By: Trevor Crow, Dufford & Brown, P.C.
Time is the biggest deal killer, so being prepared is the best way to put your business in a position to sell when the opportunity comes knocking. Selling a business is a time sensitive process. When a potential buyer is ready to pull the trigger, the business owner must be prepared to close the deal quickly or the buyer may lose interest or find another potential target. I believe it’s one of Newton’s laws of motion that says things in motion tend to stay in motion. Well, deal momentum works the same way.
Sellers with a proper exit strategy will increase the likelihood of getting their business sold and getting it sold at a favorable price. The goal of the Seller is to have a seamless and profitable sale in the shortest amount of time.
Know the Best Time to Sell
You’ve probably heard the adage that companies are bought not sold. This saying came about because potential buyers decide to make an offer when they are ready, which is not always when the target company is thinking about selling.
In addition, often the best time to sell a business comes quicker than the business owners expect. As a result, the owners start the marketing and preparation process too late. Many times a company is ripe to sell while revenues are growing each year rather than after the growth curve has flattened. Business owners should consider contacting a business broker or investment banker during this growth phase to get a better idea of the business value and prospects for sale.
Due Diligence – It’s Never Too Early to Start Preparing
When a buyer is ready, the target company can increase its likelihood of completing a transaction if it is ready at the same time. Recently, the trend has been for buyers to request more information than in the past. Having documents in digital format will speed up the disclosure process.
Compiling Documents
A good starting point is to get a due diligence checklist from your attorney, business broker, or investment banker. However, the form checklist most likely will not have everything that will be important to a potential buyer of a particular company. Thus, the business owners should think about the unique items relating to their business that a potential buyer would be interested in reviewing. Some of the basic information that the buyer will need is the company’s legal structure, distribution methods, board and management composition, key service providers (auditors, tax professionals, and attorneys), independent contractors and key business contracts.
All companies have warts and some more than others. Business owners should be prepared to address these issues with a potential buyer. Demonstrating a plan to deal with ongoing issues or providing documentation to show that certain issues have been put to rest will go a long way in easing the potential buyer’s concerns about these issues. The buyer will inevitably inquire about the warts or will include representations in the purchase agreement to flush out responses from the seller. If a surprise arises late in the process, the buyer may kill the deal or attempt to renegotiate the terms.
The easier the buyer can make the due diligence process for the seller, the more likely the deal will close. Further, providing full and accurate due diligence information can protect the Seller if a dispute arises after the sale. For example, if revenues drop the first year that the buyer operates the business, the buyer may look for misrepresentations in the purchase agreement to seek recourse against the seller or tap into an escrow fund if one has been created. If the seller provided full and accurate disclosure about the business, then the seller can make the argument that the potential issues were known and accepted by the buyer at the time of the sale.
Intellectual Property Concerns
Often a potential buyer may be a current competitor of the seller. These strategic buyers may have different levels of interest and could be fishing for sensitive intellectual property of the seller. Under these circumstances, a seller may want to stagger the disclosure of information until the seller can determine the seriousness of the buyer. Buyers often request all information at the beginning of the process. If the initial request includes sensitive information, it may be up to the seller’s advisers to explain to the potential buyer that the goal is to preserve the value of the company, which could be weakened if too much information is disclosed initially to all potential buyers. Highly sensitive information should be made available only when a deal with a particular buyer becomes inevitable.
Bottom Line: Time is the biggest deal killer. The key is to keep deal momentum going after it starts. Thus, it’s never too early to begin preparing for the sale of a business and beginning to compile the due diligence documents that a potential buyer will request.
This article originally appeared on www.biztaxbuzz.com. It is reprinted here by permission of the author.
