Ten Tips When Selling Your Company

By Michael Carter

1 – Find A Strategic Buyer
Sell to a "strategic buyer" who will view your company as complementary to his existing business and therefore will pay more to acquire it. Sell the strategic fit first prior to the financials. When projecting the net results of the acquisition, the strategic buyer will explore all possible effects of the combination, both direct and indirect. For example, the buyer's operating costs may decrease, or distribution channels may be expanded through the acquisition. During negotiations, point out any strategic advantages that the buyer might over look and quantify the savings and synergies of the two companies combining.

2 – Prepare, Prepare, Prepare
Selling a business takes preparation and planning, sometimes as long as a year or longer. The following issues reduce business risks, and should be clarified or solved: (a) Make money; (b) Simplify: legal structure, capital structure, accounting systems, shareholder list, compensation plans, insurance, people issues, etc; (c) Obtain financial statements (reviewed a minimum) from a quality CPA firm; (d) Resolve outstanding and pending lawsuits; (e) Ensure compliance with all contracts; (f) Communicate with your shareholders; (g) Minimize the importance of key employees; and (h) make the hard decisions.

3 – Vigorously Negotiate the Letter of Intent
Prior to signing the LOI you have leverage. Once you sign a LOI, you will likely be providing the buyer with an exclusive opportunity to buy your company. During this exclusive period you and your advisors can not discuss selling your company with any other company. Furthermore, the LOI is the time to negotiate and clarify the details. The buyers attorney will likely draft transaction documents. The less left up for interpretation the less disagreements during the exclusive period.

4 – Consider Flexible Terms
Immediate cash is not always the preferable form of payment. For instance, a buyer may be willing to pay more for your firm if payments are deferred and spread out over a number of years. But be extremely cautious when considering deferred or contingent payments. The purchase price can often be increased by agreeing to tie a portion of the price to the company’s future performance. The better the company performs, the more money you get. Contingent payments can be based on achieving certain milestones, or maintaining customers, employees, or other variables. Thoroughly evaluate the buyer’s current financial condition to ensure it can deliver on its promise.

5 – Create a Competitive Market
A competitive market is critical to maximizing shareholder value. A competitive market is created with a quality memorandum, contacting several qualified buyers, ensuring exposure to the opportunity occurs on schedule, and ensuring the process is done with 100% integrity. In many cases, our firm only contacts a handful of potential buyers, however, they are well screened and motivated. A competitive market is achieved without the costs and risks (wide exposure in the industry, tying up management in several meetings, and a long sales process).

6 – Write a Comprehensive Memorandum
Write a memorandum that details the company's history, operations, employees and management, market niche, and financial position and outlook. This document is a sales document to obtain a qualified meeting. It should not overstate or mislead the reader in anyway. In fact, it is an opportunity to divulge all company risks, liabilities, contingent liabilities and potential problems. No buyer wants to find a material problem during due diligence and wonder "what else has he not told me." A well written memorandum will also help the buyer to rationalize why he is paying so much for your company.

7 – Plan on Working for the Buyer
Your desire to work for the buyer greatly reduces the risk that your company does not collapse shortly after you sell the business. Often the owner is not only the executive in charge but has the energy, experience and relationships. Often customers and employees leave upon the sale, especially if they are equity owners. Staying on often involves you enjoying some upside in the form of making an earn-out, stock options or a bonus. By staying on you are demonstrating your sensitivity to the buyer's primary risk, that he paid for a company whose value is primarily the owner. During this transition period, the buyer gets to tap your knowledge of the business.

8 – Stay Behind the Scenes
Although company principals have an important role during negotiations, it should be played out behind the scenes. When owners try to negotiate directly and on their own, egos and personal feelings often get in the way of sound business decisions. Often sellers have to work with their negotiating "adversary" following the sale. Objective professionals in the merger and acquisition field are in a better position to optimize terms and increase the odds of completing an amicable transaction.

9 – Hire Experienced Professionals
Hiring your acquisitions team is one of your most important decisions. The team often consists of (i) your attorney, however, the attorney used for this transaction must be experienced in M&A transactions, (ii) company accountant (assumes you use same accountant personally), (iii) financial advisor (investment banker), and (iv) industry consultant, if appropriate. We represent a qualified team makes a huge difference in the outcome of the transaction.

10 – Estate Planning
Carefully consider the net after-tax effect of any proposed transaction. Over 50% of the sale price may be paid in income, capital gain and inheritance taxes. Meet with your estate planning advisor and financial advisor to discuss your objectives long before a sale and then the best way to meet these objectives. You may find its beneficial to elect a different corporate structure or be providing gifts of your company prior to the sale. We represented one of the two equal owners of a medical products company. Our client did some estate planning and the other owner did not, the difference in net proceeds was in the seven figures!