First of two articles.

If someone came knocking on your door today with an attractive offer for your business, would you be prepared for a sale?

Improvements in the economy are taking hold, and many potential buyers — other companies as well as private equity firms — are now actively seeking opportunities to deploy idle cash. At the same time, many owners of closely held companies are seeing their business return to prerecession valuations. Owners who were unwilling to consider a sale during the past six years as a result of depressed values are now unwilling to risk another protracted downturn—and are thus more receptive to an offer.

But when that offer comes along, will you be prepared for it, both financially and emotionally?

In this two-part series, we’ll address how to put yourself in the best position possible before a buyer comes knocking, looking at it from both the business side (the science) and the personal, emotional side (the art).

The first thing to understand about the science of business owner preparedness is that it’s not enough for you simply to want to sell your company. You also need to proactively position your company for a sale.

[caption id="attachment_92509" align="alignleft" width="192"] Jay Silverstein[/caption]

“For the unprepared, when an offer shows up in the form of a letter of intent, many options and opportunities to plan are no longer available,” said Jay Silverstein, a partner with the accounting firm Moss Adams LLP who specializes in working with business owners contemplating a transaction. “For example, there are a number of strategies that can be employed in advance of a transaction to reduce the business owner’s income and estate tax burden. These strategies become less advantageous and more risky the closer you get to the transaction.”

Too often, Silverstein added, “business owners sign a letter of intent for the sale of their business prior to doing the analysis to determine how much cash they’ll receive from a transaction after taxes, debt, and expenses. At that point they’ve lost much of their leverage. Performing this analysis ahead of time puts them in a much better position to structure the deal in a tax-advantaged way and increase their net cash.”

Preparation also often translates to a higher selling price, a shorter due diligence period, and an opportunity to structure the deal in a way that works for you. But being proactive means dedicating time and resources in advance of a deal. In fact, time is your most valuable friend. It allows you to find and fix weaknesses in the business before a potential buyer discovers them. It also helps you anticipate and understand what you personally need financially out of the deal to maintain or enhance the lifestyle you desire. (More about this in part two of our series.)

Sell-side due diligence is another key step.

[caption id="attachment_92510" align="alignleft" width="192"] Luc Arsenault[/caption]

“To maximize enterprise value, sellers (both privately held and private equity–owned) are increasingly hiring third-party specialists to perform sell-side due diligence,” said Luc Arsenault, a partner at Moss Adams who leads the firm’s transaction services practice. “It provides a number of advantages, from tangible benefits such as the increased precision of recurring earnings of the enterprise to intangible benefits such as acceleration of the deal process.”

[caption id="attachment_92511" align="alignright" width="173"] DJ Drennan[/caption]

DJ Drennan, a partner with the law firm Spaulding McCullough & Tansil LLP, added, “Buyers conduct due diligence to, among other things, assess risk associated with the acquisition. The risk is then priced into the deal, by ‘retrading’ prior to closing, indemnification after closing, or both.”

Sellers who perform sell-side due diligence in advance, Mr. Drennan added, can mitigate potential purchase price adjustments, shorten the due diligence process, reduce transaction risk, avoid surprises, and increase a buyer's confidence and willingness to pay on the high end of their range.

Sell-side legal due diligence allows a seller to "clean up" any gaps. Do the documents accurately reflect legal ownership of the company? Do any equity compensation or bonus arrangements need to be memorialized? Do the documents demonstrate that key assets are owned by the company? Are key customer and supplier arrangements evidenced by contracts? Are there any shareholder loans or other related-party transactions?

Financial due diligence is also important. Are your financial statements complete and accurate? Has the quality of earnings been assessed? Are there nonrecurring items? Are the liens accurately reflected in Uniform Commercial Code or other filings? Is the financial information well organized?

[caption id="attachment_92512" align="alignright" width="192"] Lois Lang[/caption]

Another key question to consider: How prepared is your management team for a transition? Lois Lang, a partner at Evolve Partner Group, which specializes in business succession planning, said it’s worth ensuring that your team has solid executive employment agreements that incentivize them to stay and perform following the transition. You want to be able to show prospective buyers that they’ll have a stable, knowledgeable talent base to help drive revenue growth.

“As a result,” Lang said, “it’s worth asking yourself: Do you have a good track record of performance evaluations to show them? Do you have a competitive compensation system and history of talent development? Do your key executives need coaching so they can play in the sandbox better? This is a great time to take a close look at your team’s strengths and weaknesses — in innovation, accountability, benchmarking, and interpersonal relationships. An executive coach can work with you to assess your team and help each member achieve his or her full potential.”

It's understandable that you’ll lean on your accountant and attorney during this process, but one of the greatest stumbling blocks to a successful sale is an uncoordinated, inexperienced team of advisers. While your CPA may be great for your financial reviews and oversight with your CFO, many of them have limited experience with sale transactions. The same holds true for your attorney and management consultant.

Find a group you can trust — one capable of providing you with the highest return for the sale of your biggest personal asset. Find out: How well does the team work together? How many sales have they assisted with? Why should you use a team versus piecing together advisers? Can they give you references to call? What strategies do they use to help you get a fair value for your business? How do they structure their fees?

The next several years will provide a great opportunity for you if you’re seeking a transaction. Being proactive in advance of an offer helps you understand and build the value of your business, prepare for your personal financial security, and take steps to reduce income and estate taxes.

So that’s the science of business owner preparedness in advance of a transaction. What about the art? In my next article, I’ll look at the personal and emotional issues surrounding the sale of your business and what it means for the next phase of your life....

John Whiting advises business owners on the transition from active management of their company to financial independence and creates personal financial plans for individuals and families. You can reach him at 707-535-4167 or john.whiting@mossadams.com.