We received a lot of great feedback last month from my post Checklist for Newly Formed Entities – thank you all for the emails, tweets, etc. All of your feedback got me thinking though … what about those who are planning a sale of their business? Not wanting to leave anyone out, I decided to put together a checklist of things to consider and have in place as you begin to entertain the idea of selling your business, regardless of whether you’re a self-funded, owner-operated business or a venture-backed, high profile company.
At MFA, we see a lot of transactions from both sides of the equation. In some cases, our growth-oriented clients reach that point in their life cycle where a sale of the business is necessary to further the goals of the organization. In others, our clients are identifying target acquisitions and furthering their own growth with sound, strategic acquisitions. We often work with our corporate clients, their shareholders, and our private equity clients throughout the transaction, supporting due diligence activities, mapping out advantageous tax structures, and generally working to smooth an otherwise chaotic process. The following checklist comes from personal experience and I would very much value additions that others might have.
- Determine what you want to get out of the sale of your business. Once you go to market and receive offers from interested buyers, how will you measure the value of the offers that you receive? It is a very slippery slope if your buyers are dictating terms because you’re not prepared going into the process to negotiate what you want.
- Expect to be put under a microscope— otherwise known as the due diligence process. At MFA, we are often involved in the financial due diligence process, but you’ll also be subjected to the buyer’s diligence activities concerning your market, competitors, legal considerations, management team considerations, etc. With regard to the financial diligence process, though, you must be prepared to react quickly.
- Consider the following:
- Establish a “data room”. Even if this consists of nothing more than a secure file share on your network, start populating your data room with all of your critical business documents, from your company’s articles of incorporation to key customer contracts and everything in between. When the diligence process begins, you will be asked to supply the buyer and their accountants and lawyers with more information than you ever knew you had. Each day that passes while you accumulate this data, the less interested your potential buyer may become and the more reasons the buyer may find to reduce the purchase price.
- Be prepared to look at your business like the buyer. This means doing your own review of earnings quality, evaluating your customer concentrations across different strata, analyzing your gross margins from multiple viewpoints, and understanding the seasonal and geographic trends that affect your revenues. You’ll get questions on all of these topics and more as the buyer digs in and tries to understand your business.
- Have your budgets and projections at the ready. Don’t assume that a sale of your business will close. Continue running the business with confidence, with the financial details to support your activities. A buyer will want to see what you’re projecting and forward-looking statements should help to show that this is not a distressed sale.
- Don’tunderestimate the value of your business, especially for those of you who have boot-strapped your business and did not raise outside angel or venture money. Owners of privately held businesses generally seek to minimize profits to lower taxes and, as a result, the financial statements may not reflect the real value of the business.
- Similarly, don’toverprice your business. Engage professional support and guidance to help set your expectations realistically. Investment bankers and business brokers, when utilized correctly, can be powerful advocates for you and the value of your business.
- This one may seem self-serving, but invest resources in having your financial statements subjected to annual audits by a quality CPA firm like MFA. I could go on describing why this is important, but Fred Wilson from Union Square Ventures says it best in his recent blog post – I encourage you to click through for his thoughts (look under the “Financial Audit” sub-heading). Importantly, though, have your financial house in order! Nothing spooks a buyer more than poor financial record keeping.
- This one might be better addressed by your attorney, but get your legal affairs in order. For example, do you have clean title to all of your intellectual property? Are your key customer and vendor contracts portable to a new buyer? Have you addressed state and federal privacy statutes adequately?
- Consider what life after the sale might look like. Have you discussed the financial planning issues with your advisors and family members? Active planning years before a sale event can yield significant dividends in the future.
- Engage your legal counsel and accountants early in the process. Terms in the Letter of Intent (LOI) can sometimes be deal breakers, but are not always obvious to the initiated. Similarly, complex deal terms may seem appealing when they’re negotiated, but can cause acrimonious relations in the future which often lead to legal disputes.
Again, I’m sure there are many more things that could be included herein and I’m interested to hear your thoughts. Please feel free to add them to the comments section below, and I’ll incorporate them in an updated version of this checklist at a future date.
As I said back in December, this and my earlier post are my checklists and are only meant to provide general information. This information is merely general guidance and it is not a substitute for professional advice. It should not be acted on without obtaining professional advice tailored to your company’s individual needs. If you have substantive questions, you are encouraged to consult your advisor at MFA and/or your attorney.