Nine Considerations for Founders Looking to Sell Their Business

Article written by Croke Fairchild Duarte & Beres Partner Jessica Klapper Fairchild

I have been representing sellers and buyers in M&A transactions for many years, including a significant number of founders or family-owned enterprises going through first-time sales of their businesses. While each transaction is unique, sellers of all kinds tend to face the same kinds of challenges. Here are some of the best practices I share with clients considering a sale:

Prepare for a sale before you have a buyer. If a sale is your ultimate goal, get ready before a buyer is knocking on your door. This preparation might include:

• Reviewing and addressing risks at your company
• Shoring up relationships with key staff, key vendors, and key customers
• Making sure important documentation is accessible and organized
• Proactively resolving any ongoing disputes or litigation
• Establishing your advisory team
• Working with outside advisors to review key areas at the company (e.g., financials, legal matters)
• Having a general understanding of what your company is worth in the current market
• Thinking through what you want to achieve with the sale and what your future will look like after a sale is completed

Surround yourself with an experienced team of advisors. Selling a company is an arduous task, especially when you are deeply and personally invested and it represents your life’s work and net worth. Advisors should be your true partners — willing to be in the trenches with you at whatever hour to work through your concerns, fears, and doubts. Yes, you will need financial and legal advisors, but former founders and frequent buyers can also round out the team and provide guidance as you progress through the process.

Build that team early in the process. Involving advisors early is also key — having them at your side when you are negotiating an LOI can make a big difference in key business and legal terms of the deal. Even better, establish this network before a deal is at hand so you know the team and know they will be ready to help you when the time is right.

Consider collaborating with internal partners. Most founders can’t sell their business without assistance from their CFO and other senior managers or even additional staff. Contemplate who to bring “under the tent” and make aware of the transaction. The due diligence and review process can be very lengthy and detailed, and this burden may be crushing for a single point person. As you think about who to trust with the information, remember that there are tools to incentivize those team members not to jump ship ahead of a potential transaction. These include success bonuses and other mechanisms to get the most out of your team and still accomplish your goal of selling your company. Finally, if you have not thought about rewarding your employees and team prior to the pending sale, it presents a great opportunity to create bonuses or something similar so that your team, who has worked hard to help you achieve a sale, gets compensated accordingly.

Think carefully about how to structure your ongoing relationship with the buyer. Used to being at the helm and running the show, many founders will find it difficult to work for the buyer or adjust to the new work culture that exists after a sale. These issues can be further complicated if the transaction contains a deferred compensation component. Obvious conflicts exist if a seller goes to work for a buyer and there is an earn-out as part of the transaction. This puts the former owner in a pickle — do my loyalties lie with my new employer or the former ownership group of the company I sold? There are ways to thread the needle here, such as structuring a limited transition or consulting arrangement with the buyer. In deciding whether to work with or for a buyer and/or to roll over any proceeds into a buyer’s structure, make sure you are getting good advice.

Be very skeptical of deferred compensation, such as earn-outs. These mechanisms certainly help buyers and sellers bridge the gap to get to a sale, but they very often lead to disputes after the transaction. In many cases, I have seen earnouts be completely renegotiated or lead to litigation, even with the most well-crafted and detailed earn-out provisions. Your advisors and lawyers can help you think through how best to protect an earn-out, but it is important to know up front that earn-outs are fraught with risk and should not be over-valued.

Don’t forget to think about your tax and estate planning. Many founders come to us without having planned for an eventual exit, but it is not a good idea to wait until after a sale to deal with these issues. At that point, it may be too late to put in place creative or even ordinary tax and estate protections. By consulting advisors early on, you may be able to structure your company or its assets (or your personal holdings) in such a way as to minimize tax reductions and maximize your after-tax proceeds. You will also want to think through how you’ll use the proceeds and how to protect those assets for your family and future generations.

Understand that not every deal is a good one. There are many factors to look at besides price, including your expected relationship with the buyer, and what is going to happen with your team, the brand, and the business you have painstakingly created. One very key question: do you want this buyer to own what you created? Take the time to thoroughly assess the terms, who and what is on the other side of a sale, get advice, and even see how much you can negotiate the terms offered. The deal you pass up may lead you to an even better one.

Plan for succession. Every business helmed by a single founder needs a succession plan. If you are not currently considering a sale, what is your vision for the future? Do you have leaders(s) prepared to take over? Can the business survive without you? Should you sell while your business is prospering to capture the most value? After making this assessment, you may find that seeking a sale is the best plan for the future.

With careful preparation and good counsel, you’ll be ready when the time comes to consider selling your business.