Review the assigned article, "Keeping the Sale of Your Private Company on Track." What are the common preparation mistakes sellers make in preparing to sell their company? Which one of those mistakes is most likely to be fatal? Explain your answer.

More than ever, financial executi\'es play ci key role in preparing the company for .in M&A transaction, both in the pre-transact!on stage and in keeping tlifdfalon track. From the seller's side, a multitude of events can derail a potential deal, even though the seller has given strict attention to the preparations leading up to the transaction from selecting the team (investment bankers, certified public accountants and lawyers); to deciding on the strategy and timeframe; to identifying potential buyers; to preparing the marketing document, the Confidential Information Memorandum; to preparing for due diligence; and executing the game plan. Once the seller has assembled the M&A team, conducted an internal presale legal audit and pulled together the "good, the bad and the ugly" in a detailed Confidential Information Memorandum, the seller is ready to start contacting potential buyers. To maximize the selling price, however, the seller must take certain strategic and re-engineering steps in order to build value in the company and to avoid the common mistakes made by sellers. To properly re-engineer and position the company for sale, hard decisions need to be made, and certain key financial ratios need to be analyzed in critical areas, such as cost management, inventory turnover, growth rates, profitability and risk mitigation techniques. The following are a sample of the common preparation mistakes sellers make in getting ready to sell their company: Being Impatient and Indecisive V Timing is everything. If a seller seems too anxious to sell, buyers will take advantage of the seller's impatience. Sitting on the sidelines too long, on the other hand, can close the window of opportunity in the market cycle to obtain a top selling price. Telling Others at the Wrong Time Again, timing is critical, 11 liie seller tells key employees, vendors or cusapril 2007 Keeping the Sale of Your Private times that it is considering a sale too early in the process, these entities may abandon their relationships with the seller in anticipation of losing their jobs, their customer or supplier, or from a general fear of the unknown. Key employees, fearful of losing their jobs, may not want to chance to rely on an unknown buyer to honor their salaries or benefits. A related problem for closely held companies (or If one person owns 100 percent of the shares), is how to reward and motivate key team members who may have contributed over time to the company's success and will not be participating in the proceeds of the sale at closing. It is critical that their interests are aligned with the seller's, and that they work hard and stay focused on getting to the closing table. A bonus plan or liquidity event participation plan can be an effective way to bridge that gap. This will allow those key employees to participate in tlie success and share in the proceeds at closing without owning equity in the seller's company. Company n Track Andrew J. Sherman doors and customers will want to protect their interests, too. Since key employees and strategic relationships may be items of value in the sale, the buyer may count on their being around after closing the deal. If the seller waits too long and discloses news of a sale at the last minute, employees may feel resentment tour being kept out of the loop. Also, key customers or vendors may not have time to react and evaluate the impact of the transaction on their businesses, or, where applicable, provide their approvals. Retaining Third-Party Transactions with People the Seller Is Related To II there are regulations that will not carry over to the new owner, these ghost employees and family members should follow the seller out the door once the deal is secured. have to contend with their demands after the sale. Very few buyers will want to own a company that still has remaining shareholders who may present legal or operational risks. It's akin to the real estate developer that needs 100 percent of all of the lots in a development to agree to sell before proceeding with its plans a lone straggler or two can bii-ak tlu- deal. Forgetting to Look in Your Own Backyard In seeking potential buyers, a seller should look for those who may have a vested interest in acquiring control of the company, such as key customers, employees or vendors. Deluding Yourself or Potential Buyers About the Risks or Weaknesses of the Company Purchase minority shareholder interests so that a new owner won't A seller's credibility is on the line; a loss of trust by the potential buyer usually means that he or she will walk away from the deal. wwwfei.org April 2007 ) financial executive 41 Trying to Save on Legal Fees by Not Keeping Legal Counsel Informed One of the main duties of the seller's legal counsel is to negotiate the purchase documents, including the representations and warranties, and assist the seller in drafting disclosure schedules. If a seller's legal counsel does not have all the inforn:iation, he or she can provide only limited assistance. Given that most sellers do not fully understand the legal language in the representations and warranties of the purchase agreement, the effort to save legal fees by not keeping legal counsel informed may result in a breach of representation and warranty for a lack of disclosure. This usually means that the seller will be paying much more in indemnification payments than the dollars he or she saved in legal fees. Additional Issues for Sellers To Consider In addition to the early preparation steps, several other-r issues can make or break a deal, and it's in the seller's interest to give consideration to such issues. Among those: expenses {expensive car leases, country club dues, etc.) and exclude nonworking family members. Recasting presents the financial history of a business in a way that buyers can understand. It translates the company's past into a valuable, saleable future, and it allows sophisticated buyers the opportunity for meaningful comparisons with other investment considerations. Sellin The price that a buyer may be willing to pay depends on the quality and reasonableness of the profit projections that the seller is able to demonstrate and substantiate. The profit-and-loss statement, balance sheet, cash flow and working capital requirements are developed and projected for each year over a five-year planning period. Use these documents, plus the enhanced value of the business at the end of five years, then calculate the discounted value of the company's future cash flow. This establishes the primary economic return to the buyer for his/her acquisition investment. The Importance of Recasting Privately owned companies often tend to keep reported profits and thus, tax obligations as low as possible. Thus, financial recasting is a crucial element in understanding the real earnings history and future profit potential of a business. Since buyers are interested in the real earnings of a business, recasting shows how the company would look if its philosophy matched that of a public corporation, in which earnings and profits are maximized. As part of the Confidential Information Memorandum, a seller should recast the company's financial statements for the preceding three years. For example, adjust the salaries and benefits to prevailing market levels, eliminate personal It is critical to prequalify potential buyers, especially if a seller contemplates a continuing business relationship after closing the deal. Thus, the buyer must demonstrate the ability to meet one or more preclosing conditions. These include availability of financing, n viable business plan for post-closing operations (especially if the seller will bo receiving part of its consideration in the form of an earn-out) or a demonstration that the post-closing efficiencies or synergies are bona fide. It's necessary to take the time to understand each potential buyer's post-closing business plan, especially in a roU-up or consolidation, where the seller's upside will depend on the buyer's ability to meet its business and growth plans. Once a seller has decided to sell the company, it is time to execute. The process of selling the company takes energy and demands time. In order to ensure success, a shrewd seller will want to listen to the perspectives of each of the professionals on his/her team to weigh the risks versus the goals of the transaction. The first team meeting should be used to develop an action plan, including drafting the Confidential Information Memorandum and identifying the seller's goals in the context of market realities. The open flow of information among team members is critical, and shortcuts in the planning stages can be costly. Further, the temptation to not disclose negative information to the buyers with the strongest prospects should be avoided. The preparation stage that occurs after the M&A team's first meeting is the time to take care of corporate matters and issues that may later surface and derail what could have been a successful deal. ANDREW J. SHERMAN (ShermaitA@dick steinshapiro.com) is a Partner in the Washington. D.C.. office of Dieksteiti Shapiro LLP. Adjunct Professor in MBA programs at the Universiti/ of Maryland and Georgetown University ami fouiuier of Grow Fast Crow Right (i(mm\grou'fastgroujright.com). He is author of 17 books, including Mergers and Acquisitions: A Strate<;;ic and Financial Guide for Bmjer$ and Sellers, by AMACOM, 1998 and 2nd edition in 2005. TAKEAWAYS The CFO role in preparing a company for and M&A transactions has grown, both in the pre-translation stage and in keeping the deal on track. A first step as a seller is to assemble an M&A team that includes investment bankers, CPAs and legal counsel with M&A expertise. Many mistakes in the preparation stage can derail a potential deal. One of those IS deluding yourself or potential buyers about the risks or weaknesses of the company Also key is to prequalify the buyer, especially if the seller plans on a continuing business relationship after closing the deal. 42 financial executive 2007 www.fei.o