Sales Process
The Sale or Purchase of your Business is an integrated process that warrants careful planning and execution. As with most business matters, the better prepared you are the more likely you are to have positive outcomes.
Sales Process Overview
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Pre-Sale Preparation-Legal, Financial & Operational
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Analysis of Company Results & Positioning to Determine Prospective Sales Range
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Determination of Strategic & Optimal Buyer Pool
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Preparation of Initial Marketing Information
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Execution of Non-Disclosure & Non-Solicitation Agreements for Prospective Purchasers
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Exchange of Limited Financial Information
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Negotiation of Purchase & Sale Agreement (May include initial Letters of Intent)
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Detailed Due Diligence Period
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Fine tuning Contract Issues
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Preparation of Closing Documents
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Closing, execution of Documents & Transfer of Consideration
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Post Closing-Assistance with Transition Matters, Addressing any Holdbacks and Earn Out Agreements
Pre-Sales Preparation
There are three main areas in preparing your company for sale. Legal Preparation, Financial Preparation and Operational Preparation.
Legal Considerations: You are preparing to either buy or sell a Company, what does that entail? Most businesses are sold as Asset Sales in which the buyer is buying the assets, accounts, property, intellectual property and goodwill of the business.
An Owner preparing to sell their company will need to prepare a Legal Document Inventory. This is discussed in greater detail under the heading Legal and Contractual.
You will need to obtain and have available the following:
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Company Organizational Documents
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State & Federal Licenses & Authorizations
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Copies of Insurance Policies & Histories
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Leases & Deeds of Your Properties
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Customer Agreements
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Mortgages & Security Agreements
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Any Documentation Related to Litigation
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Patents & Trademarks
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Financial Preparation Considerations:
As a Seller you should expect a rigorous review of your financial history by potential Buyers in evaluation of your company for sale. Conversely, a Buyer of a company will want to gain comfort and confidence in the accuracy of a prospective company financial results. Organized, accurate, well documented financial statements will speed the process of sale. You will need to either prepare or review the following documents. Generally, having good financial information going back for 3 years will be sufficient for due diligence in most cases. This will include the following:
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Bank Statements
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Profit & Loss Statements
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Statements of Cash Flows
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Tax Returns
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Customer Profitability Analysis
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Future Budgets & Capital Expenditure Plans
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Operational Preparation Considerations:
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Organization Charts
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Employee Files
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Benefit Plans & Agreements
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Employee Contracts
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Confidentiality and Non-Disclosure Agreements
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Customer Contracts
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Supplier Contracts
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Company Policies and Handbooks
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Insurance Agreements
The Legal, Financial & Operational operational preparation will be tailored to your actual business. Reviewing the foregoing with your advisor will tailor and focus your preparation in these areas.
Analysis of Company Results & Positioning to Determine Prospective Sales Range
Prior to Going to Market, the Brokers.Law team reviews your results, your market, the competition, comparable sales to determine a prospective range for the Sale of your business. Typically this will be a multiple of earnings in some fashion or a multiple of sales in some industries. If there are significant hard assets, such as Real Estate, Vehicles, Equipment, Factories, Inventory this will factor into the Sales price.
Example: A mobile home manufacturer has strong results for the past 3 years. In determining the purchase price range the positioning will be a combination of a Multiple of earnings or Sales, plus the value of inventory on hand, plus the value of land & buildings & equipment and other Company Assets. Existing Company receivables are usually not included in the Purchase but can be.
A Multiple of Earnings or Sales, Plus the Value of acquired Assets will be the backbone of the Purchase Price in most cases.
In determining the Multiple Used the main factors will be the overall industry multiples as adjusted by the trajectory of the Company. A company that is on a high growth track will command a higher multiple than a company in which sales have plateaued. Sales Multiple will also take into consideration existing company “Benefit to Owner” which will not be assumed. For example, a six figure salary for the owners spouse may be added back to Net Income as it will not be an expense that the Purchaser will be assuming and will add back to the Bottom Line.
Determination of Strategic & Optimal Buyer Pool
At this stage the Company is organized and is prepared for Due Diligence and has determined a target price for the Business. Next a company specific evaluation is done to determine the Optimal initial target Buyer pool. Depending on the business, this will often include other businesses and/or competitors in your industry.
For example if you have a business of multiple apartment complexes the optimal buyer might be regional or national companies that are expanding their footprint in your market or Companies that are primed for your market but have not entered the market.
A company that is looking to establish a presence in a new market, that is already in your industry, may be willing to pay a higher multiple than a competitor already with a presence in your market. Your optimal buyer or buyer pool could include one or more of your current employees that understands the value of your business innately.
Preparation of Initial Marketing Information
Initial Marketing information will then be prepared on a confidential basis (not revealing the company that is in play) with summarized financial and operational information. While this information is confidential it will describe the industry, financial results and performance of the company that is being marketed.
Confidential Prospect Solicitation
The Sale of your business will usually be very confidential in the initial stages. From the pool of Strategic and Optimal Buyers, Brokers.Law then begins to reach out through multiple channels, to the decision makers at prospective companies to gauge interest utilizing the initial marketing information.
Execution of Non-Disclosure & Non-Solicitation Agreements for Prospective Purchasers
Those prospects expressing initial interest in the Company will then be required to execute Non-Disclosure & Non-Solicitation Agreements to keep any information that is revealed during the due diligence process confidential and agree not to use such information to solicit the existing employees and clients of the business.
Exchange of Limited Summary Financial Information
After expression of interest and exchange of NDA’s and Confidentiality Agreements the prospect will have access to broader financial information about the Business and the Company, including its financial results and tax returns. Customer and Client information and results will remain summarized at this stage.
Negotiation of Purchase & Sale Agreement (May include initial Letters of Intent)
At this point the prospective purchaser will have sufficient information to enter into a contract or Letter of Intent expressing the general terms and conditions which the prospect will be willing to purchase the company for. This will usually involve attorneys and multiple negotiations. See Contractual Provisions for an exhaustive review of Contractual Matters that are included in Contracts. Significantly, a complete review during the detailed due diligence period, will commence. At this stage the parties are stating that one party is willing to sell and one party is willing to purchase the business based on these terms and conditions.
Detailed Due Diligence Period
Integral in any significant purchase Contract will be the due diligence. After reaching either the Letter of Intent or full Contract stage, the Buyer will then do a full due diligence examination. This can be handled through the use of virtual data rooms where the Seller grants specific access to the Buyer for review, but not removal of the information. During the Due Diligence phase, the Owners and Key Financial Person for the organization will usually be intimately involved in answering questions and providing additional information to the purchase. Certain key members of the Sellers’ team may also be made available to prospective purchasers (Sales or Account Managers for example). The Detailed Due Diligence phase is when the Buyer gets to confirm the information that has previously been summarized. Any significant matters arising are then addressed.
Fine tuning Contract Issues
Usually the Due Diligence phase will lead to certain matters being modified or clarified in the Purchase and Sale Agreement. In some instances the Due Diligence will proceed after execution of a Detailed Letter of Intent which sets forth the key terms that will be included in the Purchase and Sale Agreement. In either case after the Due Diligence phase is when matters become finalized in the Purchase and Sale Agreement. Obviously, the Contract issues will usually be negotiated and drafted with the Assistance of financial and legal advisors.
Preparation of Closing Documents
After any matters arising during due diligence have been ironed out in the Contract as the matter proceeds towards closing the Closing Documents are prepared. The closing documents will be deal specific but will often include Asset transfers for Real Estate, Title transfers for personal property such as vehicles, Assignment of contractual rights under insurance and other contracts, preparation of Buyer and Seller Warranties and representations and other matters. Again this will usually be prepared with the assistance of legal counsel.