Valuing and Acquiring Home Energy Businesses: Part 5 of 6
Once you have identified a company to purchase and the seller has accepted your offer, you need to do your due diligence to make sure the information represented by the seller is accurate. There are many areas of due diligence, including financial (gallons, margins, service revenues, expenses, accounts receivable, etc.), environmental (oil spills, Phase 1 & 2 studies etc.), compliance (DOT records, SPCC Plans, tech licenses etc.), operational (vehicles, computer systems, equipment, sales & marketing, payroll etc). There are too many items to list here and a more detailed list can be found at www.cetane.net/duediligence/.
During this process the buyer should get to know the intricacies of the new company. You should ask about employees, customers, vendors, and general operating procedures. This is where you get to learn more about the company than the numbers on the spreadsheet. I also recommend sharing your plans for transitioning the company with the seller. Having the buyer and seller on the same page will create an easier transition.
If you uncover discrepancies in what was represented when the offer was made, or you find that your assumptions when you made your offer have changed, this is the time to discuss any changes with the seller.
Once you have a level of comfort with the due diligence, it is time to present the closing documents. In most transactions, the buyer’s attorney presents the closing documents to the seller’s broker (which you find at Truforte Business Group) or through an attorney. In very large transactions, the documents are sometimes presented by the seller.
All transactions will have a purchase agreement and there may be separate agreements for non-competition, leases, property, throughput, employment and consulting. Don’t think that you are done negotiating after you finish the due diligence. There are legal terms in the purchase agreement that will still need to be negotiated, typically between the attorneys. Items, such as indemnifications and representations and warranties, are two sections which seem to get a lot of attention.
Non-competition agreements are very common in the home energy industry and the time frame can typically range from three years to ten years. In my experience, a five year non-compete is the most common.
Many times within the closing document phase of the transaction, the purchase price is allocated among the assets. Many buyers prefer to have a higher value on vehicles and equipment so they can depreciate the assets over a shorter period than the customer list value, which is typically fifteen years. Sellers typically prefer not to have a large allocation of the purchase price on non-competition or consulting agreements as it will typically be taxed as ordinary income, as opposed to capital gains. Owners of ‘C” corps are usually an exception. You should always check with your accountant to see how the allocation will affect the net proceeds of the sale.
It is common in the home energy industry to sign the closing documents and transfer ownership the same day. Another way to close on a transaction is to sign the closing documents and have a settlement date a few days or weeks later. In my opinion, a settlement date a few weeks later has some advantages. The time lag allows the buyer to complete certain items, such as burner service inventory, vehicle inspections, and employee paperwork.
From a seller’s standpoint, it is almost impossible to keep the sale quiet when strangers are coming in to do inventories and employees are asked to run all the reports needed for the settlement. The lag time also allows the buyer and seller time to prepare a customer letter, if they decide to send one, announcing the transaction. That subject and other transition items after the sale will be covered in the next article in the series.