The pandemic has been challenging for all industries. McGrath North understands our clients are facing challenging decisions and questioning whether this is the time for an exit.
While certain industries have been shuttered during the pandemic, the environment has created a seller’s market for many businesses. There are simple but key things a seller can organize and prepare for today to be ready for a pending future sale.
- Set Clear Goals. Top reasons for a sale include retirement, burnout or life and health challenges. You’ve built your business and you likely have a strong opinion on how you transition it to a buyer. Is the goal to find the highest bidder? Would you prefer to transition the business to top employees or the next generation of your family? Are you willing to invest some of your equity with a buyer and work for them? Do you want to cash out and reinvest in a new opportunity? Defining these goals at the outset allows your advisors to create a tailored plan to successfully achieve your goals.
- Build a Support Team. Sale transactions can be complex. Structuring errors can lead to significant financial consequences – finding experienced legal and financial professionals who have depth of knowledge and experience is key to optimizing deal benefits. The earlier you engage your team of transaction professionals, the more time they will have to help maximize the value of the sale.
- Organize Your Documents. Entrepreneurs and small business owners often intermix business and personal expenses and funds. To truly analyze the value of your business to maximize its worth, financials should be separated and cleaned-up to confirm the business’s true profit. In addition to financial information, there are many documents that will be requested by a buyer during its due diligence process (such as a list of key customers and suppliers, copies of material contracts, tax returns, organizational documents like corporate bylaws or an LLC operating agreement, intellectual property details, and employee census). The diligence process is one of the most critical and time-consuming parts of the transaction, so preparing the documentation in advance can help keep the transaction running efficiently.
- Identify Your Risk Factors. Undisclosed liabilities that come to light during a buyer’s due diligence is a common deal breaker. Identify what buyer red flags will be and create a plan ahead of time to help smoothly transition the business to a buyer. The sooner risk factors are identified, the sooner you can fix them or determine how to work with a buyer to mitigate the impact of the risks on the bottom line (and the purchase price).
- Avoid Common Deal Breakers. Negotiations can go cold for a multitude of reasons, some of which you can mitigate against ahead of time. For instance, a seller who has built a business from the ground up may have unrealistic expectations of its value or unrealistic requirements for a buyer’s post-closing operations; or a seller may find a buyer’s request during negotiations off-putting, each of which alone can kill a deal. Engaging legal and financial experts helps you set practical expectations for the purchase price and identify whether a buyer’s requests are standard for the industry.
- Anticipate COVID-related Items. Expect to receive questions from a buyer about the specific impact of COVID-19 on the business and business continuity plans that the business has in place. Depending on the type of business, a buyer may also request a site visit, which can pose logistical challenges in today’s socially-distanced environment. Start planning now for how you can put your business in the best possible light for buyers in light of the impact of COVID-19, and work with your transaction team to understand how COVID-19 may impact deal terms and value.
Preparing to sell your business can be a daunting task, but there are number of things you can do to prepare for the process. McGrath North M&A lawyers understand the complexity of issues, customary market terms and overall legal landscape, and are skilled in negotiating and documenting transaction agreements to accomplish our clients’ goals. You won’t get cookie-cutter legal advice, but tailored and practical guidance as you prepare to move forward to your next chapter. Contact a member of our experienced M&A team to better understand what you can do now to prepare for the transition of your business when the time is right for you.