M&A: What business owners should take note when selling their business

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Business owners who are strategically developing their business with the intention of selling in the future should take note of the following:

1. Some potential buyers may want assurance that there is a management team who can run the business effectively after the business owners’ exit.

To incentivize key management members to remain committed post-sale, consider implementing a long-term incentive plan based on cash remuneration that is tied to performance targets. Avoid granting equity to key management in order to retain them as this will dilute the business owners’/sellers’ shareholding and complicate the sale process.

2. Keep the earn-out period as short as possible.

There is plenty of room for misalignment of incentives between sellers and buyers during the earn-out period. Sellers typically seek to maximise the earn-out amount, while buyers prioritise the long-term growth of the target companies beyond the earn-out period.

The conflicting interests between the sellers and buyers may lead to disputes on compliance with post-completion covenants in the transaction agreements, which are designed to ensure that the business is managed effectively during the earn-out period.

This post first appeared on LinkedIn on 6 July 2023.

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