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September 11, 2017

If Opportunity Knocks, Are You Ready to Open the Door? Being Sale-Ready in a Dynamic Business Environment

Historically low interest rates, demographics and market dynamics have created an environment where the opportunity to sell a business has never been better.

  • In 2008, business owners who may have been looking for an exit strategy were sidelined by the recession. Now, almost ten years later, many of these businesses have rebounded and their aging owners are looking for the exit as retirement looms ever closer.
  • After a few years of robust new company formation, an entire new generation of businesses are looking to be acquired by private equity groups and strategic buyers flush with cash seeking returns by consolidating new opportunities across regions, businesses and industries.

Most business owners are so busy running their businesses that they aren’t actively looking for an exit when an investment banker or business broker calls.

According to a recent survey of mid-market businesses, 53% of sellers are currently involved in or open to considering a sale in 2017 compared to only 34% in 2016. Even if you weren’t thinking about selling your business, your competitors might be. If you don’t answer the call, they might and there may not be a second chance. That call might be your first, last and best opportunity to maximize the value of your business.

Get Sale-Ready

If you get that call, would you be ready to sell? Fortune favors the well prepared, so being in a sale-ready state will allow you to take advantage of these opportunities when they arise. That state of readiness doesn’t happen overnight.

A recent survey showed that 37% of mid-market businesses considered themselves unprepared or neither prepared nor unprepared for sale. The flip side means that 63% of these businesses considered themselves prepared. As momentum shifts towards a buyer’s market, being prepared for sale can be the difference between success and failure.

Building your business into a sale-ready state will permit you to answer the door if opportunity knocks. It will also force you to focus on not only what drives the business but also what drives value in the business.

Assemble the Team

With a little advance planning, making your business sale-ready is a manageable task. The first step is assembling your team of key advisors—accountants, attorneys, tax advisors and financial planners. The goals should be to understand:

  • the sale process,
  • what your business will look like to a buyer,
  • steps you can take to increase the potential sales price for your company, and
  • how deal structures can impact how much you’ll be able to keep after the sale.

Engaging with your key advisors to model the potential outcomes can help set expectations appropriately and guide you to make any structural changes that could have a significant impact on your financial outcome if undertaken far enough in advance of any anticipated sale.

Confidentiality is key. The team must be made up of those you can trust to keep the process confidential. Revealing too early that you may be planning for a sale could send key employees packing or give valued customers a reason to go elsewhere.

Conduct Self-Diligence

A big piece of the sale process is the due diligence investigation conducted by the buyer and their advisors. That process will examine in excruciating detail all aspects of your business from finances to business processes to structural and legal matters. Your goal is to make sure the due diligence process goes as quickly and smoothly as possible, and does not reveal any deal-breaker issues.

Financial statements (and everything that goes into them) will be a prime target for scrutiny. Have they been prepared in accordance with GAAP? Are they compiled, reviewed or audited by a CPA? Have revenues and expenses been accounted for properly? Your company’s financials will form the basis for determining the value of your business. With advance work, policies and procedures can be implemented to increase their accuracy.

Ownership structure will be another key focus area. Are there any:

  • areas of dispute or uncertainty regarding ownership?
  • messy situations with former owners or departed employees?
  • promises or agreements regarding equity ownership that haven’t been resolved?

Key contracts are another area that can have a big impact on a sale. Are they assignable without the consent of the counterparty? Are long term contracts nearing expiration? Is there a new lease negotiation coming up in the near future?

Other areas that should be reviewed well in advance of a sale process include:

  • employment contracts and policies;
  • commercial credit arrangements;
  • pending or threatened disputes or litigation;
  • licensing and regulatory matters; and
  • intellectual property infringement issues.

With advance planning, all of these items can be reviewed and addressed in an orderly fashion and with a view to being able to deliver a thriving and stable business to a buyer with minimal delay and disruption and no post-closing surprises that could require you to forfeit a portion of the purchase price.

Preparing for Due Diligence

A prospective buyer’s due diligence investigation will require the review of a host of documents and business records. This usually means scanning and sharing pdfs of critical records and documents.

Collecting these documents and being prepared to make them available to a prospective buyer, their advisors and your advisors can be time consuming and disruptive. Often the flurry of activity required to respond to due diligence can tip off employees that something big might be in the works.

If key records and documents can be collected well in advance, it’s usually far less expensive and much less disruptive to the business. Many advisors, such as law firms, business brokers or accounting firms, can provide access to a virtual data room to allow you to upload these documents to a confidential and controlled site so they can be shared with one or more prospective buyers and their advisors without having to make and deliver physical copies or permit numerous on-site visits to inspect them.

Plan for Tomorrow Today

Even if you aren’t thinking about a sale in the near future, engaging in some thoughtful pre-planning is still wise. Market conditions, a health crisis or loss of a key employee, supplier or customer may force a decision sooner than desired. Engaging early will give you the time and information to preserve and enhance the value of your business so you have the choice to open that door when opportunity knocks.

You may find that, whether or not you sell your business, changes and improvements that you make as a result of the preparation-for-sale process increase the value and profitability of your company.

Contact Dennis Michaels or any of the attorneys in our corporate, tax or estate planning groups to begin planning for tomorrow today.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.