Several situations can prompt the sale of a Company. The owners may need to fund their retirement or succession from sale proceeds. A tempting, unsolicited offer may materialize. Or the owners may simply be ready to sell the business: to facilitate the company’s progression to the next growth stage, because the market timing seems right, or because the owners are ready to move on to something more attractive.
The sale of a business should never be a spur-of-the-moment decision, however, and with thoughtful advance planning, owners can take steps to optimize their business’ value and make the transaction proceed more smoothly.
It is best to start thinking about the process at least two to three years prior to any sale. Preparing for a sale should start with a thorough understanding of the company’s and owners’ long-term financial plan and objectives, along with a careful tax analysis of the effect of an equity versus an asset sale. These analyses can yield important information about the needed sale price, the tax implications, and pre-sale structuring opportunities that may best meet the owners’ objectives. If financial and tax advisers have not already been hired, hire them.
In addition, long before a potential buyer begins due diligence, the owners should review the business from a buyer’s perspective and conduct due diligence in key areas to make their company more attractive and minimize unanticipated hiccups.
Financial records review
Work with the company’s accountants to clean up the company’s financial records so that they accurately present the company’s financial condition and operations and reflect the consistent application of accounting principles. These records will be the primary basis for the purchase price negotiation, and too often inaccuracies in financial records lead to buyers requiring purchase price reductions.
Be sure that the company’s corporate structure is clean. Know the company history of ownership and the disposition of any equity held by legacy owners. Understand who owns what. Make sure official corporate records are in order (i.e., the corporate minute book) and that all certificates evidencing ownership and any options or warrants are located.
Intellectual property protection
Review intellectual property assets to confirm that ownership is accurately documented, that assets are properly protected and that appropriate license agreements are in place. When significant intellectual property is critical to business operations, a buyer will require that it’s clearly owned by the company.
If the company owns or leases real property, expect a buyer to require a preliminary environmental assessment to determine whether any issues exist and whether any remedial work will be required. Failing to understand exposure to environmental risks can cause significant delays in a transaction, and falling remediate known issues will impact purchase price.
Employee benefits and pension liabilities
Review employment compensation packages and benefits for potential liabilities, such as issues regarding payroll withholding, 401(k) contributions, or unfunded pension liabilities.
Contract and lender diligence
Understand whether there are any liens on company assets, as a buyer will require that any liens be released prior to sale. Review agreements with key customers and vendors to determine whether they contain any unusual provisions that may be objectionable to buyers, such as non-competition, most-favored nation pricing, exclusivity, or non-assignability. If a counter-party must consent to the transfer of a contract to the buyer, obtaining that consent will be a pacing item to get to closing. Know in advance what may interfere with a transaction closure and try to negotiate provisions now that will avoid headaches in the future.
Related party transactions
Be prepared to identify and deal with any transactions between the company and its owners or their relatives or affiliates. Are there any personal assets listed on the company’s books? Is compensation being paid to a relative who isn’t performing material work for the company? Are owners being compensated at an arm’s length, market rate? Handle these issues before a buyer identifies them.
Not all of these considerations will apply to all companies, but it pays to carefully review each one to be sure there are no hidden problems and to implement easy fixes to facilitate sale.
Look at the business from the perspective of a buyer, and resolve any outstanding issues proactively. It is disheartening to see businesses lose potential value and suffer through transaction delays because of failure to prepare for thorough buyer due diligence.
Finally, while preparing to sell the business, line up a team of trustworthy professionals. This includes a financial and tax adviser, as well as a lawyer experienced in negotiating deals – particularly when special issues arise. Continue to work with regular counsel, but in a sale process business owners do better with specialists who represent sellers on a regular basis.
Adam Adkin is Co-Chair of Tonkon Torp’s Business Transactions Practice Group, working closely with business owners and their management teams. Sherrill Corbett counsels clients on buying and selling businesses, structuring complex joint ventures, bank financings, private placements, and more.