When contemplating selling your business, a seller must ensure that its corporate affairs are in order, their records are well-maintained, and their financials are accurately represented. Mishandling these steps can lead to various challenges, complications, and delays throughout the life of an M&A transaction.
The first step a seller should take to prepare itself for a successful M&A transaction is assembling a multidisciplinary transaction team, which will help guide a seller through the M&A process by managing expectations and the procedural steps. This team should include lawyers, accountants, tax advisors, and investment bankers who specialize in M&A transactions. Since the M&A process can take months or even years, experienced advisors can assist with unexpected strains on time and resources, help to streamline the M&A process, and help a seller navigate potential pitfalls.
Preparing for Buyer’s Due Diligence
A crucial, yet oftentimes exhausting and tedious task, is compiling all diligence materials requested by a potential buyer. A potential buyer needs to understand the business from the inside out, so the request list for diligence can be pages long and the diligence process can take months. A more prepared and organized seller will make this diligence process much smoother and much faster.
A seller must allocate sufficient time and resources for the due diligence process, so preparation should begin as early as possible, and the more diligent a seller can be in its day to day operations in maintaining organized records will help streamline the M&A process and potentially make a seller more attractive to a buyer.
One of the first steps in preparing for an M&A transaction is conducting a comprehensive review of all corporate and tax records with an accounting firm and legal counsel to determine if any corporate or tax clean-up is necessary. This task will include providing to your representatives all documents related to the formation and ownership of your company, such as publicly available documents, ownership records, corporate consents, purchase and sale documents, tax returns, and audited and unaudited financial statements. Your representatives will then determine if any corporate clean-up (i.e. filing missing tax documents, properly papering the buy-out of an owner, getting current corporate consents in place to reflect the authority of certain individuals as officers of the company, etc.) is necessary and can instruct you on how to perform such actions. Compiling these documents when thinking about entering into an M&A transaction will also help tremendously during the diligence period with the potential buyer.
Another important aspect of diligence and one that is vital to a potential buyer is financial diligence. A potential buyer will review the company’s financial records in detail to fully understand and evaluate the business. Financial statements may also be used to determine the purchase price, so accurate financial statements are oftentimes delivered to a potential buyer prior very early in the M&A process.
A seller should conduct a thorough review of the financial statements and accounting records with appropriate members of the transaction team to ensure such statements and records are accurate and up-to-date and should compile and organize such statements and records for delivery to a potential buyer.
Sellers should also proactively gather and organize all contracts with vendors, suppliers, customers, lenders and employees, independent contractors, as well as all contracts related to any intellectual property owned or licensed by the company and all real property leases. The potential buyer will want to review all of these contracts to inform their understanding of the company, and your legal counsel will need to review all of these contracts to properly assess any potential risks. Legal counsel will also evaluate any hurdles that may need to be jumped to get to closing, such as determining whether any third-party consents will be needed upon the assignment of a contract or if any termination provision will be triggered upon the assignment of a contract.
Although the M&A process can be unfamiliar, frustrating, and time consuming, it can be fun and rewarding too. This article is intended to provide a few tips to sellers to help prepare in advance for the M&A process which will hopefully reduce the tedious aspects of an M&A process and set a seller up for a smooth and efficient transaction.