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Today’s Quote
When the naked man sold you his shirt, remember that it was your own
blindness, the dazzling vision that danced before your eyes, not his skill, that
closed the deal.
-Harvey Mackay
"Show me the money"
Understand the need for a deal-closing strategy
Understand methods and strategies for deal-closing
Understand how to evaluate different deal structures
Arranging a loan or investment infusion is as much a marketing issue as a
financial issue
True or False?
Control, Income, and Value are inseparable.
True or False?
You should never give up control of your business
True or False
The fewer the shareholders, the better
Reasons to bring in a new owner
Provide new capital
Provide specific new assets
Provide specific services or expertise
Provide new customers or clients
Train a successor
Promote an employee
Estate planning or income tax planning
Issues related to new owners
Share of control
Share of profits
They may still own the stock after they leave you
Voting rights, notice of meetings
Access to books and records
Alternatives to equity sharing with employees
Bonus based on share of profits
Bonus based on share of sales proceeds
Tenure or golden parachutes
Buy / Sell agreements to get stock back
Maintaining Control
Non-voting stock or debt
Super majorities
Voting trusts
Voting agreements
Different classes of stock
Know your investors
More motivated by fear or by greed?
Who are their personal and business contacts?
Their perspectives and expectations
Their need to know quotient - frequency and content
Interest, commitment, and experience level
Their risk tolerance
Their hidden agendas
Who else they have funded
Anticipate Contingencies
Death
Disability
Voluntary withdrawal
Employment termination
Expulsion
Divorce
Individual creditor problems
Terms to work out - Equity
Control
Dividends
Liquidation preference
Conversion
Dilution
Restrictions and limitations
Redemption
Covenants
Further issues
True or False?
Credit card debt is a wonderful source of new venture funding.
Terms to work out - Debt
Interest
Payments
Due Dates
Security
Warranties and guarantees
Other costs
Covenants, events of default
Typical Covenants
Affirmative Covenants:
Maintain acceptable accounting records
Protect interested party’s rights and values
Allow periodic inspection
Maintain certain financial targets
Pay all taxes and other items when due
Maintain adequate insurance
Typical Covenants
Negative Covenants:
No other debts, pledges, or encumbrances
No material changes in character, management, or direction of business
operations
Not in violation of any laws
No mergers, reorganizations, etc.
No selling of assets or other items of interest
Only approved investments
No loans, dividends, distributions, etc.
Thou shall not miss your planned numbers
Timing is everything
Don’t sell too soon
Don’t sell too late
In many (if not most cases), the parties have opposing
interests
This is true between:
investors / entrepreneurs
partners
buyers / sellers
creditors / debtors
Who’s interest prevails?
Who has the most bargaining power?
Where do each of the parties need to end up?
Which factor is critical to each party?
Negotiating Points
Know what you want before you ask.
Have throw-away items you can give up.
If you think you’re an MVP, act like one.
You gain strength if you have competing offers.
Being tough doesn’t mean being dishonest.
Know who is across the table from you.
More Negotiating Points
Don’t fumble.
Live to fight another day.
To develop a long-term relationship, it is necessary to negotiate a contract
that is mutually beneficial.
Always leave something on the table.
More Negotiating Points
If people like you, they will want to work with you and will give you the
deal you want.
If you are perceived as sincere, the relationship will be healthier and more
beneficial to you.
Other factors
Operating agreements and covenants
Due diligence
Security
Securities laws
Valuation
Buy / Sell agreements between owners
Retirement
Death
Disability
Incompetence
Need a funding mechanism if any of these triggers occur:
Insurance
Installment payments
Savings plans
Due Diligence
Accuracy of financial statements
Appropriate accounting policies
Historical data - explain fluctuations in performance
Review for overstated assets or understated liabilities (includes valuation
issues)
Review working capital requirements
Evaluate projections of future
Search for unrecorded liabilities (environmental, pension, legal, golden
parachutes, etc.)
Other Operating Statistics
Be prepared to pay:
Due diligence costs (both sides)
Commitment fees
Legal and accounting fees (both sides)
Monitoring fees
Unused line fees
Annual renewal fees
Early termination fees
Taxation
Controlling C-Corp double taxation
Sales vs. tax-free reorganizations or mergers
Hidden traps in partnership liquidations
Deferral of gains by reinvesting proceeds
Qualified Small Business Stock
Safe selling
Make sure that you have adequate protection:
warranties
guaranties
security
indemnities
These will usually be provided by both sides.
Asset vs. Stock Sales
Taxation issues
Transfer of liabilities
Transfer of NOL credits and other tax attributes
Step up in asset basis
Helpful Hints
Never guarantee a loan for an income-producing asset beyond your proportional
interest in that asset.
Never cosign for a loan unless you put the entire amount into your business and
you control the business.
More Helpful Hints
Read every word in a contract before you sign it.
Make sure your rights under the agreement are just as strong as the rights of
the other party.
Do not waste time with agreements by permitting nonsensical revisions to
them.
Sign legal documents only when they say what you want them to say.
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Michael Goldman & Associates, L.L.C. - Consulting
& CPA Services 
