA is going to be theirs, not yours. The more you control the data, the less likely there are to be disagreements between buyer and seller.

Bob: Buyers take comfort in requiring owners to represent that their books and records are GAAP compliant.  It certainly helps retain a high sale value if the seller can represent that their books are GAAP compliant.  I will try to avoid making that representation unless the Seller has retained a CPA to prepare, audit, or review financials for several years prior to a sale.

Making Sure Everyone is on the Same Page

It is also critical for both the CPA and lawyer to be on the same page throughout the process.  Many times, one of them is the initial key advisor to the owner, but it will take both working together to truly create what the owner needs to accomplish his or her goal.  You do not want the CPA and the lawyer competing for the owner’s attention or each trying to advance one strategy over the other.  The best fit is when the CPA and lawyer collaborate from the beginning on the appropriate structure.

In addition to an experienced collaborative accounting and legal team, you may also need the expertise of an investment banker and/or business valuation advisor.  Getting your CPA and lawyer involved early will help, as they can advise you on whether there is a need for these other advisors.  Your team can suggest consultants, especially in situations requiring specific industry knowledge, or vouch for others and react to the fees they are quoting.

Final Word of Caution

Selling a business, whether to family members or key employees or outsiders, is a once in a lifetime occurrence which can have many negative ramifications if not handled properly.  Starting earlier and developing a strategic plan of action will lead to a successful transition of the business and a happy, and wealthier, former owner.

If you have questions about any of the information in this alert, or about how our attorneys or CPAs can help you with the sale of your business and succession planning, please contact Bob Maloney, at 617.456.8008 or, or Richard O’Connor, at 781.914.3314 or


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