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Selling Your Business: Ten Tactics to Close By Martin Kupferman You knew when it was time to sell your business. And now that you are, your selling strategy is on target and you're moving forward nicely. The company is well positioned and you’re optimistic about closing a deal with a solid, qualified buyer at a good valuation. Great! But hang on. It may be time to switch gears from focusing on the strategy of the deal – planning and courses of action to find a buyer at the best valuation – to the tactics – getting the deal closed at that valuation. And there are things you need to do. Deals get renegotiated or don’t close for many reasons. Some, like the deteriorating stock market and economy, or changes in the financial condition of the buyer, aren't within your control. But there are a number of pitfalls that are avoidable through your own actions. Presented below are ten common traps that are easy to fall into, but also easy to avoid. I’ve had to deal with a number of them myself while selling my own business and while acting as an intermediary on behalf of my clients. Bear in mind one central point: None of these obstacles are insurmountable. Face them head on and you'll do fine. But just because they're tactical in nature doesn't mean you should wait almost until the close of your deal to address them. It's much better to face them early. After all, the end result in closing is directly influenced by the actions you take during the early stages of the selling process.
It was the last leg for me and the shareholders of Pasqua, Inc., a retail coffee company that I co-founded with a partner over 15 years ago. Our business grew to 60 locations before we sold it to Starbucks in 1999. The long, tough process of our sale to this retail coffee industry leader was almost complete as we were about to meet all closing conditions, including approval of all landlords to the assignment of the store leases. We thought we were done, but then I received a phone call… just days before closing the deal. “We’ve never met,” the caller began. His tone was ominous. He introduced himself as the attorney who had been hired to clean up the matter of back rent for a location we closed years ago. He wasn’t mollified by the fact that we made an offer to his client to settle the matter after closing the store and that we had never received a response, which led us to move on with our lives. After three years, we considered the matter finished. But the landlord had another opinion, especially once he learned about our pending sale! There’s nothing like the sale of a company to bring all the skeletons dancing out of the closet. If there are any disputes about your intellectual property, problems with your ownership structure, or threatened or pending lawsuits, the best time to exorcise them is before the parties you’re dueling with have gotten wind of the proceeds of your sale. Look at all unresolved material business issues far in advance of selling your company. Resolve what you can, and disclose the rest to your prospective buyer as early as possible. Note: It cost us low six figures to make our problem ex-landlord go away, and that's whole lot more than it should have.
Once the due diligence process begins, you have plenty to explain to the buyer’s team of analysts, because experienced buyers look for risks that may be lurking around the corner in any transaction. It’s what due diligence teams are hired to do. But the one thing you don’t want to have to explain is why you’re not hitting the forecasts of revenues or cash flow you’ve provided to them. A good path to take is to be modest in all near-term forecasts that you provide to potential buyers. Avoid positive assumptions about sales that haven’t yet closed. Don't tout cost controls you’ve never achieved and don't be heroic when discussing your ability to overcome negative seasonal trends. You’re probably going to be bought for your enterprise’s medium- to long-term value; but failure to produce in those short months prior to close can undermine buyer confidence.
Selling shareholders (even in stock purchase deals) can wind up being responsible for their company’s liabilities. This can happen as closing proceeds are reduced to repay debt or bring negative working capital to zero. Therefore, if you are clearly on track to sell your company, one of the first things you should do is look to reduce liabilities, and avoid taking on new discretionary ones. Also, it's good to postpone capital investments that afford long-term benefit but drain working capital. For example, one of my clients had huge deferred revenues on the books, which were attached to services they had yet to render. Mobilizing staff to go out and work off these balances became our key initiative in the months before close.
A prospective sale is bound to raise concerns among your senior managers. Even if you are planning to exit the company after the sale, you need to be aware of this. In addition to your management team's concerns about the future, a sale is bound to raise questions about what’s in it for them. If these questions are not answered going into the transaction, one or more things may happen. Management may not convey enthusiasm about the company to the buyer during due diligence. They may also be less than diligent about picking up the slack when you’re involved with the deal. Or they may leave. None of these actions looks good to a potential buyer. Look out for your team’s interests. Promote their capabilities to the buyer, communicate with them honestly about sale developments, and give them a financial stake in the outcome, if you feel it is fair and appropriate.
You may need the consent of business partners (landlords, suppliers, and licensors) to the assignment of contracts you have with them. These include leases, licenses, and supplier agreements, among others. While such consents are central to closing an asset sale, they also tend to form part of the landscape of a stock deal. Look at your agreements and decide which consents you need ahead of the sale of your company. Anticipate which ones will be problematic and form a strategy for dealing with them. One of my clients had a content license that was central to their company’s products. Because the buyer didn’t want to pay royalties and also wanted to enhance their control over these products, they insisted on elimination of this royalty as a condition to close. The bottom line for the buyer was "no buyout (by my client), no deal." Not only did the buyout become more costly than if it had been negotiated at the outset of the selling process, but it took a lot of three-way negotiations to keep it from derailing the transaction entirely. The buyer and the buyer’s issues were now inserted into the negotiations between the seller and licensor.
Most people don’t like uncertainty, and employees in a company about to be acquired are at the extreme end of the worry spectrum. Your risk is that the best, most marketable talent will drift away prior to deal close, which can leave you scrambling to fill their jobs, whether the deal closes or not. Mackey McDonald, CEO of apparel company VF Corporation (Lee, Wrangler, Jantzen), is a man who has closed many deals. He sums it up this way: “After an acquisition, you have to face a room full of people who want to know, 'What happens to me?' If you don’t answer that question, they don’t hear much else…” There are two guidelines for dealing with this particular pitfall. First, don’t start your people on the worry path until you have to. In other words, don’t go public with your speculation about deals until there is a real likelihood they may happen. For private companies that means after the Letter of Intent is negotiated with major deal points resolved, and before the buyer’s due diligence teams have descended upon your company. Second, be honest and open. Communicate clearly about what you know and what you don't about the pending sale. You and the buyer may not be clear about personnel plans after the close. But share with your employees what you’ve been told by the buyer.
Optimism and romance drive deals. Cultivating and maintaining these emotions are central to getting the deal closed. However, buyers may get carried away and want to jump-start the integration process. For example, they may want to begin transition planning with your staff and suppliers, and even your customers. As a seller, your challenge is to feed the positive while protecting the line that separates your organization from the buyer until after the deal has closed. You can achieve this by limiting the buyer's access. Apart from what’s required by the sales and due diligence process, limit buyer interaction with your personnel. Pre-close communication about integration plans and other post-close matters should come through you, not the buyer’s representatives.
The dance of disclosure is a distinct feature of the M&A due diligence process. Buyers want access to the key information as early as they can get it. Sellers want comfort with the buyer’s intentions before parting with key technology, product specs, details about large potential contracts, and more. Apart from the emotions attached to making outsiders (maybe even competitors) privy to secret information, sellers are rational in being careful. Nondisclosure agreements offer only partial protection in the case of deals that don’t close. Violations are not always clear cut, and legal enforcement is expensive. Typically, though you need to part with any confidential information that drives the business, the key is to establish a hierarchy of information and withhold the most important for last. Ideally, you should wait until later in the transaction process to parcel out the most important information. By then you have hopefully cleared any impediments to moving forward with the deal and convinced yourself of the prospective buyer’s earnestness.
Let’s say you want to delay the tax bite and intend to set up a charitable trust with a portion of the proceeds from the sale of your company. You've come to this decision because you feel you can make due with the income produced off of that capital. This and other tax strategies run the risk that they won't qualify if they aren't put in place prior to deal close. Here’s another example. Let’s say you are getting paid in unregistered stock of a public company. While this can delay your recognition of gain for tax purposes, it also subjects you to the whipsawing effect of the stock market. Strategies exist to mitigate price risk from public stock that you cannot sell right away. For one example, you may be able set up a collar – a combination of puts and calls on the stock – that establishes a floor to its price in exchange for a ceiling to the upside. In this case, you can combine both to make it a cashless transaction. It's better if you set this arrangement up before receiving your stock upon the deal's close and the market ride begins.
It would be tough to overestimate the toll that selling your business can take on your attention, even with a good intermediary. For example, just doing all the things on this list is going to shift your focus from the basics of your business. Don’t let it undermine either the deal or your business. First, make sure you are getting the most out of your intermediary. They should be handling all buyer relations and helping you work through difficult matters that can impede a close. But if you are the senior operator of your business going into the transaction, make explicit arrangements with other members of your management team to supplement your role. Be realistic and make sure that the tasks critical to making your business run smoothly are handled. The process of selling a company often takes on a life of its own. You can’t plan for everything. But business owners who craft a selling strategy and who pay attention to these closing tactics are better able to close the deal at the best valuation. © Accord Capital Partners For permission to reprint or post this article on your Web site, please contact Accord Capital Partners:
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