When Should You Prepare Your Exit Strategy? Now!

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by Collette Parker

The blood, sweat, tears, and late nights put into starting up a business will one day culminate in your exit strategy.  Whether you are passing the company to a son or daughter, a partner, or selling to a competitor or larger corporation, the day must come to say goodbye.

It helps to be prepared for that day, and the sooner the better. Ironically, the birth of a new company naturally inspires an exit strategy. To be prepared means to get the highest valuation for your company; to do that, you have to give yourself adequate time and do your homework.

“Start 15 years ago”

First of all, says Numbers Coach Mike Iverson, plan for the sale of a company well before the day you must sell. “Often business owners don’t give themselves enough time. Give yourself a three-to-five-year planning period to lay the groundwork so that your business is functioning at a high level.”

A buyer will wonder why you are selling your business, and will look for any gaps or holes in your business plan and market. Give yourself enough time to find the gaps yourself and fill them as best as you can.

Iverson has worked with business owners in the past that have very thoughtfully gone through the process of selling. They were contacted by other companies who asked, “Have you ever thought of selling your business?” They might answer, “I’m not ready now,” but cultivated those relationships with a specific purpose in mind. They knew that such relationships could result in connecting with a person who could acquire their company, and they understood how prudent it was to develop a business relationship with that individual to learn how they operate.

“Start those relationships early on, even as you start the company – maybe 15 years before you want to exit,” says Iverson. Then you have relationships in place, and the sale becomes a more natural result.


Do Your Homework

The other aspect of preparing to sell a company is making sure the company is ready for you to walk away from it, and still functions properly.

“Someone has to do the financial due diligence,” says Iverson. “You may have to hire someone to help clean things up, such as customer files and HR files. I can’t stress enough how important it is to get all records in order. It will make the process that much quicker.”

If you’re selling to an individual, that is a different process than selling to a public company.

Iverson spent several years at a public company working in mergers and acquisitions, and observed that emerging growth companies under $20 million that sold for higher valuations had good solid records and complete financial information. They closed their financial records on a regular monthly basis and had an accountant on staff who could ensure the information was complete, timely, and correct.

“Not only will the selling process go much smoother, but it can actually increase the value of the business,” says Iverson. “If you go into a business where administration, accounting, and operations are very disorganized, you will likely get limited or incomplete information which will cause you to question if the numbers given to you are correct.”

“Companies that get the best valuation, in my experience,” says Iverson, “are those that have their financial house, their administrative house and their operational house in order. They are the companies that have planned their sale for a period of time, and they have the right theme in place that could help perpetuate their business even without the owner being there.”

Be Ready to Let Go

If you’re going to sell and you are the sole owner, your business has much greater value if you have set it up so when you walk away, there are no hiccups. You should not be the only rainmaker, nor the only person who knows how to make it run.

“Some companies that are worth less than $10 million have an owner that wants to be in every piece of the business and has a strong personality that people equate to the business. That can run the risk of diminishing the value of the business,” says Iverson.

Ultimately, when someone is looking to buy your business, they want to buy an operating business they can run immediately without investing a lot of additional resources. Customer retention is one of the key elements of success, especially when the owner is gone. While some owners or management teams stay in place after a sale to help transition, nine out of ten times the owners will not be there 24 months after the sale.

Letting go is tough for an entrepreneur who has put their full energy and life’s savings into building a vibrant business.  Planning ahead for the day they want to exit will provide better odds that the business will continue in capable hands and make the sale easier for everyone.

If you want to be prepared for selling your business down the road, check out the Numbers Coach M&A Tool Kit

Business Planning: Where Is The Exit?

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I have had the honor to work with many types of organizations of the 20 plus years of my business career.  What I have discovered is those business owners who have had a successful exit seemed to have a common theme—they started their business with the end in mind.  One the keystone habits from Steven Covey’s The 7 Habits Of Highly Effective People.

They could visualize what their business would look like and who would be interested in buying it.  And in some cases they even partnered or became familiar with those companies that would be the ultimate buyer.

We all “exit” our businesses in some way—sell to a third party, sell to an insider, pass on to the next generation, or simply close the shop…and no matter how its done, thinking about the end in mind can make it a reality someday.  Start your planning today even if you are starting out in business. The actions and decisions you make today will impact how you Exit the business in the future.

To your successful Exit!

Mike

Numbers Coach Helps Medical Company Acquire a Healthier Bottom Line

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What are the best ways to grow a company?  You could increase transactions, raise prices, or launch a new marketing campaign.  Sometimes, however, a merger or acquisition is the best strategy a company may adopt for rapid growth.
Choice Care began looking for companies that they could purchase to accelerate its growth plans. However, they knew they would need the voice of experience to help guide their decision, so they turned to the Numbers Coach (“NC”) for help. 

The Company

Choice Care Occupational Medicine and Orthopaedics(“CCI”) was founded by Dr. Ish Khan to develop a 21st Century model which blends the two specialties of occupational medicine and orthopaedics. His unique program is the only program of its kind in Georgia and has proven to greatly enhance the quality of patients’ medical care while generating dramatic cost savings.  CCI grew to five locations in the metro Atlanta area .

The Situation

In 2013, Dr. Khan and his team were approached by a company that wanted to expand its presence in the Southeast.  They were looking for a strategic acquisition that would make it a major player in CCI’s market.  A letter of intent with an offer price was provided to Dr. Khan, who accepted the offer.

The Solution: Trillium Financial’s M&A Support Services

NC’s, Mike Iverson, had been providing financial leadership services to CCI since 2012.  For the due diligence process that CCI was about to embark upon, Mike served in a key role facilitating and coordinating financial due diligence activities.  In addition, the ongoing financial management tools implemented by NC as part of it’s financial leadership services helped the organization focus on bottom line results during the due diligence and negotiation phase of the transaction.

The Results

NC was able to efficiently and effectively pull together the required financial and non-financial information to meet the due diligence deadlines.  NC’s comprehensive and methodical approach to measuring and reporting financial results helped ensure the information was provided for all phases of the transaction.

According to Dr. Khan, “Mike has been an integral part of our team over the years.  His solid understanding of our business and its needs for financial reporting, combined with his disciplined approach were important factors in positioning CCI for a successful exit.  I cannot imagine having to go through the acquisition process without Mike.  He was instrumental in pulling mountains of data in a timely fashion.”

How can the Numbers Coach help your business acquire a healthier bottom line?  Contact us to discuss.  

Building Business Value Now for Successful Exit Later

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Managing a growing and thriving business can require 60‐hour weeks. The day-to-day events can consume even the best‐organized CEOs.

As a result, the establishment of an exit strategy is often postponed. Business owners inherently believe there is plenty of time later to firm up an exit strategy.

The problem with this thinking is that without a strategy, improper decisions can be made that greatly reduce value or eliminate exit strategy options.

Today, many companies are built to sell. Owners with this strategy continually focus on factors to enhance the exit process. The best advice is to ensure you have a balance between the “here and now,” and the ”there and later.” Ask yourself, what is my dream for this business, and if I reach that dream, what then? How will my family and I eventually benefit from these years of hard work and risk?

Your options include, leaving the business to family members, going public, selling it to employees, or to a private equity group or strategic corporate acquirer. A natural tendency in a young business is to have a very short time horizon ‐ next payroll, next tax payment, next customer, and next month. But to realize a successful (and earlier) exit, the business owner needs to keep his or her eye on the ultimate disposition of the company.

If the ultimate goal is an initial public offering you have to do different things than if the goal is to sell a private company.

For example, a C corporation, which allows unlimited shareholders, is the appropriate form if you plan to go public, however the sale of a C corporation is more expensive from a tax standpoint compared to selling a sub‐S or limited liability corporation. With an end game in mind, your advisors will be much more effective in insuring you have the proper business structure.


Invest Time in Planning the Exit

Spend 20 minutes a day thinking about the exit. This time will produce more monetary value in the end and make earnings from anything else you would do with this time pale in comparison.  Wealth does not generally come from the earnings of the business, but upon the exit from the business.

What should you think about? Look from the outside in.  Determine who should eventually own your company and why. Take a buyer’s view of what will make the business more attractive from a  strategic standpoint.

  • Perhaps you should devote more resources to developing proprietary and unique products or methods.
  • Can you develop a brand? Branded companies are sold as a multiple of sales, rather than a multiple of earnings
  • Document and protect your technology.
  • Corner a particular market or niche and become a price leader.
  • Become recognized. Do you have a good media and public relations strategy?

Are your contracts and agreements written so they would provide value to a purchaser of your company? Often, language in contracts can be problematic for buyers and investors.


Understand Due Diligence Deal‐Breakers

The due diligence phase of a transaction is when all details of the business are inspected. In our experience, business owners often unwittingly make decisions today that are deal‐breakers tomorrow. They make decisions for expedience, based on here and now rather than there and later.

High on the list of due‐diligence deal‐breakers is any inordinate dependency on factors outside the owner’s control. These include too much revenue from one customer, too much risk from a sole supplier or too much dependence on technology controlled by outsiders.

Why would a buyer want your company if it is dependent on outside technology? The buyer would likely discount your value or worse yet, acquire the technology from the outsider just as you have.

The bottom line to maximizing value — and assuring a successful exit — is to own your own magic. At least have exclusivity on that magic.

Another area of concern during due diligence is long‐term agreements.  You may enter into seemingly insignificant agreements that become deal‐breakers. Examples that allow outsiders to “hold up” your transaction include lease, employment, licensing, loan and stockholder agreements.  Obviously, no one is recommending against entering into such agreements; just that you enter into them under terms that do not preclude a successful sale.

It may seem obvious to counsel business owners to avoid mistakes, but there are some that are perilously easy to make and unbearably tempting. The top among these is the temptation to dabble with a potential buyer.


Don’t Dabble. Your Company Is Either For Sale Or It Is Not.

The singing siren is an unsolicited buyer who allows you to “see what this baby is worth.” The risk is that the exploration will leak. . . to employees who will get nervous and bolt, to customers who will look to competitors, to competitors who will look to take both customers and employees.  Testing your value can severely reduce your value.

On the upside, when the time comes to exit—to turn your value into wealth—there are some must‐dos to keep in mind:

  • Insist on competition among suitors. True market value can only be determined by getting negotiated offers from different buyers with different motivations to own your company. We believe that the absence of competition means selling at a minimum 35 percent discount below market value.
  • Understand valuation as it applies to your business. Benchmarking may seem objective, but overall it tends to undervalue good companies.
  • Finally, do not make the mistake of overestimating your own ability to do the deal yourself. If you do, it means taking your eye off the ball of running the company, faking sincerity with competing suitors and still having trust with one at the end, and negotiating with someone who likely has superior skills and deal experience.

Build the value, keep your exit in mind, avoid devaluing mistakes and at the end your strategy will be a lucrative one.

The Numbers Coach Assists in Capital Acquisition for Company Buy-Out

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SITUATION

In 2004 Pain Consultants of Atlanta, LLC (“PCA”), a leading pain management medical services firm, entered into an agreement where key leadership would purchase their division from their parent company.  PCA management needed to find the right type of financing to ensure a successful buy out.

SOLUTION: The Numbers Coach Financial Leadership Services

PCA turned to the Numbers Coach (“NC”) to assist with finding the right financial partner to execute the buy out. NC compiled a loan report that included detailed financial information and projections. The loan report told the PCA story, its vision for the future, and why it was a good deal for a financial partner.  Since the historical financial data was strong and accurate, and the projections realistic, PCA had several options available to them.

RESULTS

NC helped PCA management evaluate and determine the most appropriate financing options and terms to meet their objectives.

  • PCA received several competitive term sheets to evaluate.
  • Financing was timed to meet necessary deadlines for the buy-out.
  • A working capital line of credit was also secured to provide adequate financing for growth

Numbers Coach Leads Online Financial Network to Merger Success

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SITUATION

In 2002 Phil Binkow founded the Financial Operations Networks (“FON”). His vision has been to create the preeminent online publishing resource for back office support operations. His first product, The Accounts Payable Network, has become the “go to” online SaaS resource for financial professionals seeking information, benchmarking, best practices, tools, templates, and advice on the Accounts Payable processes.

In 2013 Binkow and his team were approached by a company that had recently purchased one of FON’s competitors and wanted to make a strategic acquisition that would make it a major player in FON’s market. A letter of intent with an offer price was provided to Binkow and his team for consideration in mid-October and after amicable negotiations FON accepted the offer.

SOLUTION: The Numbers Coach M&A Support Services

Numbers Coach (“NC”), Mike Iverson, had been providing financial leadership services to FON since its inception. For the due diligence process that FON was to embark upon, Mike served the central role in facilitating and coordinating all financial due diligence activities and processes, including the establishment of a sophisticated online data room to house the key financial and non-financial documents. The parties wanted to accelerate the due diligence process to meet an aggressive goal of closing the transaction before the end of the year which meant completing due diligence and the purchase agreement documentation in less than 60 days.

<p=>RESULTS

NC was able to efficiently and effectively pull together the required financial and non-financial information to meet the accelerated due diligence processes and deadlines. This was possible due to Mike’s comprehensive and methodical approach to measuring and reporting financial results and having well-organized structures around FON’s financial reporting systems. The highly organized financial, administrative, and human resources information were key in getting due diligence completed by early December, well in time to close before the end of the year.

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“Mike has been an integral part of our team since we founded FON. “His solid understanding of our business and its needs for financial reporting, combined with his highly ordered and disciplined approach to financial reporting and accounting structure were instrumental in our growth and the positioning of FON for a successful exit. He is such a pleasure to work with, and remains a key player on our team as we move forward.”

Philip Binkow, Co-Founder / CEO

The Sale of the Small Business

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by Glenn Lyon, MacGregor Lyon, LLC

Thousands of small businesses change hands every year, but often not enough money is left in the hands of the seller.  As such, MacGregor Lyon would like to share some advice about preparing your business for sale.

  • Have an exit plan. Most entrepreneurs have start-up plans and growth plans, but too many fail to prepare for the time when they want to sell the business or reduce their day-to-day involvement.
  • Know the market value of your business. Know the value in the world marketplace. Simple formulas are often misleading and inaccurate measures of the value of a private business.
  • Explore ways to increase value. A business could be made more attractive to prospective buyers if changes are made in the organization, key personnel, or marketing strategies.
  • Understand when the market is ready. Be ready when buyers are active, money is plentiful, and interest rates are low.
  • Don’t assume the best buyer is local.
  • Document the growth potential of your business.
  • Consider which perks you’ll miss after selling your business.  Usually the transaction can be structured to retain those executive perks which you enjoy while meeting the buyer’s needs.

In addition to implementing these tips, be sure to work with a competent business attorney and tax professional. This is not a time to skimp on professional help.

Is Your Business M&A Ready?

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by Michael Iverson

Merger and acquisition (M&A) activity can be a key part your business strategy. Whether you seek business growth through acquisition or your business is the target of a buyout offer (solicited or unsolicited, you are a party to the M&A process. From that standpoint, it makes sense to understand what the process entails and how it might affect your business.

For the sake of simplicity, and because my clients are more often sellers rather than buyers, I will address the process from the seller’s side of the transaction. However, the same principles apply whether your role is that of buyer or seller.

Organization and Documentation

In a previous article, I discussed how to build transferable value into your business. If you desire to sell your business, you have to make sure its value is readily apparent and transferable to a prospective owner. Let’s review a couple of the tenets of transferability:

  1. Your business needs to have an organizational structure that will survive your departure from the business. Many business owners don’t have that kind of structure in place. When a business owner is an irreplaceable force in their organization, the business can lack transferability.
  2. Documenting your processes and training employees to follow them consistently adds transferable value to your business. It gives a prospective buyer a high degree of confidence that he or she can purchase the business and make a successful transition to ownership. To use a sports analogy, you are turning over your playbook to a new coach.

To bring together the two tenets above, let me point out most entrepreneurs are focused on the delivery and growth of their company and not on organizational structure and documentation – at least, not initially. Most emerging growth business owners are correctly focused on meeting customer needs and providing the products and services customers want. As a business matures, it’s important for the owner to recognize that organizational process and documentation are absolutely necessary. Without them, it is very difficult for an owner to extricate himself from the business.

Well-organized processes and documentation conveys to a potential buyer that:

  • the owner knows what he/she is doing,
  • the buyer can easily understand the business model, and
  • the transfer of knowledge to run the business can happen quickly, which makes a seller attractive.

If an owner is knowledgeable about business contracts, for example, it gives a buyer confidence. When employee files are complete and updated, it reflects the owner’s commitment to matters of compliance.

Letter of Intent

When buyer and seller reach agreement about general parameters of a sale – price, terms, a timetable for completion of the deal and the consequences if the deadline is not met – the particulars are set forth in a letter of intent. The document indicates that initial negotiations have been completed and both parties are committed to additional negotiations with the intention of completing a transaction. The letter of intent (“LOI”) typically includes language stating that information learned about the other party must be held in strict confidence in the event a transaction does not occur.

An LOI is followed by a phase called due diligence. During the due diligence period, the potential acquiring party takes a closer look at the target company. This is a time when organizational structure, process, and documentation can help seal the deal. On the other hand, if any of these is found lacking, the buyer might find reason to re-negotiate the deal. Tax returns reviewed may indicate possible obligations not earlier known to the buyer. Contracts reviewed might show significant uncertainties about vendor or customer relationships that might not be transferrable in the event of a transaction. The result can be a downward revision of the sales price.

Closing the Deal

Assuming nothing significant is uncovered during the due diligence phase, attorneys from each side will then compile a list of documents needed to close the deal. Typically all the documents must be signed by each shareholder of each company, either in person, electronically or by proxy.

When all parties to the deal have signed, the process of integrating the two operations begins. In my experience, that’s the hardest part. It includes a series of meetings, deadlines and assigned responsibilities designed to make the two become one. We will address the integration aspect of M&A in a future article.

If you have questions about M&A, or your company’s readiness, contact us. We are happy to assess your situation and make recommendations.

Identifying a Likely Buyer of Your Business

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by Michael Iverson

One of the most overlooked aspects of selling a business is identifying the right buyer. Some owners never give it much thought, but they should. Finding the right buyer is absolutely fundamental to an exit strategy.

No matter what your objectives are in selling (getting the best price, ensuring a smooth transition for employees, making sure your customers are well-served, etc.), they are most likely to be met when you identify a buyer early.

When you think about selling your business, try to imagine to whom you will sell. Allow me to suggest a few ways to sell a business to your most likely prospective buyers:

  1. Sell to one or more managers of the business.
    An inside sale can be one of the most satisfying ways to sell a business. The business owner knows the character and business strengths of his or her buyer. The buyer has a good understanding of the seller, knows the strengths of the existing operation and the collective work ethic of the employees.
  2. Sell to your employees.
    When a business has many long-time employees who believe in the business and its prospects, selling to employees as a group is a good option. An Employee Stock Option Plan (ESOP) can be established as a vehicle to transfer ownership of the business to the employees. This option may take a little longer to put into motion, but it’s achievable for many businesses.
  3. Transfer ownership to a family member.
    Some entrepreneurs hope that a child or other family member has an interest in taking over the business. Of course, having an interest is just the first step. Any family member that might take over the business also needs talent, a strong work ethic, sound judgment, and an understanding of the business and its employees. If a family member has been involved in the business for a number of years, this option is a strong possibility. The family needs to determine a financing vehicle that lets the owner “cash out” without disrupting normal business operations.
  4. Sell to a competitor, business partner or vendor.
    A competitor, business partner or vendor usually has a strong knowledge of your business and its market. A competitor that is very familiar with your business may understand the immediate, positive impact a purchase would have on his or her existing business, and therefore might be an eager buyer. A competitor buying your business gains new revenue, has an opportunity to consolidate staff, and, could be in a position to raise prices.

    5. When a business partner or vendor is made aware of your desire to sell, don’t be surprised if the initial response is cautious. If the purchase has a synergistic effect with the vendor’s existing business, you might have a potential buyer. However, the benefits aren’t as immediately recognizable as they are to a direct competitor, so a longer lead time may be required.

  5. Sell to an unidentified buyer through a business broker/investment banker.
    It’s also possible to sell a business to a private equity buyer. This can be accomplished by hiring a business broker or investment banker who advertises your business for sale and contacts appropriate buyers. Unlike the potential buyers mentioned earlier, this buyer may have less knowledge about your business or industry. A private equity fund is usually interested in the business as a new stream of cash flow and sees opportunity to enhance the value of the business down the road with the intent to sell it.

    6. Entrepreneurs who haven’t planned their exit strategies could find themselves on this path. A private equity buyer generally has the financing lined up so a quick transaction is possible. The business broker / investment banker can help guide the seller through the transaction process, which at times can be very emotional.

In an upcoming article, I’ll discuss the differences between strategic buyers and financial buyers, and the price each is willing to pay for your business.

To discuss the future sale of your business, how to time your exit and maximize your sales price, let us know and we can get the right resources in place for you.

Will You Sell to a Strategic Buyer or a Financial Buyer?

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by Michael Iverson

 

In the recent article Identifying a Likely Buyer of Your Business, I suggested a number of parties that might be interested in purchasing your business. To review, possible buyers include:

  1. Your management team
  2. Employees of your business
  3. A Family Member
  4. A Competitor, Business Partner or Vendor
  5. An Unknown Investor or Investment Group

These potential buyers can be classified as either Strategic or Financial.

A strategic buyer has knowledge of both your industry and your company. This kind of buyer has a compelling business interest in a possible acquisition of your company. The business interest might be as simple as buying out a prime competitor to achieve dominance of a local market. Or, perhaps a buyout is pursued with the intention of significantly expanding the business.

Typically, strategic buyers are willing to pay more for your business than financial buyers. A strategic buyer is familiar with your business or industry and optimistic about the prospects of your business enhancing his or her existing business. A strategic buyer isn’t afraid to pay full value for your business, because he or she expects to experience significant benefits when the two businesses are combined.

In contrast, financial buyers often have little or no knowledge of your industry or your company. This type of buyer is interested in acquiring your business’ cash flow, and motivated to buy at a discount – as a sort of hedge against his or her lack of familiarity with your business. Some financial buyers aspire to cut expenses of your business to boost profitability and flip the business in a short period of time for a profit.

Given a choice between selling to a strategic or a financial buyer, most business owners would rather sell to a strategic buyer. The price is usually closer to what the owner perceives as full value. In addition, the impact on employees is usually less.
If you have an exit plan in place, you increase your likelihood of selling to a strategic buyer, including identification of likely buyers. If you don’t plan your exit, you might end up selling to a financial buyer for lack of better options.

How Price Is Determined

Businesses for sale are usually valued at some multiple of operating earnings. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a variation of operating earnings that many investors use to compare profitability between companies and across industries. It strips away the effects of financing and accounting choices to focus on true operating profits.

Depending on the buyer, an offer for your business may be based on current year’s EBITDA or average EBITDA for the past three years. Typically, some multiple of EBITDA is offered; the multiple varies by industry. For example, 1.5 times EBITDA could be the offer for a business in a steady but low-growth industry, while 6 times EBITDA might be offered for a business in a high-growth industry. Any offer’s value also depends on whether you’re selling to a strategic or a financial buyer.

To learn more about the type of multiple your business might command, or to talk about developing a plan for its sale, contact me at Trillium Financial.

Selling Your Business: What Can You Expect From a Due Diligence Review?

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by Michael Iverson

Selling a business can be an exhilarating experience. Meeting with potential buyers, presenting the business in the best light possible, fielding inquiries, receiving preliminary bids and conducting early-stage negotiations is all part of the process. It’s pretty exciting compared to a typical day at the office.

At a certain point in the process, however, the excitement of an impending sale gives way to something much more serious. The would-be buyer’s offer is usually contingent upon completion of a due diligence review. The buyer gets a chance to conduct a very thorough examination of the business. If the review uncovers unpleasant surprises, it may be possible for the buyer to walk away from the deal.

No Stone Unturned

The buyer may well be making the biggest financial commitment of his or her life, so he or she wants to be sure about the purchase. Confirmation usually comes from outside professionals who advise the buyer through the due diligence period. At the very least, expect visits to your business by an accountant and an attorney representing the buyer. These experts will advise the buyer about whether he or she is making a wise purchase decision. Make sure everyone handling your data has signed a Non-Disclosure Agreement, then provide them the information they request.

Information requests from the buyer’s accountant are likely to include, but not limited to:

  • Financial statements for recent years and related audit reports
  • Tax filings for recent years
  • Financial projections, capital budgets and strategic plans
  • The business’ general ledger and schedules of Accounts Payable and Accounts Receivable
  • Schedule of inventory
  • A schedule of capital equipment, its location(s) and copies of purchase contracts or leases
  • A schedule of depreciation/amortization calculations related to equipment
  • A list of real estate owned or leased, plus copies of mortgages, deeds or leases
  • Analysis of fixed and variable expenses
  • Details of debt covenants and credit lines

The buyer’s attorney will likely want to review the following documents:

  • The company’s Articles of Incorporation, Bylaws and Minutes of the Executive Board
  • The company’s organizational chart
  • The company’s list of shareholders
  • Certificate of Incorporation
  • A schedule of any intellectual property of the company, including trademarks, trade secrets, patents, licenses, agreements with personnel and consultants providing technical know-how.
  • A list of litigation settled or pending; regulatory proceedings against the company; environmental actions pending.
  • Insurance coverages protecting the company and Executive Board from general liability, personal liability, product liability, errors and omissions, workers’ compensation, etc.

In addition, the buyer will want to see information about your product or service lines, customers, key suppliers, major competitors, and marketing programs of the company.

As you can see, the process will test your record-keeping and organizational skills. I often stress the importance of developing a business infrastructure. This is the occasion when all of the time and effort pays off for having a well organized and documented financial, operational, sales, and administrative processes.

Managing the Process

The buyer and his or her advisers have every right to gather the information they need to evaluate the business. You have every right to make sure their work doesn’t become disruptive to your business, your employees’ work and your clients.
Manage the process by setting a few guidelines for retrieval of information. The buyer’s requests should be made directly to you, or your designee. If the provision of information cannot be immediate; encourage the buyer to request things in advance.

The due diligence process can be very intense and emotional. Have key advisors to surround yourself so that you can keep your eye on moving the business forward. Understanding what to expect can save you a lot of time and emotional energy.