Top Ten Things To Be Aware Of When Selling Your Company
By Riaz Karamali
With the reemergence of a healthy M&A market for emerging companies, we thought it would make sense to revisit some key touchpoints to keep in mind when getting your company ready for a potential sale.
- "Only two things are certain in life – death and taxes." The shareholders should ensure that their personal tax and estate planning regimes have been put together with a view to the upcoming liquidity event. While it is obviously best to begin this planning as early as possible, it is never too late!
- "No surprises." Assess the need for and implement any required pre-sale corporate clean-up, prior to receiving a due diligence request from a potential purchaser. Necessary tasks may be as simple as tracking down missing signature pages, but could also include more thorny issues such as obtaining releases or assignments of intellectual property rights from early contributors to the venture.
- "Disclosure is the better part of valor." To the extent there are any discrepancies or risks inherent in the due diligence materials that cannot be fully cleaned up, discuss these with the buyer at the appropriate time, and make sure these are described in the Disclosure Schedule.
- "The devil is in the details." Obtain as detailed a letter of intent as possible. In most transactions, the seller's negotiating position is strongest before a letter of intent (which will likely contain an exclusivity provision if signed).
- "On the QT." Take steps to ensure confidentiality. Clearly, these would include having an confidentiality agreement in place with the potential buyer and limiting knowledge of the proposed transaction to as small a group of employees as possible. However, be prepared with a communications plan in the event that employees or third parties become aware of the pending transaction.
- "Can you take it to the bank?" When evaluating competing proposals, to the extent that some or all of the consideration would be paid in securities, make sure you understand and are comfortable with the liquidity path. Also, make sure that the buyer's remedy for breaches of representations and warranties is, as much as possible, limited to the indemnification escrow account, and limit the size of such escrow to the lowest reasonable amount. Ask yourself if you are prepared to proceed if the escrow account and any earn-out amount is never paid out.
- "All hands on deck." Prior to executing the letter of intent, ensure that all directors and required shareholders are on board with the transaction if possible.
- "Strike while the iron is hot." Unless there is a compelling reason for delay, once a letter of intent is entered into, push to prepare and review documents and close the transaction as expeditiously as possible.
- "Don't forget Plan B." Even after the letter of intent is signed, have a fallback plan if the deal falls apart. Having such a plan in mind, even if it is never disclosed to the buyer, will give you strength and leverage in the negotiations that remain over the definitive agreement and ancillary documents.
- "Keep the corporate shield in place." To the extent possible, resist having shareholders and officers sign the letter of intent and the definitive transaction documents in their individual capacities. Depending on the nature of the transaction, this will not always be possible, but is a valuable goal.