Ducks in a Row

Selling a business is typically not an easy decision and the process can be daunting. An awful lot of important decisions must be made well in advance of an attempted sale. How will the company be marketed? In an auction or a targeted sale process? What type of buyer will maximize the value? Is timing important? These and other issues must be confronted up front to achieve an effective sale process.

It is possible that the best buyer for your business will be a public company. Today, public companies are well-heeled, with lots of cash on their balance sheets and a need to show revenue growth to their shareholders. They also have been very active in the energy markets — at least 576 public and private deals were reported in 2012 alone. If a public company is among the universe of potential buyers of your company, you need to get your ducks in a row to maximize that opportunity. Here are some things to consider:

Begin Early

A seller will need to begin the preparation process long before the sale is to actually occur and the first step is to understand the process. It is not unusual for the planning process to take six months to a full year. The seller also can use this planning period to craft the marketing plan that he will use in attracting potential acquirers.

Assemble a Team

Key to understanding the process and developing an effective marketing plan will be the identification of external advisors. An experienced attorney with knowledge of mergers and acquisitions will help to explain the process and develop a timeline. An investment banker with experience in the industry will be invaluable in developing the marketing strategy. Accountants and auditors will play a key role in making sure the company is up to par before the marketing process begins.

Further, a seller will need to identify the internal personnel who will assist in the sale process. The internal team typically includes members of the company’s senior management. The team should be small enough to be efficient and maintain confidentiality but large enough to include individuals who have expertise in the areas that will be important to the transaction. Employees can get nervous when they hear that their employer is going to be sold. A few tools that are used to combat that nervousness are stay bonuses or retention bonuses and change of control agreements. A seller should discuss with his advisor team whether any of these are appropriate for the circumstances.

Perform Due Diligence

Just as a home seller fixes problems with his house before putting the house on the market, a seller of a business should address any “problems” with the company before starting the sale process. Any buyer will perform extensive due diligence on the company to understand its assets, liabilities, employees and business generally. A public company’s due diligence process can be even more intensive, particularly in financial areas.

By performing due diligence of his own, in advance of the sale process, a seller may uncover issues that can be addressed and can take corrective action before a buyer uncovers the same issues and attempts to reduce the purchase price because of them. The fewer issues that a buyer identifies during its due diligence, the smoother the sale process should go and the higher the value that the seller will realize. At a minimum, a seller’s advance due diligence process should cover the following areas:

  • Accounting – A private company that has not undergone an audit of its financial statements should have an audit of at least the past two years performed by an independent accounting firm. An audit will help uncover accounting problems of which an owner might not be aware and ensure that the financial statements are in accordance with generally accepted accounting principles, the basis on which public companies are required to report their own financial statements.
  • Internal controls – Public companies are subject to the Sarbanes-Oxley (SOX) Act, which requires management to assess the effectiveness of internal controls (i.e., processes designed to ensure reliable financial reporting, compliance with laws, and effective operations) and report on the assessment in the public company’s filings with the Securities and Exchange Commission. During the sale process, a public company buyer will consider how difficult it is to bring the private company into compliance with SOX. A seller should perform a SOX compliance audit in advance to understand what needs to be done to become compliant and then take steps to correct the deficiencies in advance of the sale.
  • Contracts – Buyers will review all significant contracts during its diligence process. Before the buyer begins its diligence, the seller should ensure the company has fully executed copies of all contracts. If there are oral arrangements in place, the company should consider formalizing those arrangements in written agreements. Generally, the company should renew any material contracts that are set to expire in the near future. A review of the significant contracts should be performed to determine if the contracts require the third party’s consent to assign to a buyer as a result of the transaction.
  • Human resources – A private company should have the company’s compensation and benefits programs fully documented. This includes bonus and other incentive compensation programs, severance terms, retirement and health and welfare plans, equity compensation programs and any special arrangements with employees. Any employee policies or procedures should be documented in a current employee handbook and reviewed for compliance with the most recent labor and employment laws. If there are any employees who should be subject to non-competition agreements, the company should arrange to execute those agreements.
  • Regulatory and environmental – A seller should know what laws and regulations (including Foreign Corrupt Practices Act, licenses, permits, environmental laws and regulations) apply to the company and confirm that the company is in compliance. All required regulatory filings should be current, and the company should have documentation of those filings. If applicable, a seller should consider engaging a professional environmental firm to conduct a preliminary site assessment to determine any potential environmental liabilities.

Other areas of due diligence will vary based on the company and its industry but might include areas such as intellectual property, litigation, insurance, taxes and real estate. A seller should be prepared to disclose to the buyer any issues that the seller uncovered and/or corrected during his due diligence process. A public company buyer will appreciate a seller who was proactive in addressing issues before the sale.

Full Disclosure

Another consideration if your buyer is a public company is disclosure. Selling to a public company may not be right for every private company. While public companies may have easier access to capital that can be used to purchase and grow the business and experienced management teams and talented personnel who can help the business succeed, public companies also must abide by Securities and Exchange Commission rules that may require public disclosure of the material terms of the transaction. Therefore, if privacy of the terms of a transaction is important to a seller, a public company may not be the right buyer. A seller should understand in advance if the public company buyer’s shareholders must approve the transaction. In such a case, the public company will have to file a proxy statement in which it is required to disclose the background of the acquisition, including the history of the negotiations between the buyer and seller. Further, if the terms of the transaction will have to be disclosed, a public company buyer may be less flexible on those terms as it may not want to set a precedent for other sellers to use against it in future acquisitions. It is wise to get an understanding of the public company’s process beforehand and how long it will take the public company to complete the transaction.

The preparation process can be long and arduous. It is hard on management to run a sale process and perform the day-to-day business duties required to generate the strong financial results that ultimately make a sale possible. But good things come to those sellers who get their ducks in a row. A seller that does his or her homework in advance should be paid off with a smoother sale process and, more importantly, a higher purchase price.

Megan L. Mehalko is the chair of the corporate and securities practice group and a member of the executive committee at Benesch Friedlander Coplan & Aronoff LLP. She can be reached at Carrie A. Benedict is an associate in the corporate and securities practice group at Benesch Friedlander Coplan & Aronoff LLP. She can be reached at

Corporate Head Office

Energy & Mining International
Cringleford Business Center
Intwood Road, Norwich, UK,

  +44 (0) 1603 274 130

Click here for a full list of contacts.

North American Office

Energy & Mining International
Finelight Media
207 E. Ohio Street Suite 351
Chicago, IL 60611

Click here for a full list of contacts.

Back To Top