Time Kills All Deals. What Can You Do About It?

Time Kills All Deals. What Can You Do About It?

All sales people understand that the longer it takes to close a deal, the more likely the deal will never close.  As more time passes, so many different factors can cause a deal to fall apart.  For example:

  • A buyer finds another solution

  • The economic environment changes

  • A critical employee resigns

So, for the most important transaction – the sale of your business – you want to make sure that time does not kill your deal.  The following steps are critical to making sure the sale of the company occurs when you want it to happen:

  1. Get your financial house in order
  2. Identify the individual who will coordinate the flow of all documents throughout the sale process.
  3. Identify your advisors – Investment banker, lawyer, CPA, other advisors
  4. Get your contracts organized
  5. If you want to leave the business, get your senior management team locked in

1. Get your financial house in order.

Here are three steps to ensure your financial and accounting operations are in the best possible shape as you begin preparations to exit your business.

Have accurate monthly financial statements

The most critical aspect of getting your financial house in order is to make sure that you have monthly financial statements – income statement, balance sheet and cash flow.  In most instances, these statements are critical to a potential buyer.

Completing a monthly reconciliation of all balance sheet accounts (not just your bank accounts) is essential to having accurate monthly financial statements.  An error in a balance sheet account means that your income statements are wrong.  Inaccurate financial statements will make a buyer wonder if other information you have provided is also incorrect.  Uncertainty about financial data or business operations means there is higher risk in a deal – that higher risk means a lower price.

Have a monthly budget for the next two years

A buyer also wants to understand your plans for the future.  Those plans involve two components – (a) Your understanding of how the business will evolve & (b) the budgets/forecasts reflecting that evolution.  Creating both a written document of your plans and a financial forecast model on an annual basis will help you convey that information to a potential buyer.  Creating these documents annually, even when you are not thinking about selling, will help you prepare for that time when you do want to sell.

Identify the critical metrics in your business

Understanding the critical metrics and regularly reporting on those metrics to your employees will keep everyone focused on running the business effectively.  Depending on the industry, each business can have different metrics.  Some common metrics include:

  • Revenue per transaction

  • Number of transactions by major business segment or major product line

  • Cost per unit of sale

  • Number of full-time equivalent employees at the end of each month

  • Common financial ratios

  • Overhead expense allocations between compensation & benefits, marketing, and office expenses 

2. Identify the individual who will coordinate the flow of all documents throughout the sale process.

You will have a significant number of conversations with the investment banker and the buyer to talk about the history of the business and plans for the future.  Throughout these discussions, you will need to keep your focus on effectively running the business.

Because of these priorities, you need to identify an individual who can coordinate the flow documents.  From the time that you hire an investment banker through the closing of the deal, someone in your organization will need to provide:

  • Financial statements

  • Customer and vendor contracts

  • Budgets & Forecasts

  • Analyses of customer and vendor sizes

  • Responses to audit and legal and due diligence questions

Typically, your controller or CFO will be this individual because they have access to not only the financial data, but also all other information.

3. Identify your advisors.

Your advisory team will contain four major individuals/companies:

  • Investment banker

  • Lawyer

  • CPA

  • CFO

The investment banker will market your company.  Typically, the sales cycle for an investment banker is 2 – 3 years.  Take advantage of this time to meet with a variety of investment bankers.  Understand their knowledge of you industry, develop confidence in their skills, and make sure the two of you communicate effectively.  Also, make sure you like the person and want to spend time with them because you will be spending a lot of time with them.  The typical cost of a broker could be 3 – 7% of the sale price. You will also have to pay a monthly retainer, which, depending on the agreement might or might not be offset against the success fee.

You have already identified a corporate lawyer to help you with normal business operations.  Talk to your corporate lawyer and see if they can support a business transaction.  If the lawyer cannot help or if you are not confident in his/her skills, then you need to hire someone else to help you review (a) the investment banking agreement, (b) the letter of intent and (c) the stock/asset purchase agreement.  For a business sale between $5,000,000 and $35,000,000, your legal fees could range between $50,000 and $250,000.

In all likelihood, your company’s CPA can provide the expertise that you need.  However, if they can’t, you will need to identify the CPA approximately one year before you plan to sell.  There are many tax strategies that need to be implemented significantly before a transaction in order to make sure you take the best advantage of your options.

4. Get your contracts organized.

One of the most significant items for due diligence is the review of your contracts, including:

  • Client contracts

  • Vendor contracts

  • Real estate lease agreements

  • Human resource files

  • Executive compensation arrangements

  • Stock & option agreements

In order to facilitate a timely review of these documents, it is important to have them available in a soft copy form.  There are many different services that allow you to store soft copies of documents.   Building a logical storage structure will allow for a quick transfer of these documents once due diligence begins.

A wonderful side benefit of these storage solutions is that these critical contracts are now easily available to others in the organization.

One other aspect of getting your documents in order is analyzing your contracts for the assignment provisions.  If a customer contract requires consent to assign the contract, you might have to contact customers before the transaction to make sure they will consent to the sale of your business.  Because of the confidential nature of most business transactions, you probably will not want to ask for your customer’s consent, so getting the assignment provisions established early in your company history’s is critical to ensuring a smooth transaction.

Consult with your legal advisor about the myriad of possibilities to address this topic.   For example, if you sell the stock of your business, the assignment provisions will probably be much less important.  If you sell the assets of your business, the assignment provisions will be extremely important.

Finally, if most of your customers are with the federal government, you will have to get those contracts novated, regardless of whether you sell stock or assets.

5.     Get Your Senior Management Team Locked In.

Your senior management team is critical to the transaction, especially if you want to exit the business soon after the sale.  The potential buyer will want to speak with all members of the management team to understand their strengths, weaknesses and long term plans.  The buyer will assess if these individuals can manage the business without your involvement.

There are two major components to getting the senior management team locked in:

  • Additional compensation when the transaction closes

  • Passing along your day-to-day responsibility long before the transaction closes

Additional compensation when the transaction closes

You will probably need to share the proceeds of the sale with your management team and other critical employees.  This sharing can take the form of bonuses, stock options, or other long-term incentive compensation plans.  Often times, the buyer will want the payment of a portion of these proceeds delayed for one to two years so the senior managers will stay with the company after the transaction.

There are many advisors who can help develop the best type of long-term incentive plans for your business.  But these plans should be developed a couple of years before you anticipate having a transaction.  The type of plan is based on the method of sale (assets or stock), the length of time you want to pay out the compensation, and how much you want to pay out.

Passing along your day-to-day responsibility long before the transaction closes

If you want to leave the business after the sale, then you need to make sure you are not so critical to the operations of the business.  What this means is delegate, delegate, delegate.  For example, how would you answer the following questions?

  • Can your head of Sales close business without your involvement?

  • Can your senior managers continue product development without your day-to-day support?

  • Can your marketing department develop campaigns without you?

  • Can you take a two-week vacation and know the business will still operate effectively?

You should still be involved in approving and challenging plans, but can your senior managers handle the business without you?  If the answer to any of these questions is “No”, then do you have the right management team in place?