Taking Your Business to Market

Historically low interest rates, aggressive lending and a positive economic outlook have continued to drive strong merger and acquisition (“M&A”) activity in 2018, with brisk deal activity expected to continue for the next 12 months according to Wall Street and public accounting firms who track M&A trends.

What are the key steps for your business to take prior to going to market? The following represent steps your business should consider taking before going to market in order to maximize your sale value:

1. Clean Up the Balance Sheet. Work with your controller or an outside accountant to determine whether your company’s balance sheet includes uncollectible accounts receivable (“A/R”) or inventory/packaging that is slow moving or obsolete. Nearly all sale transactions provide for an upward or downward adjustment to the purchase price to the extent the seller’s net working capital at closing (A/R, plus inventory and prepaids less normally recurring expenses of the business assumed by the acquirer) compares to a target net working capital baseline negotiated with the buyer. Making these “clean-up” adjustments to the balance sheet before going to market should eliminate a material swing in the purchase price and minimize concerns which arise when a buyer discovers that A/R, inventory or packaging on the seller’s balance sheet have overstated values.

2. Locking Down Key Employees. The value of many businesses hinges upon certain key employees. Buyers often condition an acquisition on key employees continuing with the business following the sale (or not competing with the business following the ownership change). Careful planning is needed to put the right type of agreements in place with key employees before the sale process starts to provide assurance to a buyer that key employees will remain on board following the sale. These agreements can take the form of a stay bonus arrangement, non-compete and non-disclosure agreements and/or employment agreements. One size does not fit all, so please carefully review what type of key employee agreements best suit your business with your legal counsel.

3. Key Customer/Vendor Relationships. If your company relies upon certain key customers or vendors, securing contracts with those key customers/vendors will enhance the value of your business. This process starts with a legal review of any contracts in place with your key customers/vendors. If no such contracts exist, evaluate the pros and cons of approaching your key customers/vendors prior to going to market to request a minimum contractual term and/or secure the right to assign the contract to an acquirer.

4. Drafting Your M&A Team. Assemble a team which includes a broker/investment banker, tax accountant and attorney with substantial M&A transaction experience. The broker/investment banker should have deep knowledge of the industry(s) your firm works in and possess the capacity and resources to manage the sale process from start to finish. In addition, your broker/investment banker can provide an estimate of the purchase price your business will potentially command from the different buyer types. A competitor or company which is vertically integrated with your business (often referred to as a “strategic buyer”) is typically willing to pay the highest multiple on earnings for your business, with private equity and individual buyers (i.e., an entrepreneur seeking to acquire his/her own business) offering a lower multiple or requiring seller financing or an equity rollover by you.

5. After-Tax Proceeds Estimate. Work with a tax accountant to calculate the projected after-tax proceeds you will receive on the sale assuming a range of likely purchase price scenarios. An understanding of the probable after-tax proceeds drives what type of sale structure your business should pursue when it goes to market (asset sale versus stock sale or merger transaction) and the minimum purchase price you require as a condition of selling.

If your business is ready to go to market, strongly consider taking the pre-sale planning steps summarized above. Do not hesitate to contact any member of our law firm’s business team to confidentially discuss the M&A pre-sale planning process further.

Written By:
Law Firm of Conway, Olejniczak & Jerry, S.C.