Preparing a company for sale – whether through a disposition of its equity interests or its operating assets – entails cataloguing the enterprise’s assets, liabilities, contracts, files, licenses, and other operating and regulatory documents, and preparing them for presentation to a prospective acquirer, who will carefully review those items with the aid of accountants, lawyers, and other professionals. (Who will undoubtedly have follow-up requests and questions.)
So…The core tenet of preparing a company to be sold is: Always tell the truth. In writing. On paper (actual or electronic). Directly. Indirectly. Always. Tell. The. Truth. Unless one wants to be accused of fraud in the inducement. (Not – repeat not – a desirable outcome.)
The operator’s approach to the pre-sale process is, as with most aspects of a company’s operation, to be proactive. To work towards maximizing value and a return-on-investment, and to concurrently minimize risk, to the seller. After all, the acquirer and its support team will likely spend a good deal of effort and resources on “kicking the tires” through the due diligence process. The seller should be sure, then, that the “tires” are properly inflated, balanced, rotated, and have good tread remaining.
In the course of providing a buyer and its advisors access to the seller’s documents, sites, and property for inspection, the seller will reveal its proprietary and otherwise confidential information (examples being business plans, customer and vendor lists, formulas, trade secrets, and employee records). It is important that the seller insist that the acquirer (on behalf of itself and its agents) enter carefully considered confidentiality and non-disclosure agreements, and, perhaps, even non-competition agreements. One detail to be included is the return (or verified destruction) of the seller’s paper and electronic documents, including all copies, if the transaction does not close.
The seller should, of course, assemble its own corps of consultants to advise it on pricing and process, such as lawyers, accountants, bankers, insurance agents, appraisers, and perhaps even an investment banker. Much like a savvy political candidate, a prospective seller should engage in “opposition research” against itself to determine both its strengths and weaknesses.
It is basic that business operators, being human beings, want to disclose the minimum necessary for its purposes. Disclosure will be dictated by statutory, regulatory, and contractual requirements. (As well as the “Always Tell the Truth” rule above.) The seller’s professional advisors can serve a value-added function of helping the seller with record retention (which is already a long-term compliance activity), organization, and presentation in a way that maximizes value and minimizes risk
While physical plant, equipment, materials, and inventory maintenance should always be an ongoing proactive risk-management activity in the life of any company, positioning a business for sale presents an ideal scenario for operations professionals to focus on repair, upgrade, maintenance, and inventory-taking functions. The seller should adopt the mindset that these are value-added functions, because even if the sale falls through, the owner will have a better functioning, more value enterprise.
Once a “PSA” (purchase and sale agreement) is entered, the formal acquisition due diligence work will begin. The seller must be prepared to provide the buyer tours and walk-throughs of the seller’s manufacturing, distribution, and wholesale/retail facilities with the full expectation that those will not be cursory “social visits”. Likewise, the seller should also be ready to make its management staff, line employees, vendors, and other agents accessible for interviews. Which again is why “NDAs” and confidentiality agreements are essential.
It is rare that a business becomes available for sale on a lark or accidentally. Certainly it can happen that the owners of a target and acquirer meet in an unplanned setting, talk, and then decide to pursue a company sale and purchase. But more likely a seller consciously moving towards a sale of its company is a seriously considered timing and scheduling matter, based upon such decision-points as retirement plans, tax needs, and the firm’s business and inventory cycles.
The next time we will “talk” about selling a business. Without actually intending to “give away the farm” of the next article, the pre-sale process leads to such matters as negotiations, letters of intent, contracts, due diligence, closing, funding, and post-closing. But more about those matters later…
For more information, call Philip N. Kabler, Esq. of the Gainesville, FL office of Bogin, Munns & Munns, and P.A. at (352) 332-7688, www.boginmunns.com/gainesvillelawoffice, where he practices in the areas of business, real estate, banking, and equine law.
By Philip N. Kabler, Esq.
Bogin, Munns & Munns, P.A.
NOTICE: The article above is not intended to serve as legal advice, and readers should not rely on it as such. It is offered only as general information. Readers should consult with an attorney regarding their legal matters, as every situation is unique.