Pre-sale planning

October 2011 » Columns » OWNERSHIP ADVISOR
So, you have decided that you are ready to sell your firm. I will be the first to tell you that selling your firm is not easy.
W. Hobson Hogan

There is a lot of work that goes into preparing and executing a sale process. Even though I never pull any punches regarding the time that executives and members of the administrative team have to invest in the process, most of my clients feel that the process was more involved than they expected. It is something that you cannot really appreciate until you have gone through it.

However, with some planning and foresight, selling your firm need not be a horrendously painful process. You can decrease the time commitment and the stress at the end of the process by preparing information you will need before the process begins. If a firm sale is even several years away, there are processes that you can undertake now that will reduce the likelihood of chaos at the onset of the due diligence process. As with any business undertaking, good planning and resource allocation will render a process that will be more easily managed and well executed.

Approximately 80 percent of all sale processes take nine to 15 months from start to finish. Typically, the workload required in a nine-month and a 15-month process is the same; it is just that the longer processes typically have longer "breaks in the action" due to a myriad of issues from either the seller or the buyers.

Rather than a year-long marathon, a sale process can be characterized by a series of wind sprints, where you prepare data requests, then throw it over the wall and wait for a response from the buyers. From a seller's perspective, there is a rather big time commitment early when preparing the prospectus and marketing information for the firm sale. Much of the information used early on is bigger picture and more broad in scope; however, there is always information that you know buyers will want more details about and it is at this time that you can prepare information to be used later in the process.

A sale process is like peeling an onion: With each step in the process you reveal more information about yourself to the buyers. Most buyers have similar data requests, with usually 80 percent of the data requested being essentially the same across buyers. It is the 20 percent that is different that causes the most heartburn and consternation. Every buyer manages their firm differently and approaches a purchase differently. Information that may not be important to Buyer A will be absolutely critical for Buyer B.

In the sale processes I run, buyers are invited to ask for additional information after meeting with the seller's management team face to face. It is at this time that you get the data requests that you did not anticipate. If your firm has a sophisticated accounting system and a capable CFO, then you will be way ahead in the process. If your firm does not have a true CFO nor a flexible accounting system, it is at this time that you begin to feel the crunch that is associated with a sale process. Once a Letter of Intent is signed, a buyer will want anything and everything related to the business.

It is not unusual for due diligence requests to be 10 or more pages long. The data request is comprehensive and will cover everything from human resources to insurance to contracts. It is in this stage that you will learn how to scan documents efficiently because you will get plenty of practice. The good news is that a diligence process is pretty standard fare and you can prepare most of the documentation months in advance if you so choose. Due diligence will last anywhere from 30 to 90 days, depending on the tenor of the deal.

Sellers that have a significant number of their administrative staff who are "in the know" have an advantage because they can put more people into the diligence process and can be more reactive to a buyer's diligence request. Firms that want to keep the sale a secret to most of their staff have to plan much further ahead due to resource constraints. In due diligence, you will probably copy or scan more than 50 percent of the files that your firm has and put them in a virtual data room.

If you are planning to limit knowledge of a sale process to just a few people, then you will have to start building the data for your data room months in advance or else your administrative or finance staff will definitely know that something is afoot. If you believe that your firm is not as strong in documentation or you think there could be difficulty pulling information together in a short time period, then it makes sense to start building the elements of your data room well in advance so your time can be spent on the unusual requests, rather than scanning "checklist" type items.

W Hobson Hogan, a principal at ZweigWhite, assists AEC firms with strategy formulation and ownership transfer issues, including buyer and seller representations.
Contact him at hhogan@zweigwhite.com
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