Selling your business? A primer

Selling a business takes planning, preparation and patience.?

As a “seasoned” business lawyer who has guided many dozens of owners, senior executives and boards in selling and buying companies and who also has helped many dozens of companies raise funding in both private and public markets, I am well acquainted with the goals, strategies and various perspectives of sellers, buyers and investors.

This series of articles conveys key background information and critical considerations in preparing for a transaction involving the sale of all or part of a business. Much of this information is equally applicable to a wide variety of potential transactions, ranging from a comprehensive sale to seeking investor support of your business.?

Topics to be addressed in this series include:

• defining and refining your goals,
• optimizing value and positioning the business,
• getting “your house” in order,
• developing a marketing package,
• preparing for “due diligence,” and
• what to expect in a purchase agreement.

GOALS

The threshold question is the single most important one:? What do you hope to achieve in selling all, part or an interest in your company? Think broadly. Your objectives and motivations may have implications for the transaction generally and how you might best proceed.

Questions to consider include:

• Scope of transaction.? Are you looking to sell all or a portion of the business? Are you looking for an exit, or for funding, or to monetize a “hot commodity”?
• Time frame.? What is your desired timing? The immediate future, the near future or longer term?
• Type of consideration.? What form of payment would be acceptable – cash, equity, a note, some combination? Would you accept payments over time? Are you willing to provide seller financing? What about earn-outs, where a portion of the purchase price is contingent on future performance of the business? Or is cash at closing a non-negotiable point?
• Transition assistance.? Are you willing to continue working in the business for some period? If so, under what circumstances and for how long?
• Employee participation and retention.? What about employees, especially key employees who may be critical to the ongoing business, or who may have been instrumental in building the business? Do they have equity and will they receive some of the proceeds? If not, will you want to make special arrangements to recognize their contributions? Should retention arrangements be insisted upon with any potential buyer?
• Client relationships.? Consider clients and customers of the business, particularly significant sources of revenue on which the business may rely. If a transition is in the not too distant future, think about carefully framed communications with major partners and clients so that a transition will not be a surprise and to provide assurance that their needs will be met.? To that end, you may wish to obtain specific commitments from any buyer that important client requirements will continue to be met and that the existing arrangements will continue for some defined period.
• Company culture and mission.? Is continuation of company culture and any stated “mission” an important element of any transaction?
• Brand maintenance.? How important is the business’s brand to you, and how dependent is the business (and the related goodwill) on the branding? Do you have a strong desire to ensure continuation of the existing branding? Or is branding a secondary or less important factor?

If a transaction is in the longer term, periodically revisiting your intentions and goals helps focus your efforts in managing the business and in positioning it for an ultimate sale. If a transaction is in the shorter term, refining your objectives can help guide more immediate business decisions.

As you reflect on these business-related points, also give thought to crafting an effective narrative for the business. You will want to develop a compelling (and accurate) story that reflects the strengths and competitive advantages of the business. Again, this narrative may shift over time based on market conditions, business developments and other factors, but thinking about “the story” can be helpful in guiding and positioning the business in light of your goals and objectives. “The story” also will be a central feature of your ultimate offering materials.

ENHANCING VALUE

Methodologies for valuing an ongoing business abound, and will be influenced by then-current market factors. Ultimately, however, value will be largely contingent on profits, rather than sales volume or size or other metrics. Positive cash flow is a “plus” factor, as it reduces the need for debt and can contribute to business growth, but cash flow that does not generate profits over time is a red flag. Ideally, your business will have steady revenue, net profit and positive cash flow.

Subjective considerations – such as business prospects, market trends, competitive positioning, client roster, ownership of valuable intellectual property or other assets – will impact valuation, but business performance in terms of profitability likely will be the starting point. And demonstrated recent profitability – rather than historical financial performance or prospective, anticipated financial performance – typically is the focus.

Anticipating “due diligence.” Buyers and investors alike will conduct “diligence” by reviewing key documents and financial information, and by speaking with key stakeholders. The diligence process (to be addressed in a future segment of this series) will inform the valuation analysis.

Sellers who are organized and prepared for diligence – and who have taken measures to improve operational efficiency and to optimize business performance – will impress prospective purchasers and investors.

Analyze the business to identify opportunities to improve value. You might start by taking a dispassionate view of the business. The standard SWOT analysis – strengths, weaknesses, opportunities and threats – may provide a useful framework. Similarly, common key performance indicators (KPIs) for the particular business (if they exist) may provide touchstones for assessing the business and for benchmarking results of operations.?

In examining the results of this analysis, consider whether and how operations, revenues, margins or overall profitability can be improved. Are there business opportunities that can be exploited? Can relationships with the most profitable customers and clients be expanded? Can additional recurring revenue be secured?

Are there aspects of the business that might benefit from streamlining or additional attention? For example, is the company’s customer relationship management system up to snuff? Are invoicing and collections done timely and efficiently? Is backlog an issue? Would information technology, privacy and security systems benefit from updating? Are the company’s HR policies and compensation approaches designed to attract the best talent and drive performance?

Undertaking a risk management exercise or implementing an enterprise risk management framework (depending on the nature of the business) can help reveal areas of potential exposure that might be protected against, opportunities to improve efficiency and losses that might be avoided, among other things. Even the exercise of creating a heat map that identifies, classifies and prioritizes risks based on severity and likelihood can improve business decision-making. By reducing a company’s risk profile and addressing potential business uncertainties, value can be enhanced.?

Value also can be enhanced by resolving any outstanding debts, disputes and legal issues. Any sort of contingent liability or dispute will – at a minimum – raise questions and could result in a discount for the uncertain exposure.

Last but not least, getting your “house in order” can contribute meaningfully to maximizing the value of your business and ensuring a successful transaction. If not in good shape, corporate and legal housekeeping, governance structure, recordkeeping and accounting procedures – among others – are matters that have stymied otherwise promising acquisitions, investments and initial public offerings. Stay tuned for the next installment!

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