pearls of wisdom for sellers

Part One1. The decision to sell is not irreversible, but it should be firm. In a family business, it is important that it is not just the majority owner involved, but that all the family members who have some ownership or who work in the business are brought into the selling process. Hopefully they are all in agreement with the decision to sell.2. Decide straight away on who is going to be the ultimate manager of the selling process, in order to avoid later ambiguity.3. Set a realistic timeframe on the selling process. This way, there will be notable milestones to keep to: For example, the completion of the sale memorandum; the contact of buyers and the close of sale. Stick to these timefames, and that way the deal doesn't drag and stands a good chance of closing as soon as possible.4. Contact real professionals. Improper advice could cost you tenfold later on. For example, when seeking a lawyer, make sure that they deal with transactions.5. Communicate with your banker about what you are doing. Bankers not only hate surprises, but also if they are surprised, may not be co-operative when you need them most.6. Target the buyers which would perceive your company to be the most valuable.7. Openly recognise certain "on and off' balance sheet items such as customer pre-payments, work-in-process billing, contract obligations, lease obligations, legal threats, etc.8. Make sure that you negotiate agreements with the top management so they will not jump ship before the business is sold. Depending on the situation and the importance and number of people involved, the agreement could be equivalent to anywhere from two to six months' salary.9. Set up a complete file in one place of all relevant information the buyer and/or his due diligence team will ultimately request; e.g., contracts, distribution and purchase agreements, leases, licences, and intellectual property documents.10. If a buyer indicates that he or she will be submitting a Letter of Intent, tell them up front what items you want to be included in the document:? Price and Terms
? If it is an asset purchase, what assets and liabilities are to be assumed
? What contracts and warranties are to be assumed
? Lease or purchase of propertyThe responsibility for employee contracts or severance agreements? Time schedule of due diligence and closing11. Audited Financial Statements: While an accounting firm's "review" is a bare minimum for a company in the process of selling, it would be well worth the effort and expense to have audited financial statements for several years before the company is presented for sale. Audited financial statements will manage to reassure the buyer and satisfy a buyer's complete scrutiny.12. Unadjusted Financial Data: If an owner is serious about selling his business, he should show real earnings without a lot of adjustments and add backs. Buyers do not get excited about companies operating at a break-even basis with a list of add backs. By nature, buyers become suspicious.13. High Quality Management: Usually if the selling company's CEO will remain on the job for several years after the company is sold, it will add value to the purchase price.If the selling company has numerous family members on the payroll, it is considered a negative. Therefore, the selling company might be wise to have those family members under contract with a specific buy-out clause.With appropriate discretion, it is effective if the owner can "show off' the top management to a prospective buyer. Especially effective is a top management well versed in the company's strategy, its goals and its position in the market. Conversely, what is most damaging for a seller is when he comes across as a "one-man-band" as opposed to a team-oriented organisation.14. Settle all litigation and environmental matters before discussing the sale of the business. These items can be deal breakers, so present these problems ahead of time.15. Prepare the business for sale two to five years in advance by preparing a business plan, which provides timely, accurate and pertinent financial reports and by implementing a culture of continuous improvement.16. Hire a great transaction lawyer, because the buyer will probably have the best available one going.17. Liquidation Appraisal on Machinery Equipment: Almost every buyer will structure a deal in which the equipment will be used as bank security by the buyer. It is in the seller's best interest to provide liquidation value so that the buyer will not discover at the eleventh hour that his borrowing base is ?500,000 less than expected, because the bank is using a lower valuation on the machinery and equipment.18. Be flexible with the property component of the business. Most buyers would rather rent the building and invest their money in growing the business. Property usually does not make money for the operating company.19. Do not be afraid of seller's notes to the buyer as it is unusual that a founder, temporarily remaining in place, is not desirable. Additionally, the best deal for buyers is one in which a note to the seller can be used as subordinated debt. Consequently, as long as former owners are owed money, they have a right to view themselves as quasi-partners, and a good suggestion is that the insightful buyer will consider structuring a share of future earnings improvement to the former owner's benefit - as long as he or she is in place.Of course, it is desirable for the seller to have some sort of security on the notes and there should be a reasonable risk rate on the coupon. The fact that the seller continues for a short time as a quasi partner, albeit as a debt holder, certainly creates value in the deal.20. Understand the Buyer's Concerns: The buyer is usually aware that the founder, owner, and CEO is principally responsible for running the business. If the company has no depth of management or is perceived to be a "one-man-band," the price for the business will be discounted. It is not wise for the CEO to overly brag about himself or let the seller know he has not taken a holiday in three years and works 12-hour days.21. Don't negotiate directly, but through an intermediary who can mediate. Don't let too much time elapse between meetings with an interested buyer. Once the process starts, keep it moving, or you may lose momentum and affect your business and the morale of your employees.22. Don't delegate important aspects of the deal to underlings - and don't let the buyer do so either. It is important for key players to stay in touch and to develop confidence in each other, and engage an investment banker who understands your business and has knowledge of your industry.23. Complexity is a killer in deal-making. It sucks time and saps strength. The more complicated the deal structure, the less likely it is to work.24. The buyer must work hard to put himself in the shoes of the seller in order to determine the real reason why the seller is talking about a sale. The real reason is seldom obvious and sellers usually sugar-coat the problems.25. Valuation is an important exercise, but usually the value thus determined is not the purchase price. The business will be bought for whatever the seller will take for it.26. In approaching a negotiation, the first problem is determining who is the decision maker on the other side. Lots of jawbones have been worn out in pseudo-negotiations with the wrong person.27. Once the decision maker has been identified, it is important to establish a rapport with him or her. Unless the seller and the decision maker on the buyer's side are able to work together, the consummation of a deal is highly unlikely. At some point, a social dinner including the buyer's spouse may be an ideal way of furthering the negotiation.28. Try to control the drafting of the final agreement and other documents. While it is customary for buyers to do the drafting, if the seller can seize that function, the seller will have an advantage.29. Keep the momentum going. Deals that drag don't close. Energy and zeal are critically important.

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