As sales of businesses and their associated valuations are at near all-time highs, many business owners are looking to cash out. Many small- to medium-sized business owners, however, find themselves lost when trying to navigate the sales process. Knowing how to manage the process can help maximize value and ensure a smooth road to exit.
Below are five areas to focus on before putting your company up for sale.
1. Get organized. Begin gathering relevant data and preparing for the buyer’s due diligence requests before you decide to sell. Sellers who are more organized and can answer a prospective buyer’s questions quickly and confidently have much higher chances of closing a deal. Consider reviewing the following:
• Financial records and reports: Prospective buyers will generally require at least three years’ worth of financial information. Make sure to review these with your accountant and be ready to explain variances in numbers or other anomalies. Also, have major customer and supplier contracts ready to be reviewed by a prospective buyer.
• Key business arrangements: Many privately held companies conduct business on an informal, or “handshake,” basis with customers and vendors. Informal agreements, however, can result in a discount to value. Formal agreements can ensure the continuity of key relationships, giving a buyer peace of mind that the company’s customer and supplier relationships (and resulting cash flow) are secure. There should be clear, written evidence of business relationships and ownership of key assets, such as patents, trademarks and copyrights.
• Legal structure: Have the charter documents for your company (i.e. articles of incorporation or formation, bylaws, shareholders agreements, operating agreements) reviewed by an attorney. Making sure to have the evidence of your business’s legal structure up to date and in good legal order can simplify the transaction and avoid problems when the business is sold.
2. Be a team player. Business owners sometimes avoid seeking help from outside advisers to save money. However, maximizing the sale price for your business requires expertise and objective decision-making. A good team of brokers, attorneys and outside advisers can explain your options, help create a solid strategy and advocate for your interests.
3. Price isn’t everything. Business owners often put too much emphasis on price alone and don’t focus on the essential details to maximize the numbers. Careful attention should be paid in advance to who the likely buyers are and why they should want to buy your business. Determining how a prospective buyer intends to deploy your business as a strategic asset can maximize value. Also, understanding your business’s vulnerabilities can better position you for a successful sale. Acknowledging and owning a problem before a potential buyer discovers it allows you to formulate a plan and control the message to the buyer.
4. Know the importance of the letter of intent. Sellers sometimes make the mistake of thinking the letter of intent only needs to capture the “big picture” view of the deal. Making sure everything you want is in the letter of intent provides leverage in post‐letter-of-intent negotiations. When a term is specified in the letter of intent, it puts the buyer in the position of having to justify any changes to those terms when negotiating the purchase agreement.
5. Don’t lose sight of what got you here. Staying focused on business while negotiating a sale is challenging. However, weak numbers leading up to a closing can result in requests for last-minute concessions on price. Make sure management can stay focused on the business and not get bogged down in the deal. Brokers, attorneys and outside advisers can take the lead in negotiations and free up management to focus on maintaining the business.
Adam Gwaltney is a corporate partner in Nixon Peabody LLP’s Providence office.