By Scott Meza, Shareholder at Greenberg Traurig, LLP
The best run companies devote careful thought and preparation to major business decisions. Owners must apply the same discipline to the process for selling their company long before the business hits the market. That advance preparation presents the best prospect for achieving an acceptable purchase and increasing the probability for closing the sale. The following are some key principles for owners of closely held businesses to follow to achieve a successful exit:
1. Identify and Address Weaknesses in the Business
Improving or sustaining the company’s performance in the following areas will be viewed favorably by buyers on their evaluation of whether to buy the businesses and what to pay for it:
- Strong financial controls and processes in place (clean books, reliable historical and projected financial statements and a capable financial and accounting team)
- A track record of consistent earnings and revenue growth over recent years
- A strategic differentiator from competitors (e.g. technical expertise; performance track record)
- Innovative technology, including internal systems
- A strong management team with a succession plan to retain and promote management and sales talent
- Liabilities that are not significant or out of the ordinary and that are quantifiable
- Good customer base without excessive concentration and a strong collection history
2. Attend to Your Personal Estate Planning
The sale of a privately held business results in the owners’ illiquid company equity being converted into cash. Long before that event, the owners need to understand whether the expected post-tax proceeds from the sale of their business can sustain their desired lifestyles after the closing. Owners also need to have an estate plan in place that can minimize estate related taxes and achieve their estate planning and charitable giving goals. For example, once the parties have entered into the letter of intent setting the price for the purchase of the company, it becomes more difficult to support a lower valuation for gifting and other trust and estate planning purposes. Working closely and well ahead of the sale with trusted financial advisors and estate planning specialists is an essential part of that pre-sale planning.
3. Address Key Tax Planning
Owners considering a sale of their business should consult early on with their tax professionals to structure the business and the form of sale transaction to acheive the most tax efficient outcome. There are usually tax planning opportunities to reduce federal and state taxes that can be put in place well in advance of the transaction closing but these opportunities often are lost if the owners delay in addressing them or allow the buyer to dictate structure and tax outcomes.
4. Separate the “Personal” from the “Business”
In closely held companies, owners sometimes commingle business and personal assets, income and expenses or otherwise use the business to support personal and lifestyle needs. Those arrangements need to be cleaned up ahead of the transaction. That clean-up will make the company look more professional and increase the buyer’s confidence in the economics of the business. It also will provide opportunities to add back revenue and remove costs which often boosts the company’s pro forma financial projections and EBITDA. That in turn may support a higher purchase price for the business.
5. Assemble an Experience “Outside” M&A Team
Mergers and acquisitions is a team sport and selling a company is a very different exercise than running the day to day business of the company. Owners need to be supported by experts in the relevant specialties, including investment banking, tax and financial accounting and M&A legal. Very often, the professionals who have historically represented a company do not have the specialized qualifications and experience needed to manage and support the owners in the sale of their business. Selecting the right M&A team includes getting referrals of qualified professionals, interviewing them, confirming their qualifications and determining they are a good “fit” for the company. That selection process should start long before the initiation of the formal sales process.
6. Identify the “Inside” M&A Team
In addition to outside advisors, M&A transactions benefit from a dedicated internal team who are “inside the tent” with respect to the sale, are able to meet the buyer’s due diligence requirements and are able as necessary to interact effectively with the buyer and its representatives. These individuals need to be knowledgeable about the facets of the company they manage and be trusted to maintain the transaction in confidence. Often these individuals may receive a financial stake in the sale proceeds to incentivize their support of the transaction.
7. Put in Place Effective Incentive Compensation for Key Executives
Buyers usually expect the seller’s management team to remain in place following the closing to continue the business and often want those employees to sign non-compete agreements. Long before the kickoff of the sales process, the company therefore should evaluate and, as appropriate, put in place those key managers who work through and following the closing and agree to employment and compensation arrangements with the buyer. Those compensation arrangements can run the gamut from retention or change in control bonuses, phantom stock and stock options and must balance the financial reward to the employee with their commitment to support the transaction and the continuation of the business post-closing.
8. Get Organized for Due Diligence
In due diligence, the buyer will ask to evaluate all aspects of the company’s business and finances and review all material agreements, including the customer, vendor and employment related agreements, and financial and personnel records. Sellers need to manage an efficient due diligence process which includes organizing and delivering relevant documents to the buyer; confirming that contracts and other needed agreements are signed and in effect, and identifying all third-part consents and regulatory approvals that are needed to close the transaction. To do that effectively, sellers should begin this organization and clean-up process long before the buyer submits its due diligence requests.
9. The Letter of Intent Matters!
Though mostly non-binding legally, the letter of intent is a crucial agreement for sellers in an M&A transaction. The letter of intern sets out the key terms of the transaction and often establishes the structure for the acquisition. Generally, it is in the interest of sellers to address most of the essential terms of the sale in the letter of intent because after the letter of intent is signed, deal terms rarely get better for the seller. Often key terms that are not addressed in the letter of intent are proposed later by the buyer with a buyer-favorable slant. The sellers may have less leverage in the negotiation at that point in the process. It is essential that the company work hand in hand with its M&A legal counsel and other professional advisors to negotiate and document the letter of intent.
10. Consider Your Post-Deal Responsibilities
Owners need to anticipate the role they may want or be asked to play in the business after the sale of their company and determine what they are prepared to offer in that regard. Often, buyers will expect substantial time commitments from sellers who have been involved in running the business and will ask for commitments not to compete with the buyer or solicit its employees and customers. Knowing that, owners need to consider in advance the terms upon which they will agree to stay in the business, including their roles, authority and compensation, and how those commitments can be reconciled with the owners’ own post-sale plans and goals.
Creating and sustaining a successful business is challenging and selling that business presents real rewards and risks for owners. The rewards will be enhanced and the risks mitigated by this kind of careful pre-sale planning and preparation.