Are You Exit Ready? Six Areas of Your Company To Examine as If You Were a Buyer10 October, 2014
You’ve probably heard the saying that tech companies are generally bought, not sold. This means that you, as the seller, may have very little control over who acquires your company and, perhaps more importantly, when that acquisition takes place. Constant readiness then becomes imperative in order to both look attractive to potential buyers and to maximize the value of your company.
When an exit is not on your company’s radar, certain documentation can fall through the cracks or become dated, which will be a red flag should a buyer approach your company. And, if it’s a red flag for a buyer, then it should be a red flag for you as well. If a buyer wouldn’t want to inherit your company’s liabilities, why would you want to retain them? But if being prepared for an exit is part of your company’s DNA, not only will you avoid scrambling for data during due diligence, but you’ll have data in place to inform you of your company’s health, expose weaknesses and liabilities, grow your company and increase value.
When your company is well-prepared for the exit process it means that everything a buyer will want to scrutinize—contracts, employee records, customer agreements, compliance documentation, HR and IP issues, etc.—is accurate, up-to-date, and organized in a way that makes it easy to review. If anything arises during preparation that would be a red flag to a potential buyer, then it should be a red flag for your company. Implementing a regular process of updating these materials provides valuable feedback on how successfully you’re executing your business strategy.
Exit readiness then is really about the creation, organization, and maintenance of the data that is critical to the growth of your business—the same data that a potential buyer will also want to review.
Whether or not an exit is on your company’s horizon, you should always aim to be ready; the more thoroughly you can prepare in advance, the more likely a potential deal will be successful. Below are several areas of your company that will be scrutinized by a buyer during the due diligence process. To ensure your company is truly exit ready, you should scrutinize them first yourself.
Six Areas of Your Company to Examine as if You Were a Buyer
#1 Regulatory Compliance
Regulation is on the rise. If your business is not regulated today, chances are it will be soon. We all love to hate regulatory compliance, but noncompliance can reduce value and kill deals.
During the due diligence process a buyer needs to have complete confidence that the compliance practices they are inheriting are not a liability.
Compliance is just good business. When compliance is made a company priority, documents and data necessary for an audit are up to date, in order and available for easy review. This allows you to get through an audit process without the horrifying prospect of having to completely shut down your business. A compliance program that is well run will reduce the cost of doing business and increase value when it comes time to sell your business.
#2 Intellectual Property
Today, almost all businesses have some form of intellectual property that needs to be protected. When selling your business a potential buyer will scrutinize your IP ownership and any issues that arise will impact value. Buyers will not knowingly take on IP risk; dealing with it is too expensive. By ensuring that your IP is protected, you not only make yourself more attractive to a buyer, but you avoid unnecessary internal headaches.
Ensure that you’ve completed all your filings. A provisional filing is not enough—a full patent is required. As your IP develops it’s imperative that you continue to file in order to accommodate the addition of new innovations so that they are also protected. Secondly, ensure that all your employees have signed assignment agreements. In small organizations there’s often a level of camaraderie and collegiality that can make assignment agreements seem unnecessary, but they are essential. Make these forms part of your culture. Have employees sign them the minute they come on board, and your IP will be better protected.
#3 Human Resources
Human Resources can be a minefield of litigation risk. When a buyer evaluates your company they’ll scrutinize your employee records to ensure that they’re not inheriting potential risk. They’ll want to know if there are any cases of discrimination, equal employment opportunity, sexual harassment, or any of the other issues on the long list of potential HR liabilities.
The most important asset most companies have is their employees. Keeping up-to-date employee records as you build your business, including job descriptions, develops that base of assets, but also protects you when problems arise. One of the most challenging problems a company can face is an HR problem. Good documentation is your most powerful defensive weapon.
It’s important to ensure that when a potential buyer evaluates your company it’s clear to them who your employees are, what they do, and why they are there. The more confident a buyer is in the returns they’re going to get from your employees the more likely the sale will go smoothly.
#4 Company Agreements
Everyone you deal with—bankers, vendors, customers, etc.—has a contractual arrangement with you. One of the frightening realizations you may experience when attempting to sell a company is that buyers will require you to produce all of the company agreements you have entered into from the very first day you started doing business. They’ll want to understand the intimate details of those agreements and what they mean.
The buyer will want to ensure that these agreements are all signed and that you’re not in default or out of compliance with any of them. It’s important to take a complete inventory of these agreements and ensure that nothing is missing, incomplete or inaccurate.
#5 Corporate Financials
When a buyer looks at your financial data they want to see conservative numbers that are backed by verifiable facts. A good practice is to present your numbers just as a public company would. Ask yourself if your company could survive a public audit, because when a potential buyer enters into the due diligence process that’s essentially what they’ll be doing. Using GAAP (Generally Accepted Accounting Principles) should be standard practice. Most buyers, if they find your numbers are not compliant with GAAP, will demand that that data is recreated so that it is. Going back three or more years to do that is a very painful and costly process and is best avoided.
Moreover, don’t ignore cash flow numbers. Accurate cash flow data will not only impress prospective buyers, but it also enables you to evaluate the health of your business on a daily, weekly, or quarterly basis and alert you to change strategies when the company is not performing to expectations.
#6 Operations, Markets and Customers
You may know your operations, markets and customers intimately, but can you demonstrate this knowledge to a potential buyer? Current and accurate data allows a purchaser to understand your markets and customers as well as you do, but robust customer and market data also allows you to leverage that information as you build your business. This kind of practice lets the purchaser know that your team of people and the product it represents are competent and valuable.
Make exit readiness part of your company’s DNA. Good quality data, housed in a central repository, is key to creating a climate for a successful exit, but it should also be viewed as a best practice for achieving ongoing growth and value.
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