The decision to sell an agribusiness can be difficult for many reasons, not the least of which is the emotional connection. Still, at some point, selling may be the best decision for owners to effectively realize the company’s full value. For an individual owner, this transaction may be the single largest capital event of his or her life. It can trigger gut-wrenching employee decisions, unaccustomed tax consequences and inheritance considerations.
Anyone who owns a privately held business faces several potentially thorny issues when selling the business, but selling an agribusiness raises special issues that should be addressed long before the sale.
While a significant value of a typical retail establishment, manufacturing or production firm may be based on inventory, equipment, livestock, real property or other hard assets reflected in financial statements, the value of an agribusiness firm’s management and client relationships cannot be discounted. By taking steps to preserve the firm’s “people assets” ahead of a sale, the seller is better positioned to realize the firm’s full value by presenting a potential buyer with a more attractive acquisition.
In a closely held agribusiness, the firm’s senior management responsibilities are often concentrated with the owners. As those owners approach retirement, they may view the firm’s sale as a quick way to cash out of their business effort and investment. From a buyer’s perspective, however, keeping the principal managers involved — at least through the transition period — often provides great value and helps integrate the firm into the buyer’s business. A seller may stay involved through an employment or consulting agreement. Ultimately, this can provide the seller with additional income that can be a welcome supplement to the business’ purchase price.
As for the employees, announcing the sale of an agribusiness can trigger a wave of employee defections. That’s particularly true among employees who won’t share in the proceeds of sale, which can result in the loss of key management talent and valuable business relationships.
Well ahead of any sale, the principal owners should identify key employees whose management experience or relationships with suppliers and customers materially contribute to the agribusiness’s long-term value.
Like any other business, an agribusiness should include non-compete and non-disclosure provisions in its employment agreements with key employees. It’s common for either the buyer or seller to make employment of longtime or key employees one condition of the sale. It may be wise to include in a key employee’s employment agreement a “change-of-control” provision that allows for a bonus payment to the individual upon a change of control, with the stipulation that the employee has to remain with the buyer for a defined time period. By anticipating such potential buyer requirements, the sellers can avoid being held hostage by a key employee who demands a large payout to remain with the company after a sale.
A firm anticipating a sale should also consider its supplier and customer relationships. When there are important contracts with the government or other customers, a key question is whether the buyer will be allowed to take over those contracts. A business’ sale can trigger the termination of key contracts or at least require the supplier’s or customer’s consent. To avoid losing any potential business relationships, a firm anticipating a sale should review its contracts’ termination and non-assignment provisions. It’s usually the seller’s responsibility to obtain any required consents, but the buyer should be alerted early in the process if the seller anticipates any parties who are likely to hesitate to consent.
For example, if the prospective buyer competes with one of the firm’s main customers, the buyer may not be allowed to continue the contractual relationship after the sale. That ultimately diminishes the business’s value to that buyer.
In this author’s experience, a phone call or visit by the owner to an important client or supplier can often smooth the way to close the transaction. But, of course, it is up to the owner or key relationship person to make the decision about when to seek a client’s or supplier’s approval. Such calls and visits are wise even if the contracts do not require notice or consent.
By protecting its people assets, an agribusiness can create value for potential buyers, but this requires planning well ahead of an anticipated sale. With sufficient planning and attention to a few critical matters, sellers can realize the maximum value created by years of effort and investment in building their firm.
For parties interested in purchasing an agribusiness, the employee and customer relationship issues must be identified and addressed in the due-diligence period. Otherwise you risk losing at least some of the value expectations that sparked your desire to purchase the business in the first place.
Other Points to Consider
Prior to pursuing or negotiating the sale of an agribusiness, the owners should take the following steps:
1) Clean up your records and financial statements to develop a clear and accurate picture of the company’s operational, management and financial strengths and weaknesses.
2) Identify potential red flags, especially environmental issues, including conducting your own phase-one environmental assessment. Address any issues before putting the business up for sale.
Pat Henderson, a Partner in Shook, Hardy & Bacon’s Business Law Practice Group, has broad experience in mergers and acquisitions, venture capital transactions, and corporate and partnership finance. Pat can be reached via e-mail at firstname.lastname@example.org for questions related to this column or other agribusiness-related matters.