Selling all or part of your business can be a rewarding experience, but it requires adequate preparation and stellar representation to safeguard your interests for the future of your company and the legacy you have built. In this article, we walk through what to expect and provide things to consider to help ensure your transaction is a success:
Begin With Your Goals: A good place to start is outlining your personal goals for the outcome of the transaction — as well as those of your partners, employees, customers, and family. This initial assessment is critical, as it will help you sort through your options and guide decisions that align with your interests for the future of your company. This will also help you focus on selecting the right partner or buyer. As you know, future growth is not just about financial capital. The best purchaser will make it a priority to understand what the business means to you personally and ensure they are aligned with your vision for the future before signing on. If you plan on staying with the company for a longer transition or consulting period, the buyer should be people you respect, trust, and want to spend a significant amount of time around.
Start Your Preparation Early: You should start planning for a sale of your business as soon as possible, include as much as five years in advance of your expected sale date. Get your financial statements audited or at least reviewed every year. Make sure your accounting is proper. Look at your business through the eyes of a prospective buyer. This will help you identify strengths and weaknesses so that you can begin to address the weaknesses early. Do you have too much customer concentration or supplier concentration? Is your business overly dependent on your involvement, or that of a single superstar salesperson? Consult with a qualified team of advisors with expertise in selling a business and follow their advice early. These include accountants, corporate lawyers, and investment bankers, and can also include sales consultants, business coaches, business process advisors, intellectual property attorneys, HR consultants, and others.
Consider Working With An Investment Banker Or Business Broker: Many business owners in a niche industry feel they already know all the potential buyers in their industry and forego working with an investment banker or business broker. An experienced investment banker or business broker can more than pay for their fee by finding the right group of buyers and running an auction process to assure you’ve tested the market and are getting the best price for your company. These professionals also present your company in the best light and provide valuable advice both before testing the waters and during the process.
Formulating the Letter of Intent: The most important part of the sale is negotiating the letter of intent. This is where expectations are set, assuming the buyer has sufficient information on the company to make an informed offer. The letter of intent to purchase the business is drafted by the buyer and negotiated by the seller. These are typically non-binding regarding the price, structure, and terms, but binding in terms of confidentiality, exclusivity, and other terms around the framework of the transaction. They are the first formal step in the purchase process after the confidentiality agreement and initial information on the company is shared. Every buyer and seller should engage experienced corporate counsel to assist with negotiating and finalizing the letter of intent.
Necessary Due Diligence and Purchase Agreement: Once the LOI is signed, remaining due diligence begins in earnest with a detailed review of all aspects of the business. This process usually takes about 90 days to complete. While the purchaser reviews the company’s assets, expenses, revenue, operations, etc. — it’s important that you conduct your own due diligence to authenticate their record and discover the value they will add as a whole. Speak with a few of their current partners and consider the following:
- Do I like the people with whom I will be working?
- Do their goals for the business line up with mine?
- Does their past performance show results?
- What is their communication style and how are decisions made?
- How have they handled strategy disagreements in the past?
- Based on the above, would they be a good fit for the culture I have created at my company?
Diligence is about the buyer learning the details about the company. It typically is divided into legal diligence and financial diligence. A buyer will often engage different teams of lawyers to review contracts, licenses, patents, employment issues, benefits plans, ownership and cap table concerns, and other aspects of the business. A buyer will also engage a team of accountants to review the financial statements and tax returns and may engage an auditor to perform a Quality of Earnings assessment or even a full audit. Your credibility is crucial here. Be honest and open with the information and demonstrate that you know your business inside and out and have the information available to correctly answer the buyer’s questions. To do that, your contracts need to be signed and organized. Your books need to be complete and recorded correctly in accordance with GAAP. Missing documents or messy or missing accounting can be a significant negative in any sale.
The negotiation on the terms of a purchase agreement also begins. This will formally define the terms of the deal, and any supplementary contracts such as non-competes or consulting contracts.
Timing and Transition Considerations Are Everything: It’s important to outline a transition timeframe as part of the purchase agreement. How long will you be involved in the transition and what options should be considered in the event things fall through? In addition, your time frame may impact the buyer’s strategy for return on investment. Find out what their time requirements are and define an exit plan. Which areas of the business do they see as short-term cost-saving opportunities, and what impact would those plans have on the long-term viability of the company?
Closing The Deal: This process is where the business actually changes hands and is handled primarily by your corporate attorney who will meticulously review all agreements, ensuring your company’s interests are protected and everything goes as planned. On the day of the close, the transfer of funds and/or shares is completed in exchange for the assets or ownership of the business. Your involvement with the business at this point depends on the structure of the deal that was negotiated with the buyer, and whether you have an earn-out or post-closing continuing employment obligation.
If you are considering a sale or purchase of a business in California, or have questions about a deal in progress, call Adams Corporate Law for a consultation at (714) 619-9360 and we’ll discuss your unique situation. We are lawyers that focus on closing deals. Use one of our experienced lawyers to make sure your interests are protected, and you understand the many moving parts in every sale of a business. We look forward to serving you!