While compiling an advisory team is important, there are many other steps to consider first in order to maximize sale price, minimize transaction costs and attract purchasers.
If you are contemplating a sale, be advised that you typically need to start preparing your business for sale 12 months prior. Purchasers are interested in profitable businesses that are easy to evaluate and operate. Consider the following steps to help ensure a smooth, lucrative sale.
1. Compile financial statements and tax returns.
Financial statements need to be up to date, accurate and readily available. Purchasers will want to review balance sheets, income statements, cash flow statements and tax returns dating back to as many as six years prior to the sale.
You will need to review audits and financial statements to chart historical performance and future growth. Compile a comprehensive list of top customers and a summary of their purchasing history, as well. Creating a summary and explanation of overdue accounts and other customer payment trends is also advisable, as this may impact the attractiveness of the business to a buyer.
2. Prepare assets for the sale.
Make sure inventory counts are current and accurate. Obsolete inventory should be sold or written off, and all equipment must be in working order. Obsolete or redundant equipment, machinery, parts and tools should be liquidated. The premises should be clean and in compliance with all regulatory requirements.
In addition to tangible assets, intangible assets should be prepared for the sale. Copyrights, trademarks, patents, domain names and software should be properly registered to ensure the business owns or has an undisputable license to use such property. If not up to current standards, consider upgrading computer hardware and software.
3. Clean up contracts and document special deals.
Purchasers do not want to be surprised by a customer who has a special price arrangement or a supplier who cancels a long-standing verbal agreement due to the sale. Therefore, all verbal agreements with customers, suppliers and vendors should be formalized in writing.
Existing contracts, equipment leases and real estate leases should be analyzed to determine whether they are assignable to a new owner, expire prior to the sale, terminate upon change of ownership or contain any other term that may impact the enforceability or economics of the relationship.
A purchaser will analyze these items, factoring in negative economic consequences of such contracts into the purchase price. New contracts should include provisions that permit assignment without approval or penalty. Lastly, if possible, terminate contracts that might be troubling for a purchaser or serve little purpose for the business.
4. Prepare the business for your exit.
Your business should be operated in a manner that makes it easy for a purchaser to take over as owner. If you are the only employee that has the knowledge and skills to operate the business, the purchaser will fear that the business is not viable in your absence. It is important for you to train a management team to perform critical business functions. Additionally, you should introduce and transition relationships with key customers to your sales team, so you can more confidently represent that such relationships will not be impacted by the sale.
5. Obtain company and ownership records.
Company records should be in order and in compliance with the jurisdiction in which the business is registered. The records should clearly establish and identify the owners and ownership percentages.
Previous ownership transfers should be documented, and inconsistencies must be corrected prior to receiving purchase offers in order to avoid buyer confusion or a situation in which non-owners claim ownership when it appears that a cash event is imminent.
6. Prepare for potential termination of interrelated transactions.
Purchasers will likely be suspicious of transactions that the business has entered into with its owners, directors or managers and their related family members or their respective businesses. At closing, purchasers will likely require that all inter-party transactions, including loans and leases, be completed, paid or terminated.
Any special compensation, payment or other benefit arrangement that has been offered to the owner or related parties that has not otherwise been presented to other employees will be scrutinized, so you may want to consider terminating these arrangements. This may include the provision of company cars, payment of health or golf club memberships and any consulting or other service arrangement with family members in which terms for non-family members are different.
7. Finalize employee policies and agreements.
Purchasers will be concerned that key employees may depart after the sale, and as a result, they may fear that intellectual property of the business could be susceptible to disclosure or misappropriation. To provide comfort to purchasers, employee policies and agreements should be put in place to protect trade secrets, patents, customers and the like.
Employee handbooks and all policies, including rules regarding reimbursement and commission structures, should be formalized. Existing employment agreements and policies should be reviewed, as the sale may impact enforceability or trigger payments to employees. An evaluation of whether any key personnel need incentives to remain with the business during and after the sale should be conducted, as loss of these employees could adversely impact the transaction.
8. Devise a plan to resolve litigation and other problems.
Any pending or threatened litigation, customer complaints or similar issues that may decrease the value of the business must be resolved. An advisory team will assist you in formulating a strategy to disclose any issues that cannot be resolved prior to the sale.
Finally, as previously stated, it is important for you to hire advisers who are experienced in representing owners in a sale of a business. Your team may include financial advisers, accountants, legal counsel and business brokers. These advisers will help you determine the value of the business, navigate the due diligence process, negotiate price, and document and consummate the transaction.
Thoroughly completing the eight steps and assembling an experienced team of advisers will help you maximize your sale price and mitigate legal exposure after the sale. With proper planning, the sale of your business will be a rewarding conclusion to your years of hard work and sacrifice and major headaches will be avoided.
Heidi Carpenter,
Fafinski Mark & Johnson:
952.995.9500
heidi.carpenter@fmjlaw.com
www.fmjlaw.com
