Estate Planning
Tuesday | 30 August, 2011 | 11:32 am

A successful transaction

By Vince Pappalardo

July 2011 - Business owners contemplating an ownership transition should consider what will be required to complete a successful transaction carefully. Business owners should undertake certain actions to ensure their businesses will attract strong interest and full valuations from a range of buyers. The following discussion will explore pre-sale preparation considerations with the goal of providing a useful framework for business owners as they evaluate liquidity alternatives.

Prior to a sale
Prior to commencing a sale process, business owners should review the company’s operations, financial reporting and legal situation to identify and address any issues that may harm the process or negatively impact value. There are simple steps that can be taken to improve the presentation of the business.

From a financial reporting standpoint, business owners should have outside accountants assist with a rigorous review of the quality of earnings, reserve methodologies and other accounting policies. Balance sheet accounts also should be reviewed to determine if assets reflect their true market values. Buyers have increased their due-diligence efforts significantly relative to the financial statements of a business. Buyers want to ascertain the GAAP compliant, sustainable cash flow (EBITDA) generated by the business as it is currently configured and assess the major risks that could impact cash flow.

Here is a simple checklist for business owners:

  • Audit financial statements.
  • Prepare detailed monthly budgets/projections.
  • Clean up balance sheet (write-off uncollectible accounts receivable, sell or write-off obsolete inventory, pay overdue payables).
  • Evaluate quality of earnings (adjust/eliminate non-recurring items, discretionary spending, aggressive accounting policies, etc.).
  • Develop system to track key operating metrics (these will help to highlight key value drivers of the business such as revenue and margins by end market, key customers or other key factors).
  • Identify customer or supplier concentration, and develop mitigation plans.
  • Assess tax impact from various sale structures (stock sale, asset sale or merger).

Legal considerations
Business owners frequently overlook the legal aspects of a business, but they are very important—particularly if the business employs critical intellectual property. The legal elements of a business may materially affect the marketability or value of a business.

Legal items to review during this preparation phase include:

  • Update and conform core documents (ownership records, minute books, charter, bylaws or operating agreement).
  • Obtain all necessary permits and certifications.
  • Confirm all contracts and agreements are valid (assess ability to assign to new owner).
  • Review all regulatory compliance.
  • Make sure all patents and trademarks for IP are in order.
  • Comply with all software license agreements.
  • Identify and evaluate all outstanding litigation and claims.
  • Maintain proper business insurance and risk management.
  • Identify any consents that may be required in a transaction.
  • Evaluate status of employee non-compete/confidentiality agreements.

Operations considerations

Management should consider fine tuning certain areas of the operations prior to a sale process. Many operations issues pertain to making sure the business can function properly.

  • Evaluate management structure (strengths, weaknesses, retention concerns).
  • Document key production/process procedures and quality control.
  • Evaluate IT capabilities in comparison to current industry standards.
  • Detail engineering or R&D activities.
  • Update website to permit customer interaction and ease of use.
  • Evaluate ongoing capital expenditure requirements.
  • Clean up the facility (discard obsolete equipment and inventory and clean/repair as needed).

The preparation may take one to two years depending on the degree of work required to properly position the business for sale. After a full review of the financial reporting, legal aspects and operations has been conducted and steps are implemented to augment the business or to minimize any issues, the business owner can begin the sale process for the business.

Proper preparation and a well-orchestrated sale process can increase the probability of a successful outcome to the sale process at the highest possible value. It is in business owners’ best interest to assess their business methodically prior to the sale process. The objective is not to transform the business but to address the potentially unattractive issues that may limit interest or value. Problems that arise during a sale process can often be traced to certain areas of the business that were not adequately prepared prior to the sale process. MM

Vince Pappalardo, managing director at Stout Risius Ross, specializes in mergers and acquisitions advisory for companies in the production and distribution of ferrous and nonferrous metals and alloys. John A. Ebe of Bressler, Ebe & Co. LLC contributed to this article. This article relates to a series of articles published in the print edition of Modern Metals. Thomas Tyndorf, director in Private Banking USA at Credit Suisse, along with David Berek, partner with Handler Thayer LLP, will be contributing to upcoming columns. For more information, contact Vince at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit<>.

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