I once asked a corporate lawyer - a veteran of hundreds of company sales - what percentage of the time the sale price of a company gets discounted between when the buyer and seller sign a letter of intent (LOI), and when the deal actually closes .
The lawyer looked at me thoughtfully and, after a moment of reflection, asked, "Is there a number higher than 100 per cent?"
The reason so many companies get discounted in the due diligence period is that the seller usually has to sign a "no shop" clause when accepting an LOI from a buyer. This lets the buyer know the seller is committed to getting a deal done and has given up any leverage they had when multiple bidders were vying for the company.
For his thoughts on how to protect your company's value during a sale process, I spoke with Peter Lehrman, the founder & CEO of AxialMarket, an online marketplace serving buyers and sellers of private businesses.
Mr. Lehrman's first four suggestions for expediting the diligence process include creating customer contracts that survive a change of ownership, nurturing "reference-able" customers, aligning your management team and preparing audited financial statements.
Here are Mr. Lehrman's top three suggestions:
1. Disclose the "hair" up front
Every company has some risk factors. Disclose any legal or accounting hiccups before you sign the LOI. For example, don't wait until after you have signed an LOI to let the potential buyer know that a former employee is suing you for wrongful dismissal.
2. Negotiate down the due diligence period
Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You may be able to negotiate this down to 45 days—perhaps even 30 with some financial buyers—so include in your negotiations with the buyer a discussion on the length of diligence. At the very least, you'll alert the acquirer to the fact that you're not willing to see the diligence drag out past the agreed-to close date.
3. Make it clear there are others at the table
Clearly but respectfully communicate that there are a number of interested parties at the table. Explain that, while you think the acquirer's offer is the strongest and you intend to honour the "no shop" agreement, there are other interested parties and that those relationships will be rekindled in the event the buyer starts to negotiate in bad faith.
Taking all seven steps will help you protect the value of your business as the balance of power in the negotiation to sell your company swings from you to the buyer.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company.