Most business owners are not aware that it can take up to two (2) years or more to properly position a company for sale. Proper positioning means that at the time your business “goes to market”, your company is structured, organized, documented, protected and operating in a manner that: (i) attracts the right business broker (which can be extremely important); (ii) will attract the right buyer (not just any buyer); and (iii) position your business to maximize your return on sale.
The following are 8 general exit strategy planning and execution considerations common to most businesses. Many of these considerations can (and perhaps should) be implemented well before it comes time to sell your company.
I. Get Your Financial House In Order. Once a potential buyer understands your business, the first thing they will review and analyze are your financial statements. By the time your company is ready for sale, you should have 3-5 years of consolidated and consolidating financial statements, prepared by professional independent accountants (not internal), including all accountants’ notes. These should either be audited or auditable. This will take some time and will require professionals. Your accountants, financial consultants and CFO (whether in-house or fractional) should be engaged to help with this process.
II. Organize Corporate Documents. When was the last time you reviewed your corporate documents? If you are like most, it’s been a while. This is the first category of documents that a potential buyer’s counsel will want to review. Make sure your documents are complete and up-to-date. This will include, but not be limited to, all formation documents, all shareholder/member agreements, all stock purchase/sale agreements, completed stock/shareholder register, all annual minutes, all options, warrants, etc., SS-4, registrations in foreign jurisdictions (other states); and re-sale certificate, among others.
III. Maximize Your EBITDA. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the single most important business metric in the vast majority of business sale transactions. Generally speaking, it is an accounting measurement of your business’ “profits” from operations. Most business sale prices are based upon some multiplier (which can be fractional) of EBITDA, as discussed below. Smart potential buyers will not only look to your EBITDA in the year of (prior to) sale, they will also look for year-over-year increases in EBITDA. There are 2 ways to increase EBITDA: (i) increase gross revenues (as long as you are similarly profitable on the increased margin); or (ii) © 2020 Lee R. Goldberg. All Rights Reserved. 2
the preferred, most efficient, and usually easiest method, … decrease business operating costs. The more efficiently that your business operates, the higher the EBITDA will become, and the higher the EBITDA, the higher the sale price. There are a myriad of great business consultants that can help with this effort (they used to be called efficiency experts).
IV. Enhance Your Blue-Sky. In modern colloquial usage, “Blue-Sky” is anything that enhances the value of your company beyond EBITDA. It is the multiplier discussed above, also known as “turns” on EBITDA (also, the measure of how long it should take the buyer to earn back the investment, all things being stable and equal). This is generally determined by uncontrolled factors including market condition, industry, local economy, unique buyer need, etc. However, Blue-Sky also includes things you can control, including extraordinary inventory and equipment, real estate, significant market penetration, and in vogue these days, intellectual property, including trade secrets, trade processes and/or unique trade supplier relationships. It always amazes me how many businesses do not even know they own and use protectable (possibly valuable) intellectual property. Find what makes your business unique and successful in the market. Then develop it and protect it as a separate asset. Again, experienced business and legal consultants can help with this process.
V. Ensure You Are Operating Legally. I know it sounds silly, but this is what a potential buyer’s legal counsel is conducting due diligence to ensure. Make sure he/she is not disappointed. This does not only relate to business licenses, and building and occupancy permits, it also means that you have any and all specialty permits and licenses required to conduct your particular business, all necessary export-import licenses, all required hazardous waste treatment/disposal permits, etc. This will also mean that your company is operating in compliance with all labor laws and health and safety laws. If required, make sure that you have your HASSP program prepared and written as well as your employee handbook and other similar documentation. Hazardous waste is a big issue. Make sure you are in compliance.
VI. Shore-up Your Contracts. If your significant contracts are not in writing, they should be. Review your customer, trade supplier, independent contractor and service provider contracts to ensure they are well written and protective of your business. Buyer’s counsel will review this in due diligence. Take note of all contracts in which you have given indemnities, limited the company right of assignment, or agreed to confidentiality. These types of restricting provisions found at the end of your contracts (sometimes disappointingly called boilerplate) should be assessed and limited in the future as they can have an effect on your business sale down the road. Also, get all of your intercompany contracts, leases and licenses prepared and signed. Finally, make sure you are protecting your business’ intellectual property, not only by registering patents, copyrights or trademarks, but also by documenting your trade secrets, legally protecting them and, above all, keeping them secret. © 2020 Lee R. Goldberg. All Rights Reserved. 3
VII. Review Your Business Structure/Operations. Your current business structure and operations may not be the best option for a proposed sale. The best structure may depend upon a number of factors including, whether you are preparing for a stock or asset transaction, the extent of the business you intend to sell (retain), the target buyer, and/or your particular tax situation. As an example, a business operating as an LLC may need to convert to a C-Corporation to attract a particular class of buyer. Another example is when ownership wishes to retain certain assets (e.g., spin off and retain real estate then lease-back to the company, or spin off and retain intellectual property and license-back to the company). There are usually ways to accomplish these restructures with little or no tax consequence (other than the tax implications of the new structure). Your accounting and legal professionals should be engaged before any of these steps are considered or taken. Either way, it is always better to be operating for a while under the “sale structure” than to first realize a problem when your company goes to market.
VIII. The Document Dump. The due diligence requirements of most every transaction will entail a detailed review of just about every document generated by the business. I will be happy to share my 15-page Due Diligence Checklist upon request at the above e-mail. If the company has been operating for a number of years, the assembly of these documents can be a monumental task requiring hundreds of person-hours. The last thing you want to do is scramble to compile these documents in the 11th hour. Not only does it become expensive and tedious, but the disorganization will be noted by the buyer. My best advice is to start your “document dump” now by establishing a stand-alone database (not on the internet – you will have sensitive files) and start populating it with all of your business documentation (separated into appropriate sub-files). Spend a few hours each month getting and keeping it up to date. When it comes time to sell your business, your business broker, legal counsel and you will all be extremely glad you did so.
In summary, as the great Paul “Bear” Bryant stated, “It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.” Will you be prepared when it comes time to sell your business?