Getting ready for the sale of your company should start with formation, and well-advised companies should make smart decisions every day in anticipation of the ultimate exit. Nonetheless, if you plan on running a process for the sale of your company, there are tried and true playbooks to get ready, which include:
- Will your financial numbers stand up? In any sale process, the buyer will review your financial statements with a fine-tooth comb, and there is no better way to spook a buyer than by having messy accounts. Sometimes, for early-stage companies, this means hiring a fractional CFO to do a proper cleanup. For larger companies, an audit will almost certainly be required. Oftentimes, the seller will even contract a second auditor to perform what is referred to as a “quality of earnings” report, much like seller disclosures in the sale of your home. Whatever you do should be a risk/reward analysis of how much time it will take and how much it will cost to make the buyer as confident as possible that your numbers are rock solid.
- Do your legal documents stand up? Are board and stockholder minutes compiled and signed? Are all employees and contractors fully documented on offer letters or consulting agreements? Are payroll records accurate and complete? Has the cap table been maintained and tied out?
- Cap table and equity grants. Do you know who owns your company, and can you prove it with documentation and proof of payment? If you have maintained your cap table in a third-party software system or with a law firm (ideally both), your cap table should be rock solid. If it isn’t, expect long delays, hand-wringing, and a large withholding of purchase price in case of third-party claims.
- Protect your intellectual property (IP). Ideas can not be patented if they have been shared with others. Do you need to file for a provisional patent application before you share something? Do you have the right to share it under an inbound license? Does your company or do the founders own the IP? Was all IP of the business assigned to the company by the inventors?
- Know what your paper says. If contracts can be terminated without notice for convenience, if contracts are automatically terminated, if stock options will make millionaires of your engineers, you need to know and plan for how a buyer will react.
- Do you have an encrypted, organized, complete and functional virtual data room for managing third party access? Once you have an NDA in place with the buyer (and, hopefully, a non-solicit agreement), the exchange of documents will commence. Having contracted with a vendor who can give you maximal functionality, encryption, security, and organization, which you have completed and updated, will be key to moving fast.
- Build the team. Who on your primary team should know about the sale process? Nothing is more discouraging or demotivating than a sale process that has leaked throughout the organization, especially if it isn’t going well and is dragging out. Key talent will leave. Do you have the right advisors to find the richest buyer, and do you have counsel who will go to the matt to protect you and get the best deal for you? Do you have accountants or auditors to ensure the numbers are right?