Eight Things to do Before Selling Your Business
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By Matthew Kelleher, McCarthy Tétrault LLP
Originally published September 21, 2011 on Canadian M&A Perspectives
When selling your business, it pays to plan ahead. Don’t forget these important – but sometimes overlooked – strategies for maximizing value and deal certainty.
I learned a great lesson from a great chef: “You consume 70% with your eyes”. Just like the artfully plated dishes that would emerge from his kitchen, the appearance of your premises says a lot about your outlook, attention to detail and dedication. It’s easy to let things slip when you’re focused on day-to-day emergencies, but invest the time to inspect and refresh your offices and other premises. Dump the dog-eared National Geographics from the reception area, purge the dusty promo materials from the corner of the conference room, replace burnt light bulbs and – let’s face it – a fresh coat of paint probably wouldn’t kill you. Prospective purchasers will notice.
Organize For Due Diligence
Most prospective buyers will dig deeper than the proverbial kicking of the tires. In fact, most buyers will deploy a team of eager lawyers and accountants to pour over a mountain your company’s key business, legal and financial records. Organize this information early, and spend the time to update your corporate minute books, government filings and other records. Buyers and sellers often want to move fast, but a messy and disorganized due diligence process can drag out the timeline, frustrate the parties and lower a buyer’s confidence.
Resolve Lingering Legal Issues
To the extent that you can do so on reasonable terms, now’s a good time to resolve any lingering legal issues, such as shareholder disputes, employee grievances and tax claims. These matters will certainly come to light during the due diligence process, and the conversation with prospective buyers will go much more smoothly if you’ve managed these issues in a diligent and reasonable manner.
Align Key Shareholders
It’s critical to take stock of the company’s other shareholders and determine the likely degree of alignment or dissent before any potential buyer is at the table. Consider whether you need to shore-up other key shareholders in support of your exit plan. Presenting a united and like-minded shareholder-base is attractive to buyers.
Understand Your Rights and Obligations
If you have one, now’s the time to dust off your shareholder agreement. Most shareholder agreements will set out important rights and obligations that apply during a sale process, and will be particularly important if some shareholders do not support the transaction. These agreements can be dense and complex, so if it doesn’t make sense or if it puts you to sleep, then engage your own lawyer (separate from the company’s lawyer) to review and explain your rights and obligations.
Think Before You Jump
Lots of sellers are eager to “get on with it”, and will appear on the lawyer’s doorstep with the signed letter of intent already in hand. Resist the temptation to solidify preliminary agreements with potential buyers – including letters of intent, confidentiality agreements and non-competes – until you’ve consulted with your financial advisor and your M&A counsel. These documents might sound routine, but they can come back to bite. Take a look at Ian Palm’s blog post for more detail on this. Similarly, you should consider various other matters, such as efficient tax planning, estate considerations and internal restructurings, before you get too far down the road with would-be suitors. Early, smart planning can decrease risk and put extra money in your pocket. The incremental cost of engaging good advisors almost always pays for itself in more effective negotiations.
Consider Pre-Sale Acquisitions or Divestitures
Have you ever considered that your business could be worth more, or could be easier to sell, if it was sold as two (or more) separate businesses? Similarly, would the acquisition of another business – such as a competitor or key supplier – be accretive to the overall value of your business and increase your sale prospects? Consider these pre-sale transactions as part of your overall sale strategy.
As you tip-toe down the road to selling your business, it’s best to keep your cards close to your vest. Although you’ll want input from your closest advisors, unwanted leaks, rumors and gossip can hurt your sale prospects, spook your customers and build anxiety among your employees. You should control carefully the tone, content and timing of your messages in the most advantageous manner.
Let me know if you’ve learned other lessons when buying or selling a business.
Matthew S. Kelleher, Partner
This article has been reproduced, with permission, from the McCarthy Tétrault LLP M&A blog, Canadian M&A Perspectives. McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally through offices in Vancouver, Calgary, Toronto, Montréal and Québec City, as well as London, UK.