Preparing Your Company to Maximize Sale Proceeds

The most important endeavor a business owner can undertake when contemplating a sale of their business is meticulous preparation for a potential buyer’s due diligence process.  The goal is to avoid the two most notorious deal killers: a long, drawn-out review process—which can result in a lower price if the market changes—and inaccurate and missing documents.  Having your records in perfect order significantly increases the odds of closing a deal.  So, long before you begin to solicit buyers, ensure that the following steps are taken by everyone involved and contributing to the buyer’s side: company executives and staff, investment bankers, accountants, lawyers, and financial advisors.

1. Understand Your Goals

To make this a successful and strategic transaction, the owner and the key team need to keep the end goals in mind.  What are you—the owner—trying to accomplish financially and personally? With these goals firmly in mind and clearly conveyed to your team, maximizing the net value of the transaction will be much easier to accomplish.

2. Plan Communication and Timing

Think about the communication strategy protocols that should be implemented as well as timing considerations with respect to advisors and personnel.  Specifically, consider the following:

• Once you decide to proceed with a transaction, let your key executives and staff know the details in appropriately expanding circles of information. The proposed transaction should generally be presented as an opportunity for the company to acquire expansion capital and growth capacity, not as a way for the owner to cash out.
• Before you bring key executives and staff into the planning circle, consider ways to incentivize them to stay throughout the entire sales process and even after the sale closes. Possibilities include giving intensity bonuses pre-closing, success fees at closing, and stay bonuses to keep key personnel from leaving after the deal closes.  These incentives needn’t be announced all at once but can be presented strategically over time.  Formally documenting these incentives will solidify commitment by current employees and avoid misunderstandings.
• Remember that one size rarely fits all. Tailor your information releases to fit the concerns or needs of each particular audience: potential buyers, key executives and staff, key company advisors and consultants, company customers, business and industry media, and the general public.

3. Pull Together Due Diligence Team

Identify, recruit, and gather your work team and consider the allocation of work among them.  Not every deal requires all of the following members, but those discussed here are the most common.

Key Executives and Staff

The goal is to keep them informed and motivated.

Investment Bankers or Financial Consultants

The responsibilities of this team include the following:

• Help locate qualified potential buyers. These professionals will have a database of potential buyers that they can tap to identify those who might respond to a “teaser” document designed to solicit interest in the pending business sale.  They should also vet interested buyers, specifically focusing on each buyer’s ability to close a deal.
• Maintain the relationships with and control the flow of information to the potential buyers.
• Maximize the net economic value of the transaction.
• Supervise the data room and the due diligence process.

Accountants and Company CFO

The allocation of work between the company’s CFO and the outside accountant should be carefully considered in order to maximize efficiency and minimize costs, gaps, and overlap.  As these team members are familiar with the company documents and records, they will assist the investment bankers or financial consultants with preparing the data room materials.

Corporate Transactional Lawyers 

The role of these lawyers is to design and document the economic deal along the following lines:

• Reduce the seller’s risk through proper disclosure and limiting the warranties and representations the seller makes.
• Consider the tax consequences and maximize the after-tax consideration received by the seller.
• Help the seller to exclude from the sale assets that the buyer does not value or for which the buyer is not willing to pay full price.
• Negotiate the deal terms with a particular focus on risks, risk reduction, proper disclosure, and limiting warranties and representations.

Sellers can very easily end up guaranteeing more than they intend to or need to in order to close the deal, and lawyers can step in when they see this occurring.

Personal, Estate Planning, and Tax Lawyers

This team will coordinate closely with the corporate transactional lawyers.

Investment Managers

This team will invest the seller’s proceeds from the transaction after the deal closes.

4. Understand Likely Market Valuation

• Strategize with your investment banker or financial consultant to create a range of expected values and to identify value enhancers.
• Finalize the engagement terms as they pertain to the investment banker’s or financial consultant’s transaction closing fee and any monthly retainer.
• Discuss with the investment banker or financial consultant what metrics should be used to determine value for your business—for example, EBITDA (earnings before interest, taxes, depreciation, and amortization) or revenue.
• Learn what metrics may be perceived as problematic to potential buyers.
• Make sure there are no surprises. Get all skeletons out of the company closet.  These are some examples of common skeletons:
  • Any threatened or pending litigation or regulatory enquiry
  • Not having a proper written contract that sets out the material terms of the agreement with a key supplier of services or products to the seller
  • Key employees not having written employment contracts with appropriate non-disclosure agreements
  • The company stock register not being current
• Determine how large the buyer pool should be. More competition tends to result in being seen as having a high value, but it also leads to more work for everyone involved.
• Decide the fate of real estate owned by selling shareholders. Determine if the real estate should be carved out and excluded with a leaseback. 
• Review any existing leases and ensure that they conform to standard industrial real estate forms and reflect market competitive rents.
• Identify any assets that will be excluded from the deal.

5. Clean Up the Books

As mentioned at the outset of this article, meticulous preparation for the sale of a company includes ensuring that the books are in order.  As part of this, the seller will need to separate out or account for any nonstandard financial arrangements.  For instance:

• The seller will likely have charged various fringe benefits and expenses to the company that will not continue to be charged to the company after the sale.
• Loans to or from relatives, if any, need to be identified and paid back before or at the close of the sale.
• The seller or some of the seller’s relatives and friends may be working for the company at higher compensation than would be paid to a non-relative (e.g., a relative who works in the mailroom and who is on the payroll for six-figures).

In addition to the special situation of family and friends who may have been paid more than market value for their work for the company, other common adjustments are routinely made:

• Onetime, nonrecurring expenses
• Expenses from discontinued operations or in connection with assets and income that are not being sold

Every experienced buyer knows that there will be adjustments to the business operations after the sale.  Buyers expect that sellers will scrub their financials of any expenses that will not be necessary after the sale for the ongoing operations of the business being sold (e.g., the aforementioned featherbedding relative whose job will be eliminated at the close).  The company’s financial documentation should include a pro forma schedule that describes and explains these adjustments, including full disclosure of every adjustment as well as a brief explanation for each adjustment.

Any cleanup of the company books should include an assessment of commonly neglected book-keeping tasks—

• not adjusting for stale accounts receivables (ARs), leading to overstated ARs
• carrying stale inventory
• failing to distribute out excess capital

  and the implementation of solutions—

• Identify company assets that are not elements of company business and consider distribution to shareholders at book value.

6. Hire Tax Experts

Identify (or engage) tax experts—company and individual accountants and tax advisors—to assist with the following areas of tax planning:

• Transactional
• Company level
• Owner level
• Owner estate planning

7. Prepare Due Diligence Documents

Assist investment bankers or financial consultants with creating appropriate materials on the company, including different versions of the same document, depending on the potential buyer and how far along the negotiations are.

• These materials will contain increasing levels of detail as the sale proceeds.
• Different potential buyers may require materials with different emphases; for example, financial buyers may care about different data than strategic buyers.
• Sophisticated buyers will also expect a quality of earnings report.

Get all bad news out early.  The seller builds trust by a full and fair disclosure of any issue that the buyer is likely to care about.

• There can be discussions and negotiations about what impact, if any, the issue should have on the sales price, but there should be no adverse surprises.
• Make a distinction between bad news consistent with the “ordinary course of business” and bad news that is outside the ordinary course.
• For every weakness or gap, create an explanation and a solution or bridge.

A successful business sale starts with planning and internal review and thrives on open and honest communication with all internal and external stakeholders throughout the process.  We are happy to discuss any of the above issues or tasks in greater detail.

Contact:

Robert E. (“Reg”) Gipson

Email: [email protected]

Phone: 310-556-4660

Website: www.ghplaw.com