So, you are thinking of selling your business, or part of your business. Congratulations! Now, take a seat and roll up your sleeves. There is hard work and tears ahead (and not just for your attorney).
A few years ago, my husband and I sold our house. But before we could put it on the market, our agent told us to get to work. We went through every drawer and every closet, removed anything offensive (don’t ask) and organized every square inch. Then, we had the plumber look at the leaky sink, replaced the roof, and fixed all the creaky doors. Our agent then walked through our house and told us to replace the window coverings and remove all personal items. Our agent told us it was easier to fix and clean-up before the potential buyer was insisting on it. Then, and only then were we ready for prospects.
You should treat the sale of your business in the same way. This process takes time, and doesn’t tend to be very fun. But the work you do before you actually sell your business is the best way for you to preserve the value of your company. I’ve broken this down in more detail below.
Tip #1: Clean House Before You Go to Market. Most of my clients do a great job of spiffing up their storefronts, but they tend to ignore the back office. In my experience, it is the mess in the back office that Buyers most often use as an excuse to ask for a discounted purchase price. For example, if you are a franchisor, do you have complete records showing that you have followed the sales disclosure regulations for each of your franchise sales? If not, Buyer’s counsel will often argue that Buyer will need to discount the price (or possibly defer payment of part of the purchase price) because of the risks that Buyer has learned about.
So, what is the best way to clean house? I start by sending my clients a standard due diligence checklist. This is the document that most Buyers use to request information from their Seller once the sales process begins. I highlight the items that I would anticipate will be the highest priority for a Buyer of Seller’s company and ask my clients to prepare their files for each item. If any information is missing or is not in order, we can often resolve it if we have the time and space to fix it ahead of time. If Buyer is the one who finds an oopsie in the files, we don’t usually have the option to fix it.
If you are considering selling your business in the near future, reach out to us. We’re happy to have a brief discussion with you about the process, and to send you a due diligence checklist for you to use to start cleaning house. Then we can have your business looking clean and bright, and lessen the chance for Buyer asking for a discount.
Tip #2: Hire (and use) your Professionals. We know you are the expert at running your business. But you may not have the same expertise in the business of buying and selling companies, which is a specialty all its own. Generally, we recommend that you work with a corporate attorney, an accountant, and possibly a broker and/or a financial consultant.
Timing is also an issue. Many sellers wait to bring in professionals until later in the process (hoping to save money). You can actually save money if you bring professionals into the process early on. We would recommend involving your professionals before you even go to market. For example, I’m often brought on board after a Letter of Intent (LOI) has been signed. Often, this means that we are trying to negotiate legal protections later in the process which were unintentionally given away in the LOI.
You’ll also want to consider each of the protections you need during the process. For example, your attorney should prepare a “deal-specific non-compete” early on in the process, and provide guidance on what types of information you should disclose before a purchase agreement is signed. Bringing on professionals early on in the process will help protect the confidentiality of your business, and make sure that you don’t give away benefits of the sale that could decrease the value of your business.
Tip #3: Know your Buyer. You found a Buyer! Life is good! Is there anything else you need to worry about? Unfortunately, this is an area that many Sellers tend to ignore. As much as companies want to sell their company and then move on, selling the company is not the end of the road for Sellers. Most purchase agreements contain various ongoing issues: a portion of the purchase price may be deferred, Seller may end up agreeing to finance a portion of the purchase price, the lease or other third party agreements may be assumed, etc. This means that even after the business is sold, the Buyer and the Seller are still riding off into the sunset together to some extent.
So, what should you be doing as the Seller? We recommend that a minimum you do some research on the financial strength of your Buyer. We would recommend that you start by researching the type of information that is publicly available online, including a UCC search and search for other industry-specific financial information, like audited financials in an FDD (if the Buyer is a franchisor).
Finally, you may want to consider researching more of the soft-side information. Is the Buyer reliable? Well-respected in its industry? Does the Buyer have a similar corporate culture as your company? Being discriminating on your Buyer will help avoid going down an expensive and time-consuming negotiation path with the wrong buyer. It will also help you confirm that the Buyer will have the ability to pay your purchase price.