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Preparing Your Company for Exit

Robert M. Okabe, Managing Director, RPX Group

So you’re ready to sell your business and you think you’ve never done it before. Well, you have, and possibly more than once. Selling your business is just like the process of raising capital, only this time you’re selling 100 percent of the company, not a minority interest. You’ll find that a lot of the same factors critical to raising money are applicable to the process of selling your company.

The Basics

Out on the money trail you have a set of tools you use to convince investors (or lenders) to part with their money. These include a business plan, financial statements, cash flow projections, copies of marketing collateral, and/or a prototype or product sample. You’ll use all of those tools and more when selling the company.

Investors provide the capital to build and grow your business, but the responsibility rests with the management team, directors, and employees. The buyer of your business assumes all of those responsibilities and the potential liabilities that go along with them. As a result you’ll spend a greater portion of the sale process discussing the past than you did when the buck stopped with you.

Keep Your SOX Clean

The “elephant in the room” in today’s mergers and acquisitions market is Sarbanes-Oxley, the recently enacted legislation intended to restore investor confidence in corporate reporting and disclosure through various regulations, reporting requirements, and enforcement tools. Commonly known as SOX, its reach extends deep into every public company and any firm that hopes to go public or be acquired by a public company.

Accounting

Financial statements are among the first things a buyer will examine closely. The statements’ integrity is a lynchpin of a successful sale of your business.

If you’ve accepted capital from professional investors or your business is growing like wildfire, you’ve probably contemplated the “A” word – audit. Audited financials are virtually a necessity for SOX purposes for public company buyers or the IPO.

You should have at least the most recent two full fiscal years of your books audited and more if your company has been around for more than five years. Complete the audits before beginning the sale process so you can correct any serious problems. Don’t try to hide or cover up things; there are legal implications if you do. Don’t expect to dodge the audit bullet if the purchaser of your firm is privately held. Many private companies will use bank financing to complete an acquisition, and lenders often require audited statements for deals they finance.

Taxes

Make sure you’re in compliance with all tax laws and rules in every jurisdiction. Start using a paid tax preparer as soon as you possibly can even if you have an in-house CPA. Be prepared to provide copies of your tax returns since the inception of the company (although most buyers will concentrate on the last three years).

The IRS isn’t the only tax authority. You probably pay some sort of annual franchise or business tax, sales taxes, payroll taxes, business licenses, property tax, and others. Make sure you’re current and in compliance with all of them. A tax judgment not only costs money it brings the management team’s ability into question as well.

Management

Your senior management team will be the key to a successful deal. A confident team that is knowledgeable and in full command of their areas of responsibility helps justify the transaction and support a high price.

Bring direct reports to the CEO into the loop right away and keep them informed. Let them know they are valued, but that the buyer may prefer to bring some of its own team in. Provide security in the form of closing incentives and substantive severance provisions.

Employees

Your staff, present and past, can represent a significant risk to an acquirer. Make sure you’ve taken steps to minimize any liabilities in your employment practices. Keep detailed records of hiring, ongoing employee performance, departures and terminations. Conduct exit interviews to ensure that a departure doesn’t have the potential to become a future lawsuit.

Facilities

If your business involves industrial processes, have independent environmental and occupational hazard reviews (relative to EPA and OSHA respectively) completed prior to starting the sale process and address major issues upfront.

Preparing for the sale of your business combines the techniques of raising capital with aspects of a strategic review. Together they create the foundation for the successful sale of your business.

© 2006 Robert M. Okabe. All rights reserved.

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