Preparing a Business For Sale
This is the third of three updated articles in which I describe the processes involved in buying and selling a business. This post focuses on the Seller's perspective. The second post also deals with the Seller. The first post focuses on the Buyer.
Wise business sellers prepare their businesses for sale well in advance to avoid common mistakes that can thwart a successful sale. Ideally, the process of sale preparation takes place over a three to five year period, but in any event, planning can help avoid potential deal-killing problems such as impatience and indecision and telling others (e.g. suppliers, customers and employees) too early or too late.
REMOVE POTENTIAL DEAL OBSTACLES
To the extent feasible, correct any weaknesses in the business, such as those due to existing or threatened litigation, contractual disputes, or other outstanding legal, tax, banking or financial issues that could slow down or complicate completing a deal. Possible obstacles to handle in advance include perfecting the ownership and registration of patents, copyrights, trademarks and other intellectual property rights; obtaining any consents that will be required to complete a transaction; settling lawsuits and claims; and environmental cleanup responsibilities.
PREPARE FOR BUYER’S DUE DILIGENCE EXAMINATION
Undertake a thorough review of the of the Company minute books, stock books and other corporate records and ensure that all are complete and up to date. Take any necessary corrective measures, such as adopting curative minutes. Similarly, make sure that all tax returns and other government filings, licenses and the like have been completed, filed and are current.
Anticipate other items that will likely be requested for review by a Buyer and prepare a strategy and plan for confidentially providing same. Often a staged disclosure plan is prepared, revealing more sensitive information only after the sale process progresses. Review a typical due diligence request checklist to understand what will be needed. Gather the required information, take any advisable remedial action and be ready to respond to the Buyer’s requests.
CONSIDER RECASTING FINANCIAL STATEMENTS
Many privately held businesses are operated in a manner to minimize the owner's tax liability. Unfortunately, these same operating techniques can work to minimize the value of a business. Although it is possible to reconstruct financial statements to relect a different method of business operation, this process may also put the owner in the position of haveing to pay additional taxes with regard to prior years. This is one reason why advance planning is valuable. A track record of three to five years of maximum profits is preferable to restating the financials. If undertaken, the recasting of financials should be undertaken with the objective of showing what the business would have achieved if run like a public company in which earnings and profits are maximized.
PLAN FOR DISRUPTIONS TO OPERATIONS
Consider how selling or attempting to sell the business will affect basic operating issues and have a written plan for dealing with them. Relationships that can be disrupted include those involving key contracts, suppliers, customers, employees and competitors as well as activities such as product development.
It is often imperative to have a detailed plan for dealing with employee morale. Employees can be upset by change even if the Buyer will offer better terms and conditions of employment. Diverting an employee's energies to the sales process can negatively affect normal operations. Steps that can be taken to combat this include "stay" bonuses, accelerated vesting of options and other benefits and other retention programs.
