Managing The Defining Moment

Considerations in selling your business

By David Corsaut

The issues that business owners face today regarding the potential sale of their businesses can seem (and often are) overwhelming, especially if the owner has not sold a business before.

Privately held businesses are sold for many reasons, but the principal drivers leading to a sale are:

• The owner is aging and has no succession plan.
• The lure of “cashing in” for a high sale price multiple of cash flow is too tempting to resist.
• Competitors, financing and personnel issues have become overwhelming, or at least have dampened the enthusiasm the owner once had for the business.

The decision to sell the business is only the beginning of the process. In order to have a reasonable chance of an orderly sale at an acceptable price, there are several issues that need to be identified, strategies that require identification, and organization and preparation that must be put in place. No matter how well-managed and well-organized the business owner believes the company is, there will be surprises as the seller and buyer make in-depth reviews of the business through the due diligence process. In many cases, the buyer will be more experienced in this process than the seller. The buyer's request for information will be, in most instances, quite extensive and typically more than the seller can easily comply with. A number of basic steps should be understood and followed in any sale:

• The seller must have experienced transactional legal counsel. Legal counsel should prepare a “non-disclosure” document that all potential buyers must sign prior to the disclosure of any information.
• Communicate the desire to sell the business to the firm's outside accountants and get their opinion of what the effort will be to organize all historical and current financial records.
• Identify which members of the management team should be brought into the process of the sale. The sale of a company constitutes an additional full-time effort for the seller in addition to the day-to-day management of the company.
• Decide how to communicate the potential sale to your management team.
• Carefully limit the number of managers who are part of the sale team.
• Should the selling company have more than one shareholder, make sure all shareholders are in agreement with the sale. There must be consistent communication between management and the shareholders regarding the process and a realistic sale price for the company.
• Seek advice from qualified tax experts on the tax impact of selling the company from a “stock sale” versus an “asset sale” perspective. Most buyers would prefer an asset sale over a stock sale.
• Seek advice on what the value of the business is. Make sure to include not only cash flow but market share, branding, regional presence, proprietary property, customers and other qualities that may represent added value to a buyer. Decide on the minimum price for which you will sell the company prior to entering negotiations.
• Remember that the sale price must include a structure whereby the buyer assumes the debt of the company or the seller pays off existing debt from the sale proceeds. This can be a critical issue, especially if the bank or creditor is seeking recourse.

Once you have identified and completed the basics, it's time to discuss the major decisions and processes that must be managed.

The Commitment to a Sale
The process of selling the company will be the most time-consuming and demanding process the seller has ever been through. If the seller is not ready for the rigors of the sale, they should either not sell or hire professionals to manage the sale process. First-time sellers are always amazed at how time-consuming and emotionally draining this process is. Remember that the business must continue to be managed professionally and profitably.

Before the Sale
Many privately held companies are run more like a sole proprietorship than a corporation or partnership. A buyer seeks to purchase a well-run enterprise where all areas of the business perform in a professional way. The following items should be carefully considered.

If the Board of Directors includes friends and family, the replacement of those individuals with at least one or two experienced businesspeople or professionals may add real value in the sale process. If friends and family are on the company payroll and are not actively involved in the business, they should be removed. These practices indicate to the buyer that the company is being run for the benefit of the family or to minimize the company's tax obligation—it is not being run in a professional manner.

Resolve any personal loans, expenses, tax liens, etc.

Resolve any litigation or have the resolution process well underway. Be able to clearly explain how the litigation occurred, what safeguards are in place (liability insurance, for example) to protect the business, and when the litigation will be resolved.

Make sure key managers understand that the potential sale of the company is being considered. This is a good time to take the necessary steps to ensure that they will stay should the sale process move forward. The seller may need to offer bonuses or other compensation to incentivize key employees to remain.

Understand the scope of the company's information systems, including the strengths and weaknesses of the system. The buyer will ask for an unending list of reports, and it will cause significant stress on the accounting and HR staff if the seller's systems cannot generate those reports.

Conduct meetings with potential buyers off site. Do not conduct these meetings at the company headquarters. Rumors regarding the potential sale will eventually surface no matter how careful a seller may be. The seller should be confident that the buyer is serious and capable before exposing that buyer to the seller's employees.

Have a plan for dealing with rumors that will circulate amongst the employees, customers and vendors once the process of discussing the sale becomes serious. Competitors of the selling company will use the rumor of the sale to their advantage with customers. At some point in the sale process, disclosure of a potential sale to all employees in a carefully scripted company meeting will be necessary. Disclosure of the potential sale to key customers and vendors will also be necessary. The timing of these disclosures must be carefully considered in conjunction with the probability of completing the sale to a qualified buyer.

Create a game plan with your legal staff, accountants, key managers and business advisors concerning the role of each team member in the sale process. All advisors are accountable to the business owner and each major step in the process of the sale should be understood amongst the team members and managed by the business owner.

How to Determine if the Buyer Is Serious and Capable
The process of selling a company is exhaustive enough without wasting time dealing with potential buyers who are not serious or not capable of closing a sale. Some would-be buyers are just looking for competitive information (customer lists and financial information) but really aren't interested in buying the business. Other would-be buyers may fit in a classification where they would like to buy the business but will not be able to get the necessary financing.

In making the determination as to the seller's interest and capability, consider if the potential buyer has purchased other companies. Which ones? Contact the former owners of those companies and ask them if they can discuss the process of dealing with the buyer. At a point early in the process, the seller must request the following information: the buyer's law firm, the buyer's primary bank, and the buyer's historical financials (three years).

Once a non-disclosure document has been executed between the seller and buyer, the seller should:

• Determine what key elements of the seller's business that the buyer finds attractive.
• Question the buyer about how the company will be run post-acquisition.
• Question the buyer about how they will communicate the sale to their employees and customers.
• Find out how the buyer intends to communicate their business philosophy and model to the seller's employees and customers.
• Discover if the buyer and seller share common customers and vendors. If so, find out how those companies view the buyer and its practices.

The Purchase Agreement
Many sellers receive a shock when they view the buyer's Purchase Agreement document for the first time. The buyer will require the seller to attest to a number of statements contained in the Purchase Agreement regarding company financials, taxes, the conduct of the business, that the seller has fully disclosed everything to the buyer, etc.

The three items in a Purchase Agreement that seem to require the most time to negotiate are purchase price, the “Representations and Warranties” section and the holdback. Purchase price and the value of the company are usually the most significant issues that cause the sale process to disintegrate.

Second, the seller can have very onerous requirements regarding any issues not disclosed to the buyer or anything the buyer may discover post-closing that is substantially different from what they discussed with the seller. Any number of legal and financial penalties can be attached to the Representation and Warranties section of the Purchase Agreement. This is where it becomes vital that the seller have an experienced transactional attorney.

Third, the buyer will want to hold back a portion of the purchase price for a period of time after the closing of the sale until they are satisfied that there are no undisclosed issues that may cause them harm. Typically, this will be an amount equal to 10 percent to 20 percent of the purchase price.

Without experienced professionals to assist the seller, the task of selling a company is overwhelming. However, getting experienced professionals to work with a seller will allow the seller to get the best price possible for the business and make the process of the sale understandable and manageable.