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How do you prepare a business for sale?

Answers

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

Public or private co?

Anonymous
(Manager) |

Private, thanks.

Topic Expert
Marc Faerber
Title: CFO
Company: Amarantus
(CFO, Amarantus) |

Get your matters in order (be in good standing, all tax authorities returns, etc. are filed, etc., be sure you undersatnd what agreements/contracts you have that are assignable or not, all paperwork, substantiate balance sheet, IP is huge (assuming IP is a critical part of your buisness, run various valuation models (discounted cash flows, comps, etc.)), if have a number of investors/shareholders it would be wise to get a fairness opinion after you get an offer that you take as serious. Try to resolve or contain any existing or pending litigations. If the employee base is a significant base for the acquisition be sure to have agreements in place that will keep the critical staff in place and to hang once the sale has occurred.

Learn as much as you can about the potential acquirer, can they afford to make the acquisition and will they honor it over time, especially if there is an earnout.

These are a few things to thing about. There are a number of checklists out there that you could find on the internet and possible one that is specific

Topic Expert
Brenda Morris
Title: Board of Directors, Audit Committee Chai..
Company: Boot Barn
(Board of Directors, Audit Committee Chair, Boot Barn) |

When I am considering a potential sale, I use the checklist for an IPO, mainly because this is truly the highest standard you'd have to meet in a sale or liquidity event. A good checklist covers every aspect of diligence you'd have to go through for most transactions and can ensure you have covered all bases and can complete the most efficient transaction (usually at the best valuation if you're organized!) you can. Good luck!

Miguel Nicolas Moreda
Title: Chief Financial Officer
Company: Wovenware
(Chief Financial Officer, Wovenware) |

While there are many operating/revenue issues to attend to maximize the value of a business for sale, I would say one of the most unattended issues would be the "readiness of the compliance paperwork".

When an acquirer, investor, or potential partner solicits the documentation, many companies do not have it ready, or have a lot of compliance that hasn't been done, or is late and penalties could be assessed. This will drive value down, since this translates into uncertainty at the acquirer level.

Acquirers ask themselves:
- "Why isn't this ready if they're looking to sell?"
- "How serious are my target's owners about selling their business?"
- "Are they rookies? Are they making the information up?"

My recommendation would be to sit down with the Finance/Accounting Manager or your CPA, in order to have all the documents ready prior to starting the process. Improvising must be avoided. Planning is essential.

I have worked with owners that plan as early as five years prior to their expected sale date. Even identifying candidates years ahead. These owners understand they can maximize value by planning.

On the other hand, having everything ready accelerates the process, provides certainty, and helps in terms of obtaining the commitment your desire from the other party. It really saves a lot of time in the negotiation process. The last thing you want to do is spend weeks going back and forth, and have the other party withdraw any interest in the transaction. If they are not interested, you can move along to your next candidate.

I recommend consulting your legal counsel or CPA prior to talking to any acquirers. This way you minimize the risk of executing the wrong documents. The last thing you want is to execute an LOI (Letter of Intent) that prevents you from doing certain things, even while the party is performing their due diligence. I have seen this one-too-many times.

On the same note and of equal importance to making sure you don't leave any money on the table: Have all the revenue, banking information, important expenses & other transactional information reconciled and ready. Due diligence focuses on making sure that the financials match the banking information. (Quite similar to soliciting financing from a bank, have a "business plan" document ready for investors. It is normally referred to as a "teaser" or a more-detailed document, referred to as the "prospectus", or "investment memo".)

A very summarized list of documents acquirers normally request are:
- Historical Financial Statements
- Tax returns (of all sorts, even property tax bills)
- Executed agreements with third parties (including financing documents)
- Employment agreements
- Insurance policies

Put this in a binder with separators for all the categories of information... You would be surprised how much you can derive out this obvious marketing tactic. The acquirer acknowledges you are a professional. It also gives the impression that another acquirer can review the information quickly and take away the opportunity from their hands. In the end, it's all about the "attractiveness" of your company... which will drive the value of your company up.

And also... make sure you're transparent and honest about everything. It will save you time, money (lots of it) and problems in the future.

Hope this helps.

Miguel Nicolas Moreda

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

In addition to the comments made by Brenda and Miguel, I recommend establlishing a data room (real or virtual, although I prefer the latter) with easy to handle data segregation. Don't underestimate the time to review agreements, collateral, systems and data feeds. Any one of these can be a land mine in preparing for the sale or divestiture.

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

Piggy-backing on Linda's comment; perhaps not a dataroom* per se, but definitely something very similar:
-Structure your data into known types (stock certs, employee agreements, plant-watering contracts...)
-Identify known gaps and work to fill them...in software and other non-physical assets a Certificate of Origin for each line of code is critical and is commonly missing.
-Have a DMS (there are many great ones; make sure you use an actual DMS and not DropBox, Google Docs, Sharepoint, and the myriad other almost-a-dms solutions.) Populate the DMS with everything. If you are missing something or want to keep it hard-copy only, DMS that fact.
This will speed the process, reduce management and employee overhead, and not create a "we're about to be sold" firedrill that can panic employees and cause unwanted transitions...which would be horrible whether you're sold or not (theory: people transition because of the uncertainty, not the actual sale).
Also, it is good business process.

Next consider your knowledge and your team. A key hire can help dramatically, even if they are only there to sell the business then leave.

Market: you may be an expert on your business, but acquirers can be surprising. If you are of material size, hiring a consultant can be money well spent to help you determine the value to acquirers (varies dramatically), paths to acquisition, legal process, go-to-market process, etc.

*If you get bought by someone who knows what they are doing, you will have a dataroom, but it will be a third party service chosen by the acquirer.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

The answers so far have concentrated on the physical aspects of having good financial, legal and statutory records, and I agree. You should also concentrate on having documentation that positions and supports your corporate value claims, that will become an essential part of convincing a prospective buyer to go ahead with a deal, and to get the best price in a competitive world. For example if you are experiencing growth in certain hot market sectors, or are seeing improving margins on certain products, or trends in cost saving due to automation etc, these are things you will want to tell your prospect, and you will need readily available data that support your value claims. This data does not necessarily sit on the face of your PL or BS. Research, accumualte and prepare to present to support your case!

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

None of the ideas put forth are bad ones. I recommend having an audit completed of your financial records and financial risks. Any acquirer will either request an audit or will request all the information that an auditer would review. I would rather my auditer find the issue before the purchaser. You will garner a higher price if you have addressed potential risks. Brenda's answer was short but spot on.

(Agent, JKS Solutions, Inc.) |

I think this question sounds like it is from the perspective of the Seller. The seller should be prepared to handle the acquirer's legal due diligence requests and also to facilitate the transfer of accounting data if systems will be combined.

Many times sellers are not friendly to purchasers and do not facilitate the transfer of knowledge very well. I suppose it is dependent on whether the seller will retain employees or all employees will be laid off.

If you are the buyer, get your accounting team together and ask them to make a list of all their needs in bringing on a new sub or consolidating a co into your systems and contract management situation.

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

All the above recommendations are great ones, especially Regis' comment about having an audit.
Here are a few others:
* Make sure you have someone who can handle the day-to-day operations while you are trying to sell the company. Depending upon your level, the CEO/CFO/COO will not be able to do their day job at times, so someone has to be running the company.
* Make sure you get an advisor. If your company is doing well, you will get a fuller price if you use a broker whose sole job is to bully the Buyers. And it works.
* Make sure the "team" knows how to present. Doing a management presentation is required, doing it well is key. You have to have your game on to do this over and over again, back to back. If anyone on the team is easily flustered, don't bring them to the presentation. Rehearsal is necessary.
* Be prepared to be "on" 24/7, especially if you have PE or VC as investors. You will have conference calls on the weekends, you will review documents on the weekends.
* Expect to be disappointed, frustrated, annoyed, elated, hysterical laughing, baffled and just outright pissed off at times. It's an emotional roller coaster. Make sure if you have a family at home, they understand what is coming down the pike. It will affect your personal life, whether it be taking a call during a friend's wedding, carrying documents to your parents anniversary party, having to leave an event early to get on a conference call, etc.

Happy to put more color to this or share my personal experiences over the phone if that will help, I have been through this process a number of times, and have worked on about 100 transactions over my career. You can email me at dprice (at) priceadvisory (dot) com.
Good luck!

David Solomon
Title: Partner
Company: Levenfeld Pearlstein, LLC
(Partner, Levenfeld Pearlstein, LLC) |

Preparing a business for sale is often a much longer process than business owners ever dreamed of. My advice is to find an advisor that can help the owner really understand their objectives in selling their company and then work to determine what resources the company has before any path is chosen. However, that same advisor should be able to articulate the pros and cons of each "business succession alternative."

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