Working with owners both prior to and during a sale process, we find that we offer some of the same advice over and over again. It’s not like we have a list that we keep handy to spew this advice. It’s just that similar concepts repeatedly arise that lend themselves to consistent messaging to owners.
During “Phase I” of a transaction, we find that we provide the following advice to owners:
- Selling your company is like a second job – There is plenty to do during the sale process including accumulating diligence, reviewing marketing materials, meeting with buyer candidates, etc. Owners should not underestimate the amount of time that the process requires and the “mind share” that it consumes, hence, selling the company is like a second job.
- Get tax advice early – The popular saying – “It’s not what you make, it’s what you keep” is equally applicable in the sale of a company. In this case, it’s the after-tax proceeds that should be of paramount importance to the owner, not the headline sale price. Seeking tax advice early will help the owner identify items such as i) the required enterprise value to achieve their after-tax objectives, ii) is a stock or asset transaction the preferred deal structure, iii) potential tax traps (depreciation recapture, for example), and iv) unique transaction structuring requirements that may not otherwise be obvious.
- Hire a deal team that customarily does deals – No one would hire an electrician to repair a leaky pipe. Similarly, it is important for the owner to assemble a deal team that routinely advises on transactions that are “similar” to the owner’s deal. This can be a sensitive topic if the owner has been loyal to generalist advisors for many years (maybe since the owner founded the company); however, augmenting the deal team with deal experts (transaction attorneys and accountants) will improve the outcome and the likelihood that the deal will be successfully consummated.
- Employees have very sensitive radar to changes in the owner’s habits – Employees are highly sensitive to their surroundings and routine. If they sense any type of change, they will naturally become suspicious and often will assume the worst. Examples of changes in the owner’s routine could include the following: i) the owner’s office door is typically open; however, it is closed more than normal; ii) non-customers/vendors come to the office for meetings with increased frequency; iii) it is not typical to provide plant tours to guests; however, the owner is giving tours to guests on a regular basis; or iv) the owner is usually at the company, except for vacations; however, the owner is now out of the office more frequently, even when they are in town.
- Run the company during the sale process like you are not going to sell it – The sale of a company is a long complicated process. Any number of items could derail the process. If updating the web site, purchasing a new piece of machinery, or hiring a new employee, for example, is the right action to take without consideration of the sale, then it is the right action to take during the sale process.
- Don’t “crossover” during the sale process as if you have already sold your company – As noted above, many sale transactions do not close so it is important for the owner to continue to act during the sale process as if they are not going to sell their company. This mind set enables the owner to make the tough decision to terminate the sale process if it is not going well. Crossing over on the other hand could result in an inferior transaction as the buyer, armed with this knowledge, may try to take advantage of the owner during negotiations since the owner mentally or practically may not be able to revert back to being the “owner.”
- Non-disclosure Agreements (“NDA’s”) will not protect the owner against unscrupulous buyers – NDA’s are a formality that are intended to put buyer candidates on notice that they have an obligation not to disclose or benefit from information that they learn during the sale process (unless of course they purchase the company). Unscrupulous buyers will sign an NDA to gain market intelligence or worse, to learn confidential information with the plan to “work around” the NDA. Regrettably, enforcing an NDA may be a game of financial resources as the NDA violator may have more resources to defend an NDA violation lawsuit than the company trying to protect its information. The bottom line is to know the buyers and their ethics prior to disclosing sensitive company information to them.
- Make sure that you are comfortable with everything that is disclosed to buyer candidates – Early in the sale process, owners should err on the side of under-disclosing information to buyer candidates. More information can always be disclosed later in the process as the intentions and seriousness of buyer candidates are confirmed. With that said though, there are many threshold items that buyers need to know in some form in order to make an informed offer for the company, e.g., customer concentration, vendor issues, and employee issues. Disclosing this information too late could result in the renegotiation of the transaction.
- Under promise and over deliver estimates and projections – Everyone likes good news: The company had a good month. The company is beating its projection. A customer signed a contract than could result in more revenue than expected. Consistently exceeding expectations will build confidence and trust with the buyer. On the other hand, consistently over promising and under delivering projections and estimates will cause the buyer to discount estimates and projections due to the company’s systematic failure to achieve these results and will erode their confidence in the owner.
None of the foregoing advice is earth shattering; however, it helps owners to think about various aspects of the transaction that will contribute to a successful closing or at the very least, not damage the company in the event of a failed sale process. In a future post, we will highlight additional advice that we offer to owners as the sale process proceeds to Phases II-IV.
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