By Andrew Comer
Selling a business can be a very time-intensive, complex, and overwhelming process. Many clients come to me wondering how or when to begin the sale preparation process (or, in some cases, are unaware that there is a preparation process!).
However, businesses that have taken time to prepare for a sale ahead of time are far more likely to obtain a higher valuation and experience a problem-free closing. Throughout my career, I’ve worked on the purchase and sale of businesses (M&A deals) of various sizes across industries. In this post, I’ll outline the nine most frequently asked questions I receive from business owners and the answers that can help you prepare for a smooth and successful sale.
How should I begin preparing for M&A?
A topline list of what to prepare includes clearing up and settling any potential claims or litigation; ensuring your business complies with all industry requirements; ensuring you have updated corporate, financial, and tax records; and having strong, fully-executed agreements in place with all suppliers, customers, and consultants.
The Fortis website links to a comprehensive due diligence checklist outlining the items sellers are generally expected to provide in a merger or acquisition. Review it and begin to chip away at the requirements, ideally at least six months before pursuing a transaction. You can always start sooner; there is no harm in getting organized early on.
What is the minimum amount of time needed to prepare for M&A?
A few months is the absolute minimum. I always advise clients to begin preparations sooner rather than later so they’re not trying to clean up messes in the middle of the deal process, which risks a devaluation of their business or a buyer walking away altogether.
Who do I need on my M&A team?
Your M&A “A-Team” will typically include three trusted advisors:
- A financial expert/CPA
- An investment banker or business broker (in most cases)
- An M&A attorney
An M&A transaction is typically not a situation where you want a legacy service provider (i.e., your day-to-day accountant or lawyer) to represent you. Handling the sale of a business is very different from handling routine business matters and is best led by accountants and attorneys with M&A experience. If you aren’t sure who to engage for this work, ask friends, family, and colleagues for recommendations.
What are business brokers and investment bankers?
Business brokers and investment bankers match buyers and sellers, advise them on what’s best for their business, provide counsel around how the deal process works, and work to ensure the deal gets closed. If they’re experienced, they can add significant value in helping you structure the deal terms and move past hang-ups that can prevent closing. They usually take a fee of around 5% of the purchase price, and if they’re good at their job, their fee is worth it.
Fortis can provide several referrals to excellent business brokers and investment bankers we’ve worked with. You should also talk to other business owners who have gone through a sale and get their recommendations.
Do I need to tell my leadership team I’m preparing for a merger or acquisition?
In a nutshell, yes, and when the time is right. You must communicate clearly with your team about your business plan and exit strategy. Buyers are typically not just acquiring your tangible and intangible assets; they want an experienced, qualified team to run the business. The last thing you want is to be in the middle of negotiating a deal for the sale of a company and have a crucial member of your leadership team decide to leave the company —especially if you don’t have a non-competition or non-solicitation agreement in place with them.
When the time is right, bring your key leaders into your preparation process and get their buy-in by putting incentive plans or vesting mechanisms in place so the company sells for the highest valuation possible. Work to ensure that top players are motivated to stay through a sale and hit key performance indicators before their agreements pay out.
How and why should I protect my intellectual property (IP)?
A buyer of your business is purchasing your IP as part of the transaction, and your purchase price can be diminished if the buyer discovers in due diligence that your IP assets are not owned or protected. Often clients mistakenly tell me they don’t have any IP because they don’t have patents or other registrations. But when we dive into the preparation process, I explain that their customer lists, trademarks (company name, designs, and slogans), written works, trade secrets, and some other elements of their business are considered intellectual property. If you haven’t already, you should take the necessary steps to protect your IP contractually and/or through registration with the state or federal government before entering into an M&A transaction.
Does it matter how my employees and consultants are classified?
Yes, if you have improperly classified employees or independent contractors, be assured that will come out during due diligence and can potentially hold up or halt the transaction altogether. A buyer may decide to walk away rather than accept the related liability.
What tax matters should I consider, and what is the ideal timing?
Prior to signing a letter of intent (LOI), you should consult with your CPA and a tax lawyer about how to structure the transaction. Your LOI will set the table for the entire deal, so if you decide to shift something midstream, it can have negative deal consequences. A proper structure can add significant value from a tax and wealth transfer perspective. This is another example of why you can’t start preparing for a sale too early, as some restructuring options take a long time to put into place.
When pursuing a deal, how can I protect my confidential financial information, other processes, and trade secrets?
Always have potential buyers sign a nondisclosure agreement (NDA) before disclosing important information. Maintain a tight-knit circle, limiting the number of people you expose your information to and who they, in turn, expose it to. There are ways to sequence the release of sensitive and confidential information during the process that can limit your risk. For example, you may want to wait until you have a signed purchase agreement, your buyer has their financing in place, or you’ve otherwise confirmed that you have a real buyer and the deal is very likely to close.
Whether you are at the early stages of your preparation process or ready to start your exit right now, our website has other resources and materials that provide guidance on preparing for a sale. M&A transactions don’t have to feel overwhelming. If you work with a sophisticated M&A attorney and accountant and get organized early, you should be on the right track to get top dollar for your business while avoiding significant stress.
Feel free to contact me directly if you have additional questions about M&A or your specific situation. Our M&A team can guide you through every step of the preparation, due diligence, negotiation, signing and closing processes.