Selling your Company? Be Prepared

Michael C. Knowles – Consulting

Thinking about selling your company? Many believe 2010 may a be good time to sell your business. In fact, more venture-backed companies were sold in the first quarter of 2010 than in any quarter during the last six years. Frank, Rimerman Consulting believes the decision to sell is also a call to action to prepare for the transaction process. Time and again, transactions have closed at lower values, and with more onerous terms, than those agreed upon in the Letter of Intent (LOI). What happened? In short: due diligence. What can go wrong during the due diligence process?

The due diligence process affords the buyer the time and—for an unprepared seller, the opportunity—to renegotiate key deal terms such as the purchase price, timing of payments, indemnification, representations and warranties, and others. Companies that are not fully prepared for due diligence can be surprised to find that the deal they thought they had agreed to is no longer on the table.

Here is what often happens: A business owner attracts several interested buyers. After negotiations with some or all of these parties, the seller enters into a LOI with the most promising prospective buyer. Virtually all LOIs require an exclusive period of time for the buyer to conduct due diligence and conclude the transaction. During this period, the negotiating leverage shifts dramatically to the buyer as due diligence concerns are identified, time passes, and other interested parties are put on hold.

Today’s buyers frequently utilize operating, financial, and legal teams to perform due diligence on everything from intellectual property ownership to human resource issues, historical and forecasted financial information, and many other areas. A single large issue, or even a series of smaller ones, identified during this process can delay deal momentum, impact seller credibility, and give the buyer significant leverage to reduce the purchase price or otherwise change important terms. Because time has passed and other potential buyers may have moved on, the seller may have little recourse but to renegotiate or call off the sale. In worst-case scenarios, the buyer will walk away from the deal.

Over the next few weeks, our Transaction Readiness team will further explain how a pre-transaction due diligence risk assessment prepares a company for due diligence before it begins, reduces the risk of closing a deal on less favorable terms, and can yield an extraordinary return on investment by helping you protect the key terms of your sale transaction.