ALP: How do I prepare to sell my business?
For the first time in several years, interest in mergers and acquisitions among buyers and sellers is now showing significant signs of a return to the deal making of the late 1990's.
Sellers are being motivated not only by buyers’ renewed interest in paying more reasonable valuation multiples, but also by other factors such as the desire to retire, the difficulty of successful succession planning, or, in the case of private equity and venture capital investors, established liquidity event timelines.
But whatever your motivation is, you should consider properly preparing your business for sale.
Why prepare? Prepared sellers are generally able to execute a sale faster and are often more successful in convincing buyers to pay at the top end of the valuation range. Conversely, unprepared sellers make buyers uncomfortable and invite additional scrutiny during the due diligence investigations of the seller’s business.
Getting started. You should analyze your business to determine whether your business (and its various specific assets) can legally be transferred for the benefit of a buyer in a sale transaction. To get started, ask your lawyer for a sample buyer’s due diligence checklist. These will be the items of most interest to a potential buyer and will include, among other things, your tax returns, employee benefits plans, records regarding compliance with laws, and material contracts. Consider compiling a “data room” of these materials either at your business or off site to preserve confidentiality. Specifically focus on the most important elements of your business including your customer and supplier relationships and your relationships with key employees.
Customer and Supplier Relationships. Analyze whether you have proper documentation of your relationships with key customers and suppliers. If your customers and suppliers are not bound by long-term, written contracts, take the time to develop those contractual relationships before starting the sales process. This will facilitate the buyer’s diligence of these key relationships and the buyer’s comfort level with the business. Such documentation should protect you in the event a customer or supplier attempts to take advantage of the sales process to better its position.
Securing your key employees. The most overlooked component in a sale is often the people who work for you. The adage that “the assets go home at night" is increasingly true in our service-based economy. Analyze whether you having appropriate noncompetition, confidentiality and trade secrets agreements which bind your key employees. Buyers forced to negotiate with your key employees often deduct from the proposed purchase price any amounts paid to secure appropriate noncompetition and other employment arrangements with your employees. Moreover, if you desire to reward key employees with special employment and bonus arrangements in connection with a sale, these arrangements are best executed well in advance of the sale.
Resolve contingent matters. Nothing spooks buyers more than disputes, litigation and other issues that could involve material future liability to the business or a contingent risk to the future revenues of the business. If you have ongoing disputes involving your business (especially involving key relationships), evaluate how to resolve them ahead of a sale or, at a minimum, develop a strategy regarding how to explain them to a buyer and how to address the disputes in the sales transaction.
Organizing your team. Last (but not least) in preparing for a sale you must organize your team of advisors. Evaluate early who will negotiate the key business and legal terms. Discuss with your advisors the type of transaction you seek (e.g. stock or assets sale, tax free merger, etc.) and what timeframe is important to you. If investment banking assistance is needed, interview a number of investment advisors and choose one with specific industry expertise and knowledge of the universe of interested buyers.
Conclusion. Its never too early to begin preparing for the sale of your business. And even if you don’t plan to sell anytime soon, following many of the recommendations above simply constitutes sound business practice for your business.