ARE YOU READY FOR THE BIG DANCE?

– A BUSINESS OWNER’S PRIMER TO SELLING A BUSINESS –

Boston Business Journal, Inc.                       May 14, 2004

     By Larry Smith, CVA, CPA, CM&A, MBA and R. Paul Faxon, Esq.

Have you thought about selling your company some day? Are you ready for the Dance?

What is “the Dance”?  Regardless of the size or type of the business being sold, many business owners experience emotional upheaval through a process whereby the ultimate buyer of the enterprise, whether by an asset or stock sale or by a merger, negotiates the value (and price) of the business down throughout each phase leading up to the closing. One business seller recently confided:

“After building up my company for many years, I didn’t expect my value to be simply negotiated away. It wasn’t properly positioned! I was relying on it to help with my retirement. Now, I’m in a situation that I never expected to be in.”

Unfortunately, it is a common story and many owners unknowingly lose millions and take on far greater risk than initially realized.  This usually occurs when the seller: enters the process unprepared and without access to informed, independent advice; struggles to maintain objectivity, including considering how a prospective buyer will view the business’ assets and liabilities; and resists directly confronting the business’ deficiencies and risks going forward.

How do you avoid this trap when you decide to sell your business? You systematically lay the foundation for the business’ sale before going to market to avoid the downward slide in value by taking the following steps:

Ø       Resist the urge to go through the process alone. Carefully interview and select a team of complementary, independent professionals in the fields of business brokerage/finance, tax and law who:

o     Challenge your inclination and assumptions to sell your business

o     Objectively analyze the business’ true market value to establish realistic price expectations. As uncomfortable as that may feel you want to work with reality;

o     Identify key buyer concerns before the business goes on the market and pro-actively eliminate or minimize these costly deficiencies and risks;

o     Structure the legal and tax aspects of the final transaction to maximize the actual, after-tax consideration you receive and minimize the anxieties and disruptions that a business sale can create.

During the life of the business, your existing accountant and lawyer have worked with you through the growth phases. When you think about selling, consider working with specialists who help people every day avoid costly mistakes when selling a business. If you find the right team they will add real value.

Ø       Develop a clear marketing plan to sell the business. Determine the types of qualified buyers that should be targeted first, second and third and how the business should be positioned.

Ø       Consider how you will position the potential sale to employees, customers, suppliers and competitors when your intentions to sell become known. Through the use of discrete, confidential inquiries and carefully prepared offer packages, the process of soliciting offers can minimize publicity. Yet, it may not be possible to permanently  keep a wider circle from hearing that your business is for sale. You want to be ready to respond.

Ø       With your tax and brokerage team, scrutinize the business’ finances, operations and industry competition; any buyer worth your time certainly will. Focus areas include: financial statements that reflect a historical desire to limit current income taxes but do not reflect the business’ true value; inadequate management and financial systems and controls; a lack of competent senior management outside the soon-to-depart owner; a new and formidable competitor; and an over-reliance on a single customer or line of products/services.

Ø       Bring in your legal team to conduct a pre due diligence assessment to eliminate potential red flags for the buyer’s lawyers.  Common pitfalls include: corporate records in disarray, including questions on whether all equity owners are properly accounted for; notices of potential governmental or private party claims against the company that lack documentation proving satisfactory resolution; key employees who have the ability to quickly set up competing businesses but who lack an enforceable non-competition/confidentiality agreement; missing legal protections for key intellectual property such as trade names; disadvantages facilities lease; and contracts with key suppliers and customers that can be terminated at will once the business is sold.

In summary, a business owner’s disciplined and pro-active approach to preparing his or her enterprise for sale often proves to be the best investment ever made.

************************************************************************

R. Paul Faxon, Esq. is a member of The New Law Center, LLC who regularly counsels entrepreneurs on the legal aspects of selling and buying closely held enterprises and can be reached at 617-969-9610 or pfaxon@thenewlawcenter.com