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With the capital markets remaining relatively strong and stable and with the overhang (e.g. raised but yet to be invested) in the private equity markets still estimated at nearly $500 billion dollars, many technology, IT, software, defense and government contractors in the Washington, D.C. regions remain prime targets for acquisitions (or a significant investment) by private equity funds. And let’s not forget about the strategic buyers, who are very much in the hunt for ways to build a stronger platform and get access to new technologies, customers and distribution channels.

Preparing For The Sale Of The Company

Regardless of whether you are considering a sale of the company in six months, eighteen months or five years, the key to the process is preparation, both mechanical and strategic. The “mechanical” side of preparation means taking all steps to prepare your company for sale from a corporate housekeeping perspective, anticipating the questions and concerns of a prospective buyer and preparing your own financial and retirement plan to determine your pricing parameters. The “strategic side” of the preparation process involves getting inside the buyer’s head. Why would anyone want to buy my company? Where is the intrinsic value? In general? To them specifically? Where are the areas that will serve as impediments to maximizing value?

The commencement of the preparation process begins with a strategy meeting with all members of the seller’s team in order to:

• Identify your financial and structural objectives;
• Develop an action plan and timetable;
• Begin preparation of an outline of the “Offering Memorandum;”
• Identify potential legal and financial hurdles to a successful transaction (e.g. begin thinking about what problems may exist which will be a “transactional turn-off” to a prospective buyer) such as unregistered trademarks, illegal securities sales or difficulties in obtaining a third party consent;
• Develop a definitive “to do” list in connection with corporate housekeeping matters such as preparation of board and shareholder minutes, the maintenance of regulatory filings, etc.; and
• Identify how and when prospective buyers will be recruited, proposed terms evaluated, and final candidates selected.
• Analyze the impact of this process as it may affect your plans to launch your next venture.

STEP 1: Selecting the Seller’s Team

One of the first and most important steps in the preparation process is the selection of a team of advisors to help prepare the company not only for the sale itself, but to provide assistance to the seller in developing an “Offering Memorandum” that will summarize the key aspects of the company’s operations, products and services, personnel and financial performance. In many ways, this “Offering Memorandum” is akin to a traditional business plan, and will serve both as a road map for the seller and an informational tool for the buyer. When selecting members for the team, a seller should choose people who:

• Know the company, its history and founders
• Understand the seller’s motivation, goals and post-closing objectives
• Are familiar with trends in the seller’s industry
• Has access to a network of potential buyers
• Has a track record and experience in mergers and acquisitions with emerging growth and middle-market companies
• Has expertise with the financing issues that will face prospective buyers
• Knows tax and estate planning issues that may affect the seller both at closing and beyond

STEP 2: The Legal Audit

The next step in the preparation process is to take steps to get the company ready for the buyer’s analysis and due diligence investigation. A pre-sale legal audit should be conducted in order to assess the “state of the union,” which is critical in identifying and predicting the problems which will be raised by the buyer and its counsel. The legal audit should include corporate housekeeping and administrative matters, the status of the seller’s intellectual property and key contracts (including issues regarding their assignability, etc.), regulatory issues, litigation, etc. — the goal here is to find the “bugs” before the buyer’s counsel discovers them for you (which will be embarrassing as well as costly from a negotiating perspective) and to exterminate as many bugs as possible before the first buyer is considered. For example, now may be the time to finally resolve any disputes with minority shareholders, complete the registration of copyrights and trademarks, deal with open issues in your stock option plan or renew or extend your favorable commercial leases. It may also be a good time to set the stage for the prompt response of those third parties whose consent may be necessary to close the transaction, such as landlords, bankers, key customers, suppliers, or venture capitalists because, in many cases, there are contractual provisions which prevent an attempted “change in control” without consent. For those bugs that can’t be killed, don’t try to hide them under the carpet, explain the status of any remaining problems to the prospective buyer and negotiate and structure the deal accordingly.

STEP 3: Preparing the Offering Memorandum

The third step in the preparation process is to identify a marketing strategy to attract prospective buyers. This strategy should include a set of criteria being developed to understand the profile of the “ideal” buyer, identify how and when buyer will be identified, determine who will meet with potential buyers and include a description of the initial set of materials that will be given to potential buyers and their advisors. These initial materials are often referred to as the “Offering Memorandum.” The Offering Memorandum should include the following information:

• Overview of the seller’s company;
• Description of the seller’s key products and services;
• Description of the company’s management team and organizational structure;
• Summary of the seller’s company’s financial performance to date;
• Schedule of key customer relationships and intangible assets;
• Key hurdles (if any) to accomplishing the sale; and
• Supplemental materials.

As you know, when offering anything for sale — from single products to an entire company — you must present the information truthfully and attractively. You must resist the temptation to paint an overly-attractive picture or fail to disclose key problems or challenges which face the future of the company when drafting the Offering Memorandum.

Once you have assembled your team, conducted an internal pre-sale legal audit and pulled together the “good, the bad and the ugly” into a detailed Offering Memorandum, you are ready to start meeting with buyers. The balance of the process is described in Box A below and may be the focus of the future columns in SmartCEO.