What type of business sale process will you run?

Attorneys are known for asking leading questions. This one presumes you will sell your business. And you will. Which begs the follow-up: When? and How? Whether you do it when you want, and on the terms you want, is largely dependent upon your investment in planning. Sovereign Legal Group continues to be very active in legal representation of both buyers and sellers in M&A transactions, including deals ranging from <$1M to $20M+ in 2015 thus far. Here are some key factors to consider when deciding how you’ll sell your company:

  • Level of Secrecy. Who will you let in on your plans, and when? What's at risk if key employees, customers, or suppliers learn of your plans too soon? And what if the deal doesn’t happen? Who will you need to assemble due diligence information, and will you provide it in a phased approach, only after progressive assurances are received?
  • Capitalization and Organization of the Company. If you are a single member LLC or single shareholder corp, skip ahead. If not, you need to clearly understand your fiduciary duties to other equity-holders in a transaction, and the steps that should be taken ranging from special meeting notices to the approvals required under applicable law and your organizing docs. 
  • Tax and Wealth Management Analysis. Have you developed some intellectual rigor to inform your financial decisions? Have you modeled different purchase price and deal structure scenarios with your CPAs? What are your current and projected spending levels? How will you invest sale proceeds, and what is your level of risk tolerance? How long will your proceeds, with risk-adjusted returns, sustain your spending needs?
  • Your Bottom-Line. Have you developed a reason-based purchase price range, taking into account the type of consideration? Are you open to terms (other than cash at closing), i.e. would you accept a portion in a seller note, acquirer stock, or contingent earn-outs? Is your bottom line supported by an objective valuation study? Does your valuation apply market-based principles (comparable companies and transactions, discounted for size and lack of marketability)?
  • Transition. Are you willing to stay on to ease the transition? Do they want or need you? For how long? In what role, and reporting to whom? Can your ego handle that?
  • Legacy and Culture. Do you have specific “legacy” criteria? (Preserving the company brand, jobs for employees, community reputation.) And how important is that to you?

Types of Sale Processes

At the left end of the spectrum is a “narrow” process, an extreme (but common) example of which is responding to an unsolicited offer and entering into an exclusive LOI to attempt to conclude the deal. At the right end of the spectrum is a “broad” process. The extreme example here is an “auction” process run confidentially by an investment banker or similar intermediary firm. Most often we encounter transactions somewhere in the middle: a structured process run by a professional intermediary, but one which carefully selects a limited number (5-15) of “pre-qualified” potential purchasers to be contacted in order to confirm valuation and preserve negotiating leverage.

Business Sale: Process Spectrum

Narrow Parties Contacted Broad
Lower Seller’s Negotiating Leverage Higher
Higher Confidentiality of Process Lower
Lower Likelihood of Deal Consummation Higher
Higher Potential for Business Interruption Lower

Typical Scenarios

1-on-1 Negotiation Targeted Process Broad Auction
Unsolicited offer from competitor, key supplier, management Management or intermediary identifies and contacts 5-15 parties. Intermediary identifies and contacts 15-30 strategic and financial parties.

DISCLAIMER: The information contained in this blog is not intended as legal advice for you. It is intended only to provide general information, and to promote self-analysis, more informed questions, and further discussion with advisors. Specific legal problems necessitate specific legal advice tailored to each client’s specific set of circumstances. Use of this Blog does not create an Attorney-Client relationship.