Key Takeaways

• Early Planning and Governance: A successful sale requires assembling a core internal team of key executives early in the process, engaging experienced legal, accounting, and financial advisors, and ensuring active board oversight to fulfill fiduciary duties and manage conflicts. Companies should also carefully negotiate investment banking engagement letters, if applicable, before signing.
• Due Diligence Preparation Reduces Execution Risk: Sellers should conduct thorough internal diligence before going to market to identify and address issues that could impact the sale and set up a secure, well-organized virtual data room. Commercially sensitive information should be disclosed in stages, with proprietary data shared only as buyers advance in the process.
• Proactive Approval Management Avoids Delays: Many transactions require government, including foreign, approvals that can affect closing timing, so applicable regulatory regimes should be identified early. Sellers must also plan for board and stockholder approvals at key stages, ensure compliance with legal notice and voting requirements, and be prepared to secure material third-party consents at the appropriate time.

A successful sale of a company represents the culmination of years of hard work and vision, yet the path to closing is often a demanding and intricate journey marked by high-stakes negotiations, complex due diligence, and the resolution of numerous business and legal issues. Our team brings deep experience and a proven track record in guiding clients through every stage of the M&A process, ensuring that strategic objectives are achieved while navigating the challenges that inevitably arise along the way. Drawing from this experience, one of the most impactful things a seller can do to protect value and maintain leverage throughout a transaction is to prepare early and thoroughly.

Below we have outlined a brief, initial preparation roadmap for companies considering a sale, with a focus on reducing execution risk. 

Transaction Planning and Governance

Corporate Governance: Board oversight is essential throughout the sale process to ensure directors fulfill their fiduciary duties and manage conflicts. Board and stockholder approvals are needed at key stages of the sale, including prior to consummating the transaction. Pay attention to legal requirements for notice and voting, and keep major stakeholders informed as much as practicable throughout the process to avoid surprise delays at the closing.

Assembling a team (while maintaining confidentiality): Assemble a core internal team early, including key executives, to coordinate efforts and maintain confidentiality. When assembling the internal team, sellers should endeavor to maintain confidentiality to prevent employee uncertainty and avoid operational disruption. Sellers should ideally limit knowledge of the deal to a small circle of senior leaders, informing the broader team only as certainty of closing increases. Engage experienced legal, accounting, and financial advisors to help structure the deal, prepare financials, and support negotiations.

Understanding the Value of Your Business

Whether a seller is running a competitive auction process or responding to an unsolicited, one-off offer from a prospective buyer, it is highly important for the seller to have, at minimum, a general understanding of the value of its business before entering into any transaction discussions. Engaging a financial advisor or investment banker is often one of the most valuable steps a seller can take in this regard. An experienced investment banker can provide a comprehensive valuation of the business using established methodologies and help frame the seller’s price expectations.

Sellers should ideally engage legal counsel, however, before signing an investment banking engagement letter, which can be highly nuanced to the uninitiated.  Counsel can help ensure the engagement letter clearly defines the advisor’s role, structures fees to incentivize results, and provides proper protection around the termination of the agreement (if needed).

Due Diligence Preparation

Getting Your House in Order: Conduct thorough internal diligence before marketing the company to identify and address issues that could impact the sale. Key areas of focus typically include, but are not limited to:

• financials – are they in good order (and ideally audited, particularly for larger transactions)?;
• ownership/capitalization – are capitalization records accurate and up to date?;
• material contracts, particularly key customer and supplier contracts – will any third-party consents be required in connection with the sale (and, if so, are there any concerns with obtaining such consents)? Are the terms of the contracts likely to be acceptable to a buyer?;
• intellectual property and data privacy – are all material IP assets protected and fully owned by the company? Is any data collected from employees or customers properly managed and stored in compliance with applicable law;
• pending or prior litigation – is there a path to resolution and/or a clear narrative explanation for any current or past claims?; and
• employment – are employees and independent contractors properly classified? Are there any concerns about key employee departures?

Establishing a Dataroom: Set up a secure virtual data room with organized, up-to-date documents, including financials, contracts, and corporate records. Restrict access to the data room as needed, and employ protective measures like watermarks and activity tracking to safeguard confidential information. Before sharing any proprietary information, including providing access to the dataroom, with a potential buyer, ensure that a counsel-reviewed confidentiality agreement is in place. Furthermore, sellers should consider staging the disclosure of commercially sensitive information, starting with high-level overviews and only sharing detailed or proprietary data as buyers progress deeper into the process (and perhaps only sharing such proprietary data with a limited subset of buyer personnel).   

Regulatory and Antitrust Considerations

Many transactions require antitrust and other regulatory approvals before closing. Identify applicable regulatory regimes early, and assess potential regulatory risks, ensure compliance, and be aware that sector-specific or foreign investment approvals may impact closing timing.

Risk Allocation

Depending on the nature and size of the transaction, consider requiring buyers to commit to obtaining a representations and warranties insurance (RWI) policy. RWI can protect both parties from post-closing risks associated with breaches or inaccuracies of the statements of fact a target company makes about its operations in the definitive transaction agreement. Sellers frequently include a requirement that buyers obtain RWI as part of any process letter sent to interested bidders.

If you are considering a sale process, please contact the Foley Hoag M&A team for a more detailed overview, including access to our proprietary “Sell-Side Toolkit”.