Thinking About Succession Planning

If you haven’t been thinking about succession planning, the bottom line is that you should be. In the February 20, 2019 Divestopia article, “All Companies Need to Look at Succession Planning,” author Brad Cherniak examines the importance of succession planning. Owning and/or operating a business can be a great deal of work, but it is imperative to take the time to develop a succession plan.

Succession Planning is for Businesses of All Sizes

Author Cherniak wants every business owner to realize that succession planning isn’t just for big businesses. Yet, Cherniak points out that the majority of small-to-medium sized businesses, as well as their senior managers, simply don’t focus much on succession planning at all.

Many business owners see succession planning as essentially being the same as exiting a business. Cherniak is quick to point out that while the two can be linked and may, in fact, overlap, they are by no means the same thing. They should not be treated as such.

Following an Arc Pattern

Importantly, Cherniak notes, “Succession planning should also be linked to your strategic planning.” He feels that both entrepreneurs and businesses managers follow an arc pattern where their “creativity, energy and effectiveness” are all concerned. As circumstances change, entrepreneurs and business managers can become exhausted and even a liability.

The arc can also change due to a company’s changing circumstances. All of these factors point to “coordinating the arcs of business,” which includes “startup, ramp-up, growth, consolidation, renewed growth and maturity,” with whomever is running the business at the time. In this way, succession planning is not one-dimensional. Instead it should be viewed as quite a dynamic process.

Evaluating Each Company Individually

Cherniak highlights the importance of making sure that the team matches the needs of a company as well as its stages of development. Who is running a company and setting its direction? Answering these questions is important. It also is of paramount importance to make sure that the right person is in charge at the optimal time.

Companies and their circumstances can change. This change can often occur without much notice. As Cherniak points out, few small-to-medium sized businesses focus on succession planning, and this is potentially to their detriment.

Copyright: Business Brokerage Press, Inc.

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Evaluating a Red-Hot Market

A new article from BizBuySell entitled 2018 Set New Small Business Sales Record as Buyers Eagerly Exit Corporate World is quite an eye-opener.  Simply stated, businesses, all kinds of businesses, are selling like never before.

If you have a business and you are considering selling, then realize that now truly may be the time to jump in and put your business on the market.  The market is historically hot.  All one has to do is take a closer look at the numbers as outlined by BizBuySell.

In 2013 the number of closed small business transitions stood at 7,056, whereas in 2018 this number jumped considerably to 10,312.  Between 2016 (10,312) and 2017 (9,919), there was a massive jump.  Last year only continued to build on the already impressive numbers from 2017.

It is also important to note that the last three years have all been record years.  Brokers have noted that there has been an increase in both the number of buyers and sellers.

Of course, all of this leads us to some questions.  Why are so many business owners looking to sell and why now?  Why is the market so very hot?

In the BizBuySell article, a surveyed owner commented that purchasing a business has become easier for first-time buyers and this factor has, in part, contributed to the noticeable increase in sales volume.  Other factors cited in the article include Baby Boomer retirement, and owners selling to avoid dealing with rising operational costs stemming from increased minimum wage requirements and health care.  Some of those surveyed also included pending regulations, both political and economic, as factors in their decision to sell.

On the buyer end, it appears that two factors are at play, namely, buyer confidence that the economy will continue to be strong and greater access to capital.  Additional factors, such as business owners noting that their businesses were performing better, also likely contributed towards making 2018 yet another record-breaking year.

For those looking to sell, there is considerable good news.  The median asking price and sale price have both continued to trend upwards.  Business brokers are optimistic about the future and for good reason.  Whether you are considering buying or selling a business in the near future, it is prudent to talk to an experienced business broker.  A broker can help you navigate this very hot market and make a deal that is beneficial for all parties involved.

The Importance of Understanding Leases

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Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

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Valuations Change. What Should You Do?

Valuation changes over time.  Yet this simple enough fact is widely forgotten or even ignored.  In Chris Mercer’s insightful article, “A Problem: Fixed Price Buy-Sell Agreements,” Mercer explores the complexities of the fixed price buy-sell agreement.  At the core of the problem is the fact that, as Mercer points out, “time passes and value changes.”  With the passing of time values invariably change as well.  Yet, many involved parties frequently fail to recognize this fact.

In particular, Mercer notes that it is possible for large discrepancies in value to arise, meaning that the initial fixed price can drift dramatically from the “fair market price” of the business.  The problems this presents, once the problem is recognized, are pretty straightforward.  If the value of the business is higher than the original fixed price, then litigation could be on the horizon.

Looking at the Solutions

How does one go about addressing this issue?  Mercer has noted that there are “bad solutions” and “better solutions.”  The bad solution involves having a provision calling for an appraisal process if the fixed price lasts longer than a given period of time.  Mercer states that a typical period of time might be something like two years or even more and that these agreements are usually derived from a template.

Simply stated, this approach isn’t the best.  In Mercer’s view a somewhat better solution for repairing or “fixing” a price buy-sell agreement is to forgo the fixed price altogether and replace it instead with a valuation process.  Mercer’s view is that it is prudent to add a “single appraiser valuation process, as the fix in the event that a fixed price is out of date when a trigger event occurs.”

What is the Ideal Approach?

The process Mercer believes is best is called the Single Appraiser, Select Now and Value Later valuation process.  In this process, an appraiser is selected and this is part of the agreement.  Once the buy-sell agreement is triggered, the selected appraiser jumps into action and provides a binding valuation.

In this approach, the business is reappraised each year and a new, more accurate and up to date, price is reached.  If everyone knows from day one that this is how the situation will be handled, then there are no shocks, no surprises and a reduction in the risk of litigation.  Click here to read Mercer’s article and learn more.

What Do Buyers Want in a Company?

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Selling your business doesn’t have to feel like online dating, but for many sellers this is exactly what it can feel like.  Many sellers are left wondering, “What exactly do buyers want to see in order to buy my company?”  Working with a business broker is an excellent way to take some of the mystery out of this often elusive equation.  In general, there are three areas that buyers should give particular attention to in order to make their businesses more attractive to sellers.

Area #1 – The Quality of Earnings

The bottom line, no pun intended, is that many accountants and intermediaries can be rather aggressive when it comes to adding back one-time or non-recurring expenses.  Obviously, this can cause headaches for sellers.  Here are a few examples of non-recurring expenses: a building undergoing foundation repairs, expenses related to meeting new government guidelines or legal fees involving a lawsuit or actually paying for a major lawsuit.

Buyers will want to emphasize that a non-recurring expense is just that, a one-time expense that will not recur, and are not in fact, a drain on the actual, real earnings of a company.  The simple fact is that virtually every business has some level of non-recurring expenses each and every year; this is just the nature of business.  However, by adding back these one-time expenses, an accountant or business appraiser can greatly complicate a deal as he or she is not allowing for extraordinary expenses that occur almost every year.  Add-backs can work to inflate the earnings and lead to a failure to reflect the real earning power of the business.

Area #2 – Buyers Want to See Sustainability of Earnings

It is only understandable that any new owner will be concerned that the business in question will have sustainable earnings after the purchase.  No one wants to buy a business only to see it fail due to a lack of earnings a short time later or buy a business that is at the height of its earnings or buy a business whose earnings are the result of a one-time contract.  Sellers can expect that buyers will carefully examine whether or not a business will grow in the same rate, or a faster rate, than it has in the past.

Area #3 – Buyers Will Verify Information

Finally, sellers can expect that buyers will want to verify that all information provided is accurate.  No buyer wants an unexpected surprise after they have purchased a business.  Sellers should expect buyers to dig deep in an effort to ensure that there are no skeletons hiding in the closet. Whether its potential litigation issues or potential product returns or a range of other potential issues, you can be certain that serious buyers will carefully evaluate your business and verify all the information you’ve provided.

By stepping back and putting yourself in the shoes of a prospective buyer, you can go a long way towards helping ensure that the deal is finalized.  Further, working with an experienced business broker is another way to help ensure that you anticipate what a buyer will want to see well in advance.

Copyright: Business Brokerage Press, Inc.

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The Top 3 Unexpected Events CEO’s May Encounter During the Selling Process

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When it comes time to sell a business, not everything goes as planned.  You may be one of the lucky ones and find that selling your business is a streamlined process with only a few unexpected occurrences.  But most CEO’s looking to sell a business find they can expect the unexpected.  Let’s take a closer look at some of the top surprises CEO’s experience during the sale process.

Unexpected Occurrence #1 – Surprisingly Low Bids

CEO’s looking to sell their businesses need to be ready for almost anything.  One of the larger surprises that CEO’s face are surprisingly low bids.  Don’t let low bids shock you.

Unexpected Occurrence #2 – A Huge Time Commitment

CEO’s have to make sure that everything from an offering memorandum to management presentation and suggestions to potential acquirers are ready to go.  The offering memorandum is considered the cornerstone of the selling process and is typically at least 30 pages in length.

Most business intermediaries expect the potential acquirers to submit their initial price based on the information contained in the memorandum.  Management presentations are also time consuming, but it is common to have these presentations ready before the final bids are submitted.  Ideally it is best for the CEO to show the benefits involved in combining the acquirer and the seller as well as the future upside for selling the company.

Unexpected Occurrence #3 –The Need for Agreement from Other Stakeholders

You, as the CEO, are able to negotiate the transaction, but the sale isn’t authorized until certain shareholders have agreed and done so in writing.  Until the Board of Directors, shareholders and financial institutions who may hold liens on key assets, have agreed to the deal, the deal simply isn’t finalized.  Often this legal necessity turns out to be an issue that gets in the way of a successful deal.

Sellers can take their “eye off the ball” during the time-consuming process of selling a company, however, this can be a serious mistake.  CEO’s must understand that potential acquirers will be examining monthly sales reports with great interest.  If potential acquirers notice downward trends they may want to negotiate a lower price.  No matter how time consuming the sales process may be, CEO’s have to maintain or even accelerate sales.

Ultimately, there can be a wide array of surprises awaiting a CEO who is looking to sell a business.  Avoiding these kinds of issues is often, but not always, a matter of excellent preparation.  However, it is vital that they keep in mind that even with the very best preparation and diligence, there can still be surprises when selling a business.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recently published article from Business.com entitled “Why Every Business Owner Needs an Exit Strategy” outlines the importance of having an exit strategy for business owners, no matter what point they are at in running their business. The author uses an analogy involving building construction: if multiple exit options are required for each floor of a multi-story commercial building in preparation for disaster, why not plan for the same in your business?

As can be expected with most elements of a business, exit strategies will vary depending on the business and will be tailored to each specific business’s circumstances. The basics, however, include the following:

  1. Business Goals
  2. Timeframe
  3. Intentions for the Business
  4. What’s Next for the Business Owner

While some may argue against incorporating an exit strategy into a business’ initial business plan, some benefits for exit planning early on include enhanced business value and the ability to use the strategy as a blueprint for success or a flexible template for sale preparation. Whether or not an owner decides to pursue exit planning now or further down the road, these are all factors to consider.

Click here to read the full article.

 

A recent article from Divestopedia entitled “Who is the Right Buyer for Your Business?” illustrates the thinking that should go into determining which type of buyer will fit best in the sale of a business. A single business transaction can present several different types of potential buyers, each having their own goals and motivations for buying a business. Understanding these types of buyers can help an owner make the right choice for their own personal goals as well as for the good of the business.

Some buyer types include:

  1. Defensive
  2. Synergistic
  3. International Entity
  4. Financial or Private Equity

While sometimes surprises do happen during the sale process, it is invaluable for a seller to have some knowledge and understanding of the types of buyers they will encounter during the sale process.

Click here to read the full article.

A recent article posted on the Axial Forum entitled “Succession Planning — A Critical Missing Element in Many Family-Owned Businesses” outlines shocking statistics from a recent survey that shows the succession plans of U.S. family-owned businesses: only 52% plan to keep their businesses in the family! This is down a whopping 22% from only two years ago and raises some questions regarding the goals and plans owners have for their businesses after their death or retirement.

These statistics can help to reveal some important findings about the owners of family-owned businesses in this country: they often have little understanding of the fair market value of their businesses. Unfortunately, many small businesses overestimate the true value of their investment, which can come as a shock when it comes time to sell. According to the survey, less than 25% of respondents had a clear, actionable transition plan in place, while almost a third had no plan in place at all. These things alone can debilitate any seller, especially in the necessity of a quick sale.

Understanding what an effective transition plan and process entail is a great start for any business owner, especially one that falls into the category of owners without proper transition plans. These things can be better understood with the help of an M&A advisor or business consultant, who will help iron out some of the wrinkles and prepare a business for its future.

Click here to read the full article.

 

A recent article posted on The Business Journals entitled “How to Pass a Family Business from an Overbearing Father to the Next Generation” illustrates a hypothetical example of a difficult business transition from a ruthless old-school owner to a seemingly less passionate and less aggressive family member. It explains how transitioning from an overbearing leader is often difficult because not only are potential family successors unmotivated to take over, existing employees are also alienated due to harsh and improper treatment.

The author’s solution for this is forgiveness: when it comes to business, animosity can kill motivation and productivity and revenge is never the right answer. Business survival relies on proper practice and great leadership, among many other factors, so forgoing personal grudges for a seamless transition can prove to be vital to future and ongoing success.

Click here to read the full article.

 

Copyright: Business Brokerage Press, Inc.

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Are You Sure Your Deal is Completed?

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When it comes to your deal being completed, having a signed Letter of Intent is great.  While everything may seem as though it is moving along just fine, it is vital to remember that the deal isn’t done until many boxes have been checked.

The due diligence process should never be overlooked.  It is during due diligence that a buyer truly decides whether or not to move forward with a given deal.  Depending on what is discovered, a buyer may want to renegotiate the price or even withdraw from the deal altogether.

In short, it is key that both sides in the transaction understand the importance of the due diligence process.  Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function 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.”

Before the due diligence process begins, there are several steps buyers must take.  First of all, buyers need to assemble experts to help them.  These experts include everyone from the more obvious experts such as appraisers, accountants and lawyers to often less obvious picks including environmental experts, marketing personnel and more.  All too often, buyers fail to add an operational person, one familiar with the type of business they are considering buying.

Due diligence involves both the buyer and the seller.  Listed below is an easy to use checklist of some of the main items that both buyers and sellers should consider during the due diligence process.

Industry Structure

Understanding industry structure is vital to the success of a deal.  Take the time to determine the percentage of sales by product lines.  Review pricing policies and consider discount structure and product warranties.  Additionally, when possible, it is prudent to check against industry guidelines.

Balance Sheet

Accountants’ receivables should be checked closely.  In particular, you’ll want to look for issues such as bad debt.  Discover who’s paying and who isn’t.  Also be sure to analyze inventory.

Marketing

There is no replacement for knowing your key customers, so you’ll want to get a list as soon as possible.

Operations

Just as there is no replacement for knowing who a business’s key customers are, the same can be stated for understanding the current financial situation of a business.  You’ll want to review the current financial statements and compare it to the budget.  Checking incoming sales and evaluating the prospects for future sales is a must.

Human Resources

The human resources aspect of due diligence should never be overlooked.  You’ll want to review key management staff and their responsibilities.

Other Considerations

Other issues that should be taken into consideration range from environmental and manufacturing issues (such as determining how old machinery and equipment are) to issues relating to trademarks, patents and copyrights.  For example, are these tangible assets transferable?

Ultimately, buying a business involves a range of key considerations including the following:

  • What is for sale
  • Barriers to entry
  • Your company’s competitive advantage
  • Assets that can be sold
  • Potential growth for the business
  • Whether or not a business is owner dependent

Proper due diligence takes effort and time, but in the end it is time and effort well-spent.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article published by Divestopedia entitled “The Only Valuation Method that Really Matters” explains the best method to use to value a business: the Business Buyer Valuation Method. While there are certainly other valuation methods, the author suggests that this one is the best and will bring you close to what a buyer is actually willing to pay.

Steps like determining who the most likely buyer is for your business and how this buyer may structure the transaction, among others, will help a seller build a valuation that will both make sense and be fair for a potential buyer.

Click here to read the full article.

 

A recent Axial Forum article entitled “Take Customer Due Diligence to the Next Level – Here’s How” identifies revenue growth as the majority driver of new value growth after a business transaction. The article outlines the vitality of due diligence within both the overall market and the customer base. One huge factor in this process involves customer due diligence, or the exploration of customer relationships with the business that is being purchased. This typically includes customer feedback, typically through interviews or surveys, and helps to educate potential new owners on things like customer satisfaction and loyalty, risks and opportunities, market growth outlook, market trends, and more.

Click here to read the full article.

 

A recently published Business.com article entitled “Your Five Year Plan to Build a Business to Sell” explains the steps involved in building a business for the purpose of a sale. Although many owners think that this is just a fantasy, there are actually some early steps that can be taken to help push a business toward a potential sale in the future. While the process can take several years, it truly can pay off in the end for both the seller and buyer.

One of the first and often overlooked steps in this process is to build a business in a market that is not only lucrative now, but will be in the future as well. This is much easier said than done in some instances of course, because many markets and industries are difficult to predict three to five years out, so this step should be taken with care.

The next, and arguably most important, aspect of creating an attractive business is profitability: a business that is profitable and one in which the profit is growing is the most attractive to potential buyers. Bidders want to see a business that is both making money and growing.

Other important aspects of an attractive business include keeping the business “clean” and building a corporate structure that doesn’t depend on the involvement of the owner. Clean businesses are ones that are transparent with well documented processes and transactions, as well as a problem-free workforce. An independent corporate structure is one that is able to function without the current owner as the core of the business. A business that cannot function when the owner is absent is not an attractive option for buyers.

Click here to read the full article.

 

A recent Forbes.com entitled “How To Make Millions Off Your Exit: 7 Entrepreneurs Worth Over $2 Billion Explain” outlines important insights for making an exit, taken directly from entrepreneurs that have started and sold businesses of their own. The list below outlines the entrepreneurs’ advice:

  1. Sell to Make Your Business Grow
  2. Prepare in Advance
  3. Create an Expert Team
  4. Sell the Potential of Your Business
  5. Focus on Providing Value
  6. Seek Advice
  7. Actively Look for Buyers

While some of these aspects of a successful business sale may seem obvious, many are often overlooked. Another important lesson to take from this: learn from those that have experience making deals!

Click here to read the full article.

 

A recent BizBuySell article entitled “Top 4 Small Business Funding Methods of 2017” outlines some of the best options for funding the purchase of a small business when personal savings, loans from family and friends, or credit cards don’t quite cut it. They include:

  1. SBA Small Business Loans
  2. 401(k) Business Financing
  3. Home Equity Lines of Credit
  4. Unsecured Loans

Each of the above methods have their own pros and cons, and deciding which method is best when looking into funding options is ultimately up to the borrower. While there still several options outside this list, these are some of the most common and are widely available to applicants in a wide variety of situations.

Click here to read the full article.

 

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recently published Divestopedia article entitled “The Top 10 EBITDA Adjustments to Make Before Selling a Business” explains common practices in adjusting EBITDA before selling a business for the purpose of helping the seller get the best value from the sale. The process of normalizing a company’s financials is often done by investment bankers before a sale to help show potential buyers the best possible version of a company’s financials with the ultimate goal of getting a higher selling price. The following adjustments are some of the best:

  1. Non-Arms-Length Revenue or Expenses
  2. Revenue or Expenses Generated by Redundant Assets
  3. Owner Salaries and Bonuses
  4. Rent of Facilities at Prices Above or Below Fair Market Value
  5. Start-Up Costs
  6. Lawsuits, Arbitrations, Insurance Claim Recoveries and One-Time Disputes
  7. One-Time Professional Fees
  8. Repairs and Maintenance
  9. Inventories
  10. Other Income and Expenses

Adjustments in these factors can be crucial to getting the most out of a business sale. Follow the link to read more about how each of them can affect the sale price of a business.

Click here to read the full article.

 

A recent article published on Axial Forum entitled “Dying is Not an Exit Strategy” speaks on the importance of having an exit strategy and succession plan. There can be nothing worse than the unexpected illness or death of a business owner without a proper plan for the business in place. These unfortunate circumstances will not only burden the family of the owner, but will likely result in the liquidation of a business at a fraction of its true value.

Three important factors to consider when planning a succession strategy include:

  1. Who will run the business?
  2. Who will own the business?
  3. How will proceeds from a sale be distributed?

Whether or not you’re in a position to think about selling your business in the near future, it is still important to think about how you’d like to transition in the event of unexpected circumstances.

Click here to read the full article.

The recent article published in Divestopedia entitled “Who Will Buy My Company?” helps business owners understand the avenues for finding a buyer for their business. With options in selling internally, externally, or a combination of both, there are multiple paths and opportunities to finding the right buyer. Each of these paths can result in a unique outcome, so it is important for a seller to choose the one that best fits their needs.

The article identifies two important and useful steps in understanding who will want to purchase a business: identify best buyers and take an offensive approach. Having at least a general idea of who would even consider buying your business is a great first step, which can be refined with better and more pertinent information over time. Taking an offensive approach involves actively becoming a bigger presence in different communities related to the business or industry, giving a seller better insight into what potential buyers may be interested in.

Click here to read the full article.

 

The recent article published in Divestopedia entitled “If You’re Selling Your Company, Don’t Get Sandbagged” explains what a “sandbag clause” is and how sellers can avoid them during the transaction process. As explained by the author, sandbagging occurs when a purchaser goes through with closing a deal when they are aware of misrepresentations in a seller’s contract. This is often used as basis for an indemnity claim by the buyer after the sale.

Sellers can get sandbagged in a few different ways, with some of the more common related to the fact that the seller doesn’t know every exact detail about the daily operations of a business. Often times, a buyer can uncover some of the finer details that may have been missed in the contract, which is why it is of utmost importance for sellers to be diligent in the process. As the article suggests, having an experienced M&A lawyer may help to mitigate these risks.

Click here to read the full article.

 

Copyright: Business Brokerage Press, Inc.

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