take particular care to understand whether the contract will require the consent of the other party in the context of a potential sale, or whether a potential sale will result in a loss of your rights under the agreement, and try to address these concerns before beginning discussions with buyers.
All too often, privately held businesses (large and small) are embarrassed when the time comes for them to share their financial statements with a potential acquirer. The problem isn’t so much that the financial statements make them look bad or that they look too good, but rather that they simply don’t always reflect the results of the business if it were to be run by a neutral party. The business may be paying for personal expenses of the founders, or it may be accounting for costs of the business in a manner more related to tax positioning than an effort to cause the financials to accurately depict the business’s operations. Certainly, accounting and tax rules can differ, but for a buyer to properly evaluate the results of an operation it really needs to have transparency and an understanding of how the business has been run. For most buyers of any meaningful size, this means they want to see a target’s financial statements to be prepared in accordance with generally accepted accounting principles (GAAP). Note that the GAAP financials of a target don’t necessarily need to be audited — depending on the size of the operation that may be an unnecessary expense — but they should be reviewed by an outside accountant if the intent is to give a buyer comfort that the financial statements are reliable.
THIRD ACT: TRY TO HAVE AN OUT-OF-BODY EXPERIENCE.
This one is tricky. Much like the realtor’s effort to stage my home, the savvy seller will want to conduct a thought experiment and put herself in the position of an acquirer. With that perspective, she should consider two questions. First, what problem is the potential acquirer trying to solve in its own business by making an acquisition? If the seller can identify something that the buyer (or better yet, a class of buyers) needs, then the seller can use that information to position itself as a solution to the buyer(s) problem(s). Make no mistake, this is a difficult task. But the seller that achieves this feat will be rewarded by having significant leverage in negotiations with the potential buyer. Second, what problems will the potential acquirer find in the seller’s business and strategy? In some businesses, these problems consist of customer or supplier concentrations (e.g., a substantial majority of the seller’s products are sold to a single customer — or the seller is troublingly dependent upon a particular supplier in order to make and sell its products). In other businesses, these problems consist of internal difficulties (e.g., a fractious shareholder, former partner or disgruntled former employee). Your buyer will not want to purchase a problem — and so may discount the value of your business significantly if these or similar problems present. The clever entrepreneur will scour her business for these pitfalls and address them before approaching buyers.
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