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How to Best Prepare Your Business for a Successful Sale

January 5, 2024

Jeffrey Cronn - Tonkon Torp LLP

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A potential business sale transaction can be an exciting time for a business owner. The sale represents pay-off for years, or even decades, of hard work. However, it’s seldom a simple process. A successful merger and acquisition (M&A) transaction requires its own hard work and typically takes many months of preparation.

Successful M&A transactions begin by transitioning the outlook of a business owner from an operational to a transactional point of view. Instead of thinking like an owner, they need to think like those who will play a key role in the deal; primarily, potential buyers and employees of the business going through an ownership transition process.

Think like a buyer

As a starting point, owners should look at their business through the eyes of the potential buyer. Remember that operational issues that people take for granted on a day-to-day basis can trip up a buyer. Do you have current signed agreements in place? Or are you working on expired agreements or handshake deals? Do you have a properly executed, long-term lease for your primary operating facility? Buyers will want current, signed agreements with relevant counterparties.

Similarly, do you own your intellectual property (IP)? Do you infringe on the IP of others? Is your IP protection program truly robust, or do you have employees and contractors without IP assignment agreements? Buyers will want minimal ambiguity.

If you have a pending business dispute or a regulatory issue, resolve it, if possible, before moving toward a business sale. Unresolved disputes can make buyers uneasy.

These are just some of the potential operational considerations — each business will have its own set of issues to be identified and addressed.

Think like an employee

It also makes sense to consider employee incentives before you move toward a deal. The business sale process is often burdensome; employees without the right incentives may begrudge the additional work and have concerns that, upon completion of the sale, they may not have a job.

For those employees who will be responsible for the continuation of the business, the new buyer will be their boss, not you. These potential conflicts of interest between owners and employees are often overlooked but are very real. For example, management employees sometimes “jump the fence” during a business sale transaction and begin to promote the interests of the buyer. This is typically because these employees feel underappreciated or undercompensated. Unhappy employees, particularly key managers, can kill a deal.

Get organized

Successfully completing the sale of your company is data intensive and takes substantial organization. Buyers will require the opportunity to review a variety of essential documents. Setting up an electronic “deal room” specifically for the transaction early in the sales process can help you avoid crisis mode and maintain deal momentum.

A deal room helps you organize and store all the essential documents necessary to close the deal. A side benefit for many companies is that the collection of a comprehensive set of current corporate records often provides immediate operational benefits by deepening the understanding of company equity structures, tax planning opportunities, IP weaknesses, indemnity exposures, and other business issues.

A deal room is also efficient during the sales process, particularly if you have several interested buyers. You can control access to your corporate, financial, and operational information on a user-by-user, file-by-file basis.

Why go to such lengths?

Thinking like a buyer, methodically cleaning up any outstanding issues within your operations, and providing complete documentation will put you in good position to negotiate the best deal price and terms. Thinking like an employee can keep your transaction from being derailed in the negotiation process.

If you don’t take the time to adequately prepare, buyers gain leverage. A buyer can use unresolved or ambiguous operational issues to justify a lower price or other less favorable deal terms. Good preparation helps generate a top-dollar offer for your company and makes it much more likely that your transaction will close quickly, efficiently, and at the highest price.

Considering buying or selling a business? Contact the experienced team at Tonkon Torp to see how we can help maximize your value.

Jeffrey Cronn is Co-Chair of Tonkon Torp’s Business Transitions Practice Group, regularly counseling public, private, and nonprofit entities with respect to mergers and acquisitions, corporate governance, securities and financings, and more. He also advises clients with regard to partnership and equity ownership disputes.