INSIGHT · DECEMBER 2009

Are you considering a major transaction for your business, such as a sale, merger, private placement, or debt financing? These deals matter enormously to your company's stakeholders and its future, and they are time-consuming and costly. In a major transaction, the owners will also be asked to make representations and warranties about the business that can make them personally liable for any breaches. Addressing the issues below in advance prevents them from becoming pitfalls.

Maintain reliable financial information.

Work with your in-house financial staff or your CPA to prepare financial information that you and other decision-makers can rely upon, supported by effective audit and internal control procedures. Three years of financial statements is recommended, ideally reviewed by an outside accounting firm. Audited financials are ideal but not necessary for most privately held companies. Reliable financials let you gauge performance, demonstrate value to the other participants in the deal, and show that your business is organized and well managed.

Talk to your banker.

Experienced commercial bankers recommend meeting face-to-face on a quarterly basis. An open exchange of information lets your lender respond proactively to both up and down cycles in your business. Come prepared to speak about positive and negative trends, and bring relevant documents, financial statements, and projections.

Anticipate the due diligence review.

Before you embark on a major transaction, ask your counsel for their due diligence checklist and see how your company matches up against it. Does your company have an organizational chart that conveys responsibility and reporting lines? Review your contracts, leases, licenses, and permits to determine what third-party consents you need to consummate the transaction. And before entering negotiations with any third party, have them sign a nondisclosure agreement to protect your confidential information.

Be prepared to discuss your liabilities, and offer solutions.

All businesses have problems. Identify the significant issues facing yours, address them actively, and package them before meeting prospective business partners: contracts up for renewal, problematic leases, tax liabilities, litigation or potential claims, employee disputes, product defects, expiring patents, customer concentration, etc. Recognizing these issues and talking frankly about them matters; offering solutions matters more. Some buyers may adjust the price, but generally speaking, more disclosure is better than less.

Obtain a valuation of your business.

A third-party valuation gives you a realistic range of values for your company. Business owners are frequently too close to the business to gauge its value. A valuation of the company's tangible and intangible assets, and the factors driving value, gives you assurance that the buyer is paying the right price or the investor is getting the appropriate stake for its money.

Separate your divisions.

If only certain divisions are being sold, or certain assets excluded, you will need to divide the assets and employees of one division from another. That covers human resources decisions, computer systems that must be separated so the correct data transfers to the purchaser, and contract review to ensure ongoing obligations are met by both sides. Consider whether you will still need the same space afterward, or whether a smaller lease makes sense for the trimmed-down company.

Maintain your corporate records.

Update the corporate records of your business regularly: annual shareholder and director minutes for corporations, current operating or partnership agreements for other entities, and required state and tax filings for all. Good records defend against veil-piercing claims, show deal participants that your company is organized, and spare you from chasing paperwork in the middle of a complex transaction.

Keep your employees through the transaction.

A company's value is often closely tied to key people, and major transactions breed uncertainty. Retention agreements and equity incentives such as stock option plans motivate key employees to stay through the end of the deal and beyond.

Get the help of professionals.

Meet in advance with your lawyers, accountants, and investment bankers or financial advisors. They will help you identify issues and prepare the company; advance tax planning alone can save you a great deal of money later. Business owners should not attempt these transactions on their own. Proactively addressing the issues above will smooth the path to a successful closing.

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