You are here: Home » Exit Execution » Preparing to Sell a Company – First Steps in the Exit Process

Exit Execution

Preparing to Sell a Company – First Steps in the Exit Process

by Basil Peters on May 14, 2012 · 13 comments

This is a checklist for the first phase of the exit process. These tasks should all be complete before engaging with the first prospective buyer.

Exit Strategy

  • Fully signed Exit Strategy document
  • If necessary, discuss mechanisms to increase alignment

The Exit Team

  • Engage an external accounting firm for a review or audit – ideally a ‘big four’ firm
  • Engage an M&A Advisor (aka investment banker)
  • Engage an M&A Lawyer – must be an expert in M&A transactions, not a generalist
  • Review board appointments and board composition in the context of an exit transaction

Hitting the Projections

  • Don’t let the exit process distract management from their most important job:
  • Meeting, or hopefully exceeding, the financial projections

Corporate Structure

  • Think carefully about changes to the structure to optimize valuation and tax
  • Review the company Minute Book and Share Register
  • Review minutes from board meetings and shareholder meetings
  • Discuss the ownership structure to ensure optimum tax treatment in either a share or asset sale
  • Review share structures to accommodate tax treatment of any type of purchase price payout
  • Options – particularly problematic under the new tax and accounting laws, tax liabilities can be significant to shareholders or buyers
  • Complete corporate search – PPSA etc. (by the new M&A lawyer)
  • Discuss Articles and shareholders agreement with M&A Advisor and Lawyer – especially in the context of an asset sale

Intellectual Property, Employment, Contractor and Corporate Protection Agreements

  • Review every employee and contractor agreement – especially in consideration of how these laws differ from country to country
  • Conduct an initial patent search – similar to what a US buyer would do during due diligence
  • Software audit – especially for open source code buried in your systems
  • Confirm IP ownership of all forms of IP
  • Patent search for freedom to operate
  • Impact of government grants on IP ownership or transfer

Tax review

  • Best possible review of possible tax liabilities – especially at the US state level
  • Special focus on states where the company may have a nexus
  • Explore tax loss carryforward strategies
  • Discuss SRED implications of possibly becoming a non-CCPC
  • Meet with tax advisors to discuss tax implications of various exit scenarios

Accounting Systems

  • Review internal accounting systems to ensure accurate monthly financials are available within a few days after month end

Positioning Statement (Elevator Pitch)

  • Develop a one or two sentence description of the business
  • Should clearly state what you are the best in the world at
  • This is a prerequisite to the PR plan and creation of the sales collateral

Public Relations Plan

  • Update the company’s public relations plan to include potential acquirers and the media they are likely to follow (this applies regardless of whether the company will be exiting in stealth mode)
  • Integrate the PR plan with a targeted, tracked email campaign to prospects

Exit Sales Collateral

  • Financial model with key metrics, 5 years of history, 3 years of projections and a 12 month current year plan
  • Confidential Information Memorandum (CIM) – reviewed by the M&A lawyer
  • Two page non-confidential executive summary
  • PowerPoint – rehearsed for online presentation
  • Videos – increasingly used as part of the exit process

Due Diligence – all in PDFs for electronic access

  • All financial statements and tax returns including SRED claims
  • Thorough review of any agreements with personal guarantees
  • All material contracts, insurance agreements, etc.
  • Review all contracts for assignability without consent and change of control clauses
  • Sales funnel and CRM remote access
  • Update Org Chart if necessary
  • Trademarks, copyrights, and any patent related documents
  • Business licenses, permits, etc. – especially at the state level
  • Potential litigation (including employee related) or possible liabilities not in the financials
  • Product warranties and support obligations and warranties
  • Leases, guaranties, banking agreements
  • Asset ledger – especially in the context of a possible asset sale
  • Equity confirmations from all current and past employees and contractors
  • Review employee share ownership agreements

Reps and Warranties

  • Start to discuss reps and warranties with significant shareholders – typical terms, limits, periods
  • Agree on who will sign which reps and warranties

New Confidential Email Addresses

  • We recommend starting to use new, confidential email addresses at about the time you engage an M&A Advisor. Gmail for example
  • Our team prides itself on open, honest communications and the absolutely highest ethics in all of our dealings.  We only work with clients with similar standards.
  • But when you sell your business you hand over your corporate email archive
  • About 20% to 30% of the time, there will be some post transaction legal issue
  • The exact translation is disputed, but Cardinal Richelieu is attributed with saying: “If you give me six lines written by the hand of the most honest of men, I will find something in them which will hang him.” That was 350 years before email was invented.

{ 13 comments… read them below or add one }

M&a advisor June 20, 2012 at 11:21 pm

No praises should be enough for this detail outlined blog post on which you have illustrated the exact procedures to sell your business properly. From the strategy formation to proper implementation of those planned strategies, you have depicted it all nicely in your blog post. Moreover the way through which you composed this post, makes sure all the concerned issues are correctly pointed out.

Reply

Basil Peters September 20, 2012 at 6:03 am

Thanks for your encouragement and support. I’m glad you found this post valuable.

Reply

John Thomas September 20, 2012 at 7:59 am

Greetings Basil! I’d really like to introduce you to and have your opinion on a startup I’m involved with known as Nodally Technologies. Would you have some time in the next few weeks for a visit and demo? Best regards, JST

Reply

Basil Peters September 23, 2012 at 6:27 pm

Hi John,

Great to hear from you. I will send you an email to schedule a time.

Basil

Reply

Fredelia M&A January 31, 2013 at 8:40 am

Basil,

I just found your blog through this posting – excellent summary of a selling process!
I subscribed to your RSS feed to keep on reading your future posts.

Thanks & regards from Berlin,
Wolfgang.

Reply

Basil Peters January 31, 2013 at 11:09 am

Wolfgang, thanks for your positive comments. I am impressed with the quality of the English language posts on your blog. (I’m sure the German language ones are similarly excellent, unfortunately my German is not.)

Reply

Paul Cronin February 27, 2013 at 7:56 am

Great post Basil. At Successful Transition Planning Institute, we ask the owner to describe his future life, beyond the business. Everyone needs an identity, as well as meaning and purpose in their life. For a business owner, it’s often the business that defines their identity, and by extension, how the derive meaning and purpose. If owners fail to fully vet their options for their future life, as well as the options for their business future, they invite emotional sabotage to the biggest transaction and transition of their life. In the book, Finding Your New Owner, Jack Beauregard expounds on this.

Reply

Suki Mudan February 27, 2013 at 12:24 pm

Paul makes an important point – emotional sabotage.
I see three basic tenets of a succesful exit/transiiton – Financial, Legal and Legacy. Basil, you address the first two very well in your checklist but it seems to me that thee are very many emotional and ‘soft’ topics that have more to do with the sellers’ state of mind and desire to move forward can often derail the path to a succesful exit. These, rather loosely defined, ‘Legacy’ aspects need to be in alignment for closing the deal smoothly. Thoughts?

Reply

Basil Peters March 1, 2013 at 9:39 am

Suki, I agree with you. The psychological elements in the exit planning and execution process are not well understood. And, IMO, underappreciated by most professionals. I think more discussions on this topic would help us all.

Reply

Catherine Fuller March 23, 2013 at 1:59 pm

The cooperation and information gleaned from the sellers is of premium value and needs to be cultivated with expertise. Depending upon the conditions of the sale, emotions could range from totally disengaged to extreme grief and sense of failure. They can sometimes see the buyers as people who are insensitive, aggressive competitors. Attempting to step up and do what they could not. Many business owners may also view their businesses much like their own baby. And when they can’t make it work, it is as if their child had died, and they have failed. They are either disengaged or emotionally overwhelmed.

Reply

Basil Peters June 12, 2013 at 4:11 pm

Catherine, you have obviously executed a few exits. I completely agree. The child analogy is a good one. Emotions are usually a significant factor in sell side M&A work.

Reply

Sarab Mann January 22, 2014 at 5:29 am

One of the most valuable blogs ! Otherwise, information in such a depth is hardly shared. I learned from experience that mentioning exist strategy in the business plan/executive strategy is considered crucial and after the funding no one like to touch the subject. Founders always avoid this topic due to emotional attachment to their startup and angel investors lacks required experience. When you say “exit” others hear “failure”.
It may not be easy process or communication, a minor mistake can send wrong messages to all the stakeholders, and even it could be PR nightmare.
Basil, what is the best method to contact you. I sent a message from exits.com but I feel it was not through.
Regards,
Sarab Mann
778.838.4500

Reply

Basil Peters February 11, 2014 at 9:37 am

Sarab, I am in enthusiastic agreement.

So many entrepreneurs completely avoid discussing their exit. I admit that I did exactly that with my first company.

It is a very emotional conversation.

Reply

Leave a Comment

Previous post:

Next post: