Carried Interest: Sell your business the Private Equity Way

Carried Interest: Sell your business the Private Equity Way

A reader asks: In the next six months I'm going to try and sell my business. As a private equity investor can you suggest things I should do to prepare?

Here are my Top Ten suggestions (and I'm sure fellow readers can add others):

1. Hire advisers who buy and sell businesses for a living. Yes, they'll charge a lot more than Fred who does your tax return, or the neighbourhood lawyer who sold your house, but it will be money well spent.
2. Dividend out all excess cash well before the sale process begins. Smart buyers will always go after the cash sitting in your business.
3. Try to resolve outstanding or pending litigation. It may even be worth taking a financial hit to remove litigation which could scare off potential buyers or result in a tough warranty/indemnity/escrow regime.
4. Address leadership succession issues well before the sale process begins. No smart investor wants to buy a business from a retiring founder. (See my previous post on this topic).
5. If your inventory controls are loose, complete a professionally supervised stock take. Your goal is to build buyer confidence, and that means avoiding surprises.
6. Make an effort to collect overdue debtors. It's unlikely that the buyer will pay for accounts receivable which are dated (depending on your industry, this typically means 90+ days).
7. Sell obsolete or slow moving inventory, as well as any surplus assets. Again, the buyer probably won't give you value for these, so try and monetise them before you start marketing your business.
8. Remove those embarrassing “personal" assets from the balance sheet. Come on, you know what I'm talking about. Your daughter's computer, the boat you never used for customer sales events, the car you ex-wife drives . . . time to clean it all up.
9. Ensure that property leases are arms-length. Buying a company where the seller is also the landlord is an uncomfortable, but common, situation. If your company's buildings are sitting in the family trust, at least put in place a proper lease on typical market terms.
10. Run a competitive sale process. As a private equity investor I hate to admit it, but I've rarely seen an exclusive sales process which generated the best possible financial result for the seller. Getting an offer from several buyers will not only almost always drive up the sale price, but it may also give you a range of different transaction structures to consider. I've seen situations where a seller went into a process expecting one outcome ("I'm selling out to the highest bidder and retiring") and ended up choosing a totally different structure ("I'm selling half my stake and staying on for five more years").

July 16, 2010 in Private Equity Education | Permalink

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