So you’re considering leaving. What’s on your to-do list?

Successful merger and acquisition (M&A) exits are becoming increasingly difficult to achieve and taking longer as a result of recent economic headwinds and regulatory restrictions. Despite this, many private equity funds and strategic acquirers still have a significant amount of dry powder to work with, and the prospects for M&A are improving. As deal flow increases, business owners looking to sell should do everything they can to maximize the value of their company and otherwise prepare for a successful sale transaction.

Planning ahead and evaluating frequently
The best options are often formulated early in the sales exploration process, but it is crucial to routinely review options, analyze your business through the lens of a potential buyer, and remain flexible and creative to achieve the ultimate goal of a successful sale. If a business owner is thinking about selling their business, there are certain actions and steps that should be taken early on to present a well-organized and attractive business, ready to sell to potential buyers.

For example, owners should attempt to discover and resolve or correct any issues with their business before it goes to market, including capitalization issues, deficiencies in corporate books and records, or potential noncompliance with applicable laws and regulations (including, for example, employment laws and privacy and data security laws). They should also facilitate the buyer’s due diligence by providing a fully completed, well-organized, and complete data room for legal and financial due diligence. Due diligence for buyers before they go to market, such as obtaining a Phase I environmental assessment for existing properties or a quality of earnings report, can help streamline the process, as can reviewing and resolving any issues with the company’s corporate documents and material contracts.

To minimize the perception of risk and build trust with a potential buyer, owners should consider obtaining audited financial statements and ensure that they have fully executed and recorded complete copies of all contracts. Potential sellers should also ensure that they have taken appropriate steps to document ownership and adequately protect their company’s intellectual property and comply with all applicable laws and regulations.

Listing a business that is well-established and has no known issues ensures that you receive the highest purchase price with the fewest strings attached (e.g., smaller deposits with shorter terms, fewer specific indemnities, etc.).

Continuously increasing business value
Don’t delay operational improvements during the exit process and always keep in mind market expansion, product innovation needs, sustainability and transformational opportunities. Similarly, many potential buyers, especially financial buyers, want to invest in great management teams, so it’s crucial that business owners commit to building a strong team around them to maximize value in the sale process.

Many owner-operators who have built great companies make the mistake of being too important to the continued success and growth of the company (e.g., being responsible for all innovation, “owning” all the key customer/vendor relationships, etc.). On the other hand, owners who build and empower talented management teams tend to be more successful at maximizing value in the sale. In addition, it is crucial to implement a framework to ensure that your team is in sync with you during the sale process and beyond.

It will also be important for the seller to identify any working capital issues. Depending on the structure of the deal, most buyers will require sellers to provide a normal (based on the company’s recent financial history) amount of working capital at closing with an adjustment to the purchase price if the amount of working capital actually provided at closing differs from this normal amount. As a result, sellers should manage their working capital to avoid a shortfall that results in a negative adjustment to the purchase price.

Collaboration with experienced advisors and conscious action
The owners should include an investment banker, an M&A attorney (as well as an estate planning attorney), and an accountant who can help them navigate the complexities of the exit process and create an exit structure that maximizes value.

When selling a business, every seller will need to consider what key terms of the deal are important to them. These key terms will naturally include the purchase price, but they will often also include things like the seller’s role in the business post-closing (if any), the ability to “roll over” a portion of the transaction proceeds back into the business post-closing for a “second bite,” the extent of the permissible non-compete restriction, and the like. While it’s important to consider what your key terms are, it’s equally important to clearly communicate these key terms to the buyer early in the process. Clearly defining (both internally and externally) these key terms will help avoid discrepancies that could ultimately kill the deal.

It’s also important to negotiate a solid and well-considered Letter of Intent (LOI) early in the process. A seller will never have more leverage at any point in the sale process than at the LOI stage (before the buyer begins due diligence). Once the LOI is signed, that leverage reverses. Therefore, the seller should work closely with its advisors to negotiate an LOI that includes all the key terms of the deal that are critical to the seller (and that means engaging a skilled M&A attorney before negotiating the LOI, not after it’s signed).

By following these tips and looking to the future with an exit mindset, you can increase your chances of planning and executing a successful exit.

Eric Tanck is a partner in the M&A and Corporate Transactions group at Nixon Peabody. He focuses his practice on commercial and corporate law, with a particular emphasis on mergers and acquisitions, commercial transactions, and business formation, financing, and development.

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