Housekeeping at the most elementary level requires that you update - or create - salary guidelines, board meeting minutes, job descriptions. In fact, even the smallest company needs a policy and procedures manual for employees, covering hours, vacations, health insurance, retirement plans and record keeping procedures. An organizational chart, complete with titles and lines of accountability, will convey a sense of organization, and suggest that you as a CEO are already grooming others for senior executive positions.
Another preparatory step is one we've discussed relating to establishing your company in the financial community, that of assembling a distinguished board of directors (in some parts of the world, these are called Advisory Boards). Just as a list of respected executives on your board impresses a banker, it also speaks volumes to potential buyers. Recruit them carefully, person by person, as if you were putting together a team of all-stars. Offer them free stock, or options and warrants, to compensate them for the use of their name and the time they may spend advising you and your successor. (…)
Your company also needs some literature to add to its legitimacy. A brochure tells prospective buyers, as well as clients, of course, that the company is prosperous and aggressive in its marketing program. Brochures for high-tech firms are especially effective in explaining what the company does in pedestrian language. An illustrated color brochure will add pizzazz to the most seemingly mundane or complex businesses.
Clean up your financials too. I'm sure you wouldn't do this, but a lot of companies use "tax avoidance strategies," such as excessive compensation, to camouflage earnings from the tax authorities. Such tactics may well have a negative impact on a potential buyer who says to himself, 'Hmmm ... what else are these guys hiding?' But beyond ethical issues, buyers will typically only recognize your traceable profits. They're not going to pay for earnings that are invisible or not clearly documented, no matter how blatantly you nudge and wink...
In order to avoid getting caught between the tax authorities and the concerns of a potential buyer, I suggest that in anticipation of putting your company on the market that you "invest in taxes" for a couple of years. Yeah, when all else fails, pay your taxes. Just keep in mind that your company will be acquired based on multiples of earnings, so your investment in one or two years of taxes should bring you multiples of that amount when you sell.
We've talked about audited financials. Such a report issued under the logo of a respected accounting firm will lend credibility to your company. This is another reason to "get honest" on your tax avoidance schemes. (…)
During the normal course of business, you may have gotten a little loose in collecting your receivables and tightening up your inventory. Uncollected receivables that you'll never collect should be marked down, as should those dated and cobwebbed items in inventory that you'll never sell. Sure as hell, a prospective buyer will dispatch his auditor to find these untidy holdovers. So you find them first, and write them off. None of my companies will ever enter into an acquisition without an acquisition audit. (…)
Another clean-up chore is to strengthen and lengthen contractual agreements. Any potential purchaser wants to buy into the same pattern of arrangements which have helped make you successful. These arrangements include any property and equipment leasing contracts, and, in a union environment, any labor contracts. If you're anticipating selling, negotiate ahead of time a long-term labor contract that subsequently gives any buyer a sense of stability with regard to his union workers. Although this isn't always possible, it is definitely worth trying.
Customer contracts are equally important. (…) Also solidify any contracts you have with suppliers, to provide you with raw materials or other products at a certain price for a number of years. The more contracts you nail down, with every party, the more stability you craft into a promising deal for a likely buyer.
(…) It's in your best interest to maintain all the data a prospective buyer looks for as evidence of an organized and efficiently run operation. For example:
• Payroll records.
• Tax records, reflecting up-to-date filings.
• Documentation of any bank loans.
• Documentation of copyrights, trademarks or patents.
• Copies of current licensing, distribution or franchise agreements.
• All documentation required by (…) (the) bureaucratic tentacles of government.
(…) Make sure your company is in compliance with any appropriate environmental regulations and guidelines. Hire an outside evaluator to check your procedures and processes for dealing with handling and disposal of any waste your company may be generating. And document everything.
Buyers who see a working system of controls in place are more likely to pay a premium for the company. They know that your systems will save them the agony of having to install these processes at a time they're going through post-acquisition transition. I suggest you have your accountants or an external consultant review your controls and data processing systems to ensure they meet your needs. The cost of this review will be more than recouped in the price paid by a satisfied buyer.
Buyers want assurance that you're not going to band them the key at closing and disappear, along with all the expertise which has made your company successful. You may now be running your company single-handedly, but if you're planning to sell, you'd better begin to develop a management team, a second level of competent management and control which will ultimately make you dispensable, and raise your buyer's comfort level about the people he is inheriting. Especially key to this management team is a conscientious, certified Chief Financial Officer who continuously feeds data into the system.
In addition, almost any buyer will want you personally to be around during the transitional period, leading him through processes you know by heart, and helping him establish relationships of his own with employees, customers, suppliers, bankers and anyone else in the business community who can continue to provide him support.
Depending on the size and complexity of the company, and the confidence and experience of the purchaser, you might be asked to stick around for anywhere from 90 days to two to three years. Negotiate for the shortest period in your buyer's comfort zone. You want to get on with your life - and begin your next Quantum Leap! Besides, former owners, becoming increasingly irrelevant to all parties, tend to take on the aura of a ghost from the past if they hang around too long.
While you're tidying up, clean up your lawsuits. If you're the defendant, settle wherever possible and put litigation behind you. On the other hand, if you're the plaintiff, keep the suit. Make sure you advise the buyer of the particulars of the suit, and emphasize why you feel it's important to pursue it to the end. The buyer will appreciate your being forthright, and you give him the option to continue or drop the action after purchase.
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