Mintz’s Sell-Side Series: Preparing Today for Tomorrow's Sale — Week 1
Week 1: Pre-Planning: Developing Your Goals and Defining Your Game Plan
For many, the mere thought of selling their business is difficult. It may be, for example, that your company has been in the family for generations, or it may be that you have invested significant personal time and resources into starting or growing your company — selling it might feel like you would be losing part of yourself. Nevertheless, it is always better to be prepared. Recent studies have shown that only about 10–15% of family-owned businesses remain privately held companies by the time the third generation is ready to take charge.” Each year, an increasing number of transactions are prompted by unsolicited offers. Preparing for a sale now will give you greater control in the future.
Issues and Questions to Consider
What Are Your Goals?
When thinking about whether or not to sell your business, defining your objectives is important: clear priorities will guide your decisions and enable a smoother process. Today’s business environment may push you to rush into a sale to capitalize on seller-friendly terms. As moving quickly is often inevitable in the context of a sale, it is crucial to consider the important issues in advance. To clarify your goals, you may want to ask yourself:
- What is your main objective?
- When is your ideal exit?
- Do you prefer a strategic buyer that is already a participant in your industry to a private equity buyer? Each has advantages and disadvantages.
- What is your post-exit plan?
- Is the family the best owner or manager of the company?
- Are you in business to support your family?
- Who are the stakeholders?
- Are any of your priorities in tension with one another?
Your goal may be to expand the business to provide more support to your family. Alternatively, you may decide that you do not want to sell but want to generate liquidity and receive assistance running the company. Or you may find that there is no reason to bring in a third party – your business is doing well, and you want to keep the company in the family and maintain total control. As an owner, knowing your family dynamic and your financial, retirement, and tax planning goals is essential to achieving your desired outcome. Without defined goals, the sale will result in disappointment.
If you are running a family business, it is likely that the economy has changed significantly since its founding. The resources currently available to you may not be sufficient to compete with larger national and international industry competitors. Many small businesses that used to have a monopoly of the local market no longer do today. Others may have succeeded in maintaining local control, but recognize that a larger firm could offer the resources needed to expand the business. Keeping up with increasing regulation is also challenging. Selling part of your company may expand what you can offer: larger entities come with more sophisticated marketing teams, HR departments, IT professionals, and expanded customer service hours.
What Is Your Game Plan?
The sale of a privately held company is usually a time-consuming process and may also be emotional. A typical sale transaction can take six to eight months to complete from the decision to sell and will require significant involvement of management. This process can be significantly longer if unnecessary hurdles arise for which the seller is unprepared. Thorough planning and the right team are important to avoiding roadblocks later. Furthermore, if mismanaged, the sale process can be incredibly disruptive to the business: it may affect relationships with suppliers, shareholders, family, and employees in ways that reduce the value of the company. A well-managed process, however, can significantly increase the value of your company and foster growth under new ownership.
Building the Right Internal and External Team
Choosing the right team of advisors is crucial to the success of the deal. Because a sale process is so disruptive and time-intensive, changing the team mid-sale is not only difficult to do but may also decrease the value of the sale in the marketplace. It is important for the owner(s) to assemble a team that will work productively together to achieve the best results for the seller. The M&A team typically includes the management team, legal advisors, an investment bank or other financial advisor, and accountants. The management team includes C-suite executives and will principally act as a liaison between the M&A team, the board of directors, if there is an active one, and other key employees to assist with due diligence, contract negotiations, and other matters. To ensure that the deal is structured and documented properly, the owner will need to identify attorneys (who may all be in one firm) with specialized knowledge in M&A transactions. Such attorneys in this area will anticipate issues before they arise and protect the seller post-closing. The investment banker or financial advisor is responsible for maximizing the value of the deal through marketing the business and targeting potential buyers [a future issue of this series will cover hiring an investment banker]. You also will need an accounting firm to make certain that all of the company’s financial statements meet the necessary standards. The accountants will also coordinate with the attorneys to address any relevant tax considerations. In addition, the attorneys and the accounting firm will provide support when the buyers conduct their diligence investigations.
Managing Employee Relationships
The advisors can help manage employee communications and relationships. You may have a staff that has worked for you for a long time and expects the business to remain in the family. While withholding your plan to sell may be difficult, it is important to maintain confidentiality. Employees are often anxious about the changes that may occur after the sale and may look for new jobs. Your employees are a key piece of what makes your company attractive to a buyer; losing employees before a closing may affect the value of your business. In some cases, holding “town hall” meetings or preparing FAQs can be useful ways of communicating with employees while allowing you to control the messaging and flow of information. Your advisors may also be able to recommend other means of protecting your interests and those of your employees (e.g., retention bonuses can incentive key employees to stay with the business while preserving the company’s value in the eyes of the buyer).
Additionally, you may never have worried about your employees signing non-compete agreements. If this is the case, you may want to consider putting in place non-competes to make your business more saleable.
Value Drivers and Hindrances to Sale
It is never too early to get organized. Understanding and working to increase the value of your company will put you a step ahead should you decide to sell.
- Financial records: It may be useful to have audited statements. This sometimes involves the retention of another or additional accounting firm. The acquiring company will do its own due diligence, but it can be advantageous to have confidence in your financial records before engaging a buyer.
- Intellectual property: Depending on your industry, the intellectual property of your company may be the most important asset category. If this is the case, it is crucial to have your business contracts, patents, and trade secrets reviewed by an intellectual property attorney to ensure the ownership of those assets is clear. Ambiguous ownership will jeopardize the value of the business.
- Employment contracts: Review employment contracts to make sure your key employees will work toward a successful sale and stick around after the business changes ownership.
- Commercial contracts: These should be reviewed to, among other things, ascertain if there are provisions such as change of control clauses, restrictions on assignment, or exclusivity rights that might impede a transaction.
- Corporate records: Conducting due diligence on your own records may also be useful to identify concerns and effectuate solutions before the buyer identifies such concerns.
1 See “A Toast to Morley Safer,” CBS News, May 22, 2016, https://www.cbsnews.com/news/60-minutes-toasts-morley-safer/; George Stalk, Jr. and Henry Foley, “Avoid the Traps That Can Destroy Family Businesses,” Harvard Business Review, January–February 2012, https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses.
2 Cohen & Company, Ltd., The Sale of a Privately Held Company: valuations, process and best practices, 2017, https://www.cohencpa.com/getattachment/Insights/Whitepapers/MA/MA-Process_WhitePaper_2017.pdf?lang=en-US&ext=.pdf.