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

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 larger, well recognized 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 committees in the context of an exit transaction

Hitting the Projections

  • Don’t let the exit process distract management from their most important job: Meeting, and hopefully exceeding, the financial projections – this should have the highest priority

Corporate Structure

  • Think carefully about changes to the structure to optimize valuation and tax
  • Review the company Minute Book and Cap Table (i.e. share or stock 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
  • Options – can be particularly problematic under some new tax and accounting laws, tax liabilities can be significant to shareholders and buyers
  • Complete corporate search for liens and registrations (done by the 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 – even for past employees and contractors – especially in consideration of how these laws differ from country to country
  • Conduct an initial patent search – similar to what an international 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 (ask the M&A lawyer)
  • 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 carry forward strategies
  • Discuss R&D tax credit and grant implications of an international sale
  • Meet with strategic tax advisors to discuss 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

Financial Model and Projections

  • Financial model with key metrics, and
  • 5 years of history, 3 years of projections, and
  • 12-month current year plan (operating budget)
  • More on the financial model here

Net Promoter Score

  • For any company where it’s applicable, a Net Promoter Score is becoming a standard part of the exit package.
  • This is a good summary from Wikipedia

Positioning Statement (Elevator Pitch)

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

PR, Website and Newsletter

  • 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 weekly, tracked email newsletter to buyer prospects
  • Integrate the PR and news items into a website upgrade to support the exit process

Confidential Information Memorandum, etc.

  • Confidential Information Memorandum (CIM) or Presentation (CIP)
  • One or 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
  • 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 the 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 thoughts on “Preparing to Sell a Company – First Steps in the Exit Process”

  1. 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.

  2. 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

  3. 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,

    1. 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.)

  4. 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.

  5. 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?

    1. 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.

    2. 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.

      1. 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.

  6. 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 but I feel it was not through.
    Sarab Mann

    1. 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.

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