Insight

Preparation Is Key When Selling a Business: What to Know

12 июня 2024 г.

After years of dedication to building a business, the time has come to consider selling. The process of selling can be complex, but taking the time to prepare before listing a business for sale or engaging with potential buyers will make the process smoother. Thoroughly preparing the business for sale establishes a strong foundation for negotiations, reflects well on the company, and streamlines the due diligence process for potential buyers— making the business a more attractive acquisition.

Assemble a team

Before selling a company, it is important to assemble a transaction team, including

  • a management team,
  • legal advisors,
  • an investment bank, broker, or financial advisor, and
  • accounting and tax advisors.

Each part of the team will have specific roles and responsibilities, as detailed below.

Management Team

The management team comprises the business's key executives and officers. The team may be involved in all aspects of the sale process, including engaging advisors, marketing the company, due diligence, and negotiation.

The management team liaisons with the company, the board, and other parties involved. The retention of members of the management team could also be a vital facet of the deal itself. The group of management team members "under the tent" should be broad enough to speak in depth about all critical aspects of the business (operations, finance, human resources, and intellectual property) but compact enough to ensure efficiency and the confidentiality of the transaction throughout the negotiation process. Rumors of a potential sale can spread quickly through an employee base and harm day-to-day business operations if confidentiality is not maintained.

Legal Team

Legal advisors negotiate legal terms, draft transaction documents, coordinate the signing and closing processes, and identify and address other legal issues that may arise. Lawyers will also work with the broader transaction team to manage the due diligence process. Specialized counsel in tax, intellectual property, regulatory, environmental, and labor and employment may be needed.

While cost will be an essential factor in selecting a legal team, a law firm with relevant merger and acquisition (M&A) experience will be effective and efficient in providing counsel on the legal issues of the M&A transaction—so it is important to engage such professionals early and communicate with them regularly.

Financial Advisor

A banker, broker, or financial advisor can help identify buyers and market the business. Engaging a financial advisor can help in reaching a broader range of buyers, resulting in a higher sale price. The banking/broker team may also help value the business and manage the sale process.

Accounting & Tax Advisor

Along with assisting with the preparation of financial statements and projections, accountants may also work to resolve any outstanding accounting issues before the sale. Accountants may be involved with the diligence process and in the negotiation of the deal documents, where their accounting expertise may be relevant to financial deal terms such as the calculation mechanics of an earnout (a mechanism by which the payment of a portion of the purchase price is contingent upon the future performance of the business).

It is important to consult and coordinate with an accountant about the tax effects of the proposed sale of the business because, depending on the nature and complexity of the transaction, a tax specialist's advice may be warranted. Structuring the sale tax-efficiently is critical to maximizing the value received for the business.

Ensure that all advisors have significant and relevant experience in M&A transactions in the industry.

Search for well-qualified buyers

Two options for selling the business are sourcing potential buyers individually or holding an auction where potential buyers bid on the company.

An auction can be closed or public. In a closed auction, the buyers are approached confidentially. In a public auction, there is public communication regarding the sale of the company. In either scenario, a banker, broker, or advisor may help identify buyers and in marketing the business to maximize the sale price.

Before marketing the company, determine an accurate and realistic value by using industry benchmarks as a guide. An independent valuation can enhance objectivity and credibility. A broker/advisor can assist with a valuation.

While marketing the company, ensure that potential buyers maintain confidentiality by having them sign a nondisclosure agreement (NDA). A potential buyer may gain access to sensitive information during the diligence process. Consider staging the release of sensitive documents and information as the transaction progresses, mainly when dealing with a strategic buyer competing with the business or seeking to enter the industry.

When evaluating buyers, beyond the purchase price and deal terms, consider the following:

  • Type of buyer (financial or strategic)
  • Buyer's market share and whether that may trip any regulatory or other issues
  • Buyer’s internal and external approval requirements
  • Buyer’s financing needs
  • Buyer’s operational needs
  • Alignment of the buyer’s values and vision

Intangibles like the above impact whether a transaction will be successful. In addition, some buyers may offer the option to retain a minority equity interest ("rollover" equity) in the business. In such cases, it is essential to have confidence in the buyer's ability to operate and grow the business to maximize the value of the rollover equity.

CONDUCT DUE DILIGENCE ON THE COMPANY

Conducting diligence on the business will help identify and resolve issues that may impact the sale or value of the company. Due diligence will also help identify consent and regulatory matters, including required consent from third parties. Information gathered in this process can also be leveraged in the buyer's due diligence process.

Information that should be collected during the due diligence process includes the following:

  • Financial statements and other financial records
  • Corporate formation and other governance documents, including agreements with employees
  • Capitalization records
  • Material contracts, including whether counterparty consent is needed in connection with the sale—the company’s legal team can assist with this determination
  • Descriptions of material relationships with third parties
  • A list of company-owned assets
  • Intellectual property records
  • A detailed list of employees and contractors, employment agreements, and benefit plans
  • Government permits and licenses
  • Current and historical legal claims
  • Real estate leases and related documents
  • A description of any environmental issues
  • A summary of insurance coverage, including loss runs

GET ORGANIZED

After gathering the relevant documents and information, create a well-organized data room. Financial and legal advisors can recommend secure, user-friendly data room hosts appropriate for the sale of the business. The data room should be easily navigable and free of clutter. Maintain an index of the data room, and it can be helpful to annotate it with additional information and guidance on the company’s information contained in the data room.

Takeaways

Taking some steps before selling a business will make the process go smoother and help maximize the value of the company:

  • Strategic Preparation: Evaluate the business's current status and future potential. Ensure that financial records, customer data, and operational systems are well-documented.
  • Assemble a Team: Gather a reliable team of advisors, including a legal advisor, an accountant, and possibly a business broker. Each will play a crucial role in different phases of the sale.
  • Due Diligence Readiness: Prepare for the scrutiny a potential buyer will bring. Organize a data room. Address gaps in corporate records in advance of engaging with a buyer.
  • Market Analysis: Understand the market conditions and the value of similar businesses within the industry. This knowledge will be invaluable when setting a realistic price and negotiating terms.