Selling or Buying a Company? Here’s What to Consider First (Part 1)

Part One: Putting A Company Up For Sale? Answer These Five Questions First

There are dozens of issues that need to get addressed when selling a large business. Each business and each industry has unique challenges. Selling a public company, a piece of a public company or a private company each raises its own issues. Despite the differences in every situation, after over thirty-five years of helping sell businesses, there are common themes that I see arise time after time. Here are five of the issues that commonly come up when selling any company:

1.????Who are your potential buyers?

Before beginning a sale process, there needs to be an assessment of who will comprise the potential pool of buyers. Organizing the sale process will flow from this assessment. For example, is this a business that will primarily appeal to your competitors? If so, will those competitors have access to sufficient capital to be able to buy your business? Will there be regulatory issues in selling to a competitor? Antitrust regulation is getting tougher. How concentrated is your competition? And how is your market defined?

Alternatively, is the pool of potential buyers primarily private equity firms? Antitrust considerations may no longer be front and center, but instead financing availability becomes critical. What does the current market for financing look like? If the business up for sale is a subsidiary or a portion of a bigger business, are there stand-alone financial statements available that can be used to obtain financing?

2.? What happens to existing management after the sale?

Starting at the end of the process may seem odd, but it won’t to the management. They will be acutely concerned about what happens to them. The answer to this question may also relate to the assessment of the pool of buyers in the prior question. If private equity firms are part of that pool, they generally are looking to retain current management. Corporate buyers may not wish to retain the most senior management of a business they are buying. In either context, it is vital to make certain that the members of management are active and constructive participants in the sale process and will remain in place at least through the closing of the transaction. It is highly advisable to put in place a special retention package at the outset of the sale process, to ensure that management is incentivized to be fully engaged in that process all the way through the closing.????

3.? What are the biggest problems that the business faces?

A seller needs to be candid with themselves and look at a business with the same critical eye as a potential buyer. What are the flaws and risks in the operations or the existing or potential liabilities of the business that might concern a buyer? The diligence process will expose all of these matters, ultimately. A potential buyer will have questions about them that will need to be answered. Be candid about such issues when presenting the business to potential buyers. Raising them allows you to put them in the context of the strengths of the business. Surprising potential buyers late in the process or allowing them to ferret out potential or actual problems on their own will create a difficult negotiating dynamic. No one likes being surprised with bad news during a sale process. As a seller you will earn credibility and control the narrative if you are upfront with the flaws of a business.

4.? Are?you being helped by trusted and experienced financial and legal advisors?

This question may seem self-serving, since I am in the business of providing legal advice in sale processes. But, having advisers, both legal and financial, who are an integral part of your team will greatly facilitate a successful sale. If you do not regularly sell businesses, your financial and legal advisers will be able to shoulder much of the burden of organizing the process. Valuing your business, finding potential buyers, organizing data rooms, crafting the sale agreement, negotiating non-disclosure agreements – all of these aspects can be handled by your advisers.?This is true no matter how sophisticated your internal team may be. Using your advisors as intermediaries with prospective buyers is immensely valuable. They can take the lead in negotiations and manage the daily back and forth, while allowing the seller to preserve their relationships with prospective buyers. Finally, your advisors will have previously seen many of the issues that will inevitably arise. Experience counts and they will have seen what has been successful, or unsuccessful. Using advisers effectively and wisely will greatly enhance the ultimate outcome of a sale process.

?5. Do you have to sell now?

Heading into any sale process, or any negotiation for that matter, you should know whether you are willing or able to walk away. If this is a business whose sale must take place, and a process that must be done within a specific timeframe, the people managing it internally as well as your advisors should know that. On the other hand, if you are willing to end a process without a sale if you don’t receive a sufficient price or desired terms, you should be clear about that. Of course, there is a wide range between those two extremes. But you should be thoughtful about your views heading into a sale process. Your degree of commitment to selling now will greatly inform your approach and the perspectives you take as you engage in the sale process and any negotiation with prospective buyers.

Any attempted sale will have its own unique path. Addressing these five threshold questions will get your sale off to a good start and greatly improve the odds that you will reach a successful conclusion.

Tomorrow: Part II, Buying a Company? Five Questions to Answer