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Unlocking Hidden Business Value: Securing Top Dollar by Giving Full Appreciation to All Available Assets On The Sale of A Private Company

In the midst of a global Pandemic that is devastating to the health of our community and to our economy, the last thing on the minds of private business owners may be the future sale of their company. But while business owners are sheltering safely at home as ordered, they may be wise to consider adopting a longer term view, and evaluating specific steps that would help to position the company for a future, profitable sale.

This Post reviews potential hidden value in the business that the majority owner can bring to table to enhance its sale value, but which may not be reflected on its financial statements. This discussion does not present an exhaustive list, and instead, the purpose is to prompt a review of the company’s existing or potential business assets that may require further development after the Pandemic subsides and business activities are permitted to resume.

Existing Intellectual Property Assets

The sale process for any business will always include a discussion with the potential buyer about the company’s proprietary trade secrets, confidential information and any patents it holds and/or uses in the business. For strategic reasons and concern about public disclosure of its private information, the company may have decided not to apply for patents for any of its work processes, equipment, software or other patentable inventions. As a result, it may be too late for the company to seek patent protection for some of its inventions, but perhaps not others.

During the downtime imposed by the government, majority business owners may want to reconsider their aversion to patent applications. While the legal fees of applying for patents are not insignificant, this sunk cost will almost certainly be more than offset by the value of a patent portfolio. Indeed, including a patent portfolio in the business assets to be sold is likely to add significant value to the purchase price paid for the company. Patent lawyers are working from home, and starting the process of applying for patents can therefore begin now and need not wait until the current social distancing rules are removed.

The Customer List – Valuable Client Data

The existing customer list will also be a key focus of the sale process. On this point, the majority owner can enhance sale value by gaining more knowledge about its customer base. More specifically, a financial buyer will want to know all of the following about the company’s major clients: (i) how long have they been clients, (ii) what volume of products or services do they purchase, (iii) what are the growth prospects of the clients and have they been increasing the volume/size of their purchases from the company, (iv) have the prices been increasing over time of the products and services sold to the clients or have prices stagnated and (iv) are there other related products or services the clients would be interested in purchasing.

The buyer will also be focusing on client concentration, and a business overly reliant on a single client or small group of customers will be perceived as a bigger risk by the purchaser. The owner will therefore want to consider what diversification strategies are possible. Further, if the purchase of the company is through a financial buyer, the purchaser may have other products that can be sold into the same channel of customers. Therefore, gaining information regarding the customer base and providing details to the purchaser regarding the needs, purchase habits and potential buying power of the customer base will be helpful in securing the best price for the company at the time of sale.

The Work Force – Attributes of the Team

The sale of a business is much more than the purchase of bricks, mortar, computers and a customer list. In particular, in the context of a sale to a financial buyer, the purchase will likely also involve the acquisition of a highly functioning team, which may include some top executives, middle managers and front line employees, who will all be integrated into the existing business. These employees may have exceptional value that is not shown on the balance sheet if they have the talent to help grow the existing business.

For example, the purchaser may place significant value on an accomplished sales team, on a successful marketing group who will be able to help ramp-up sales and marketing efforts for the buyer. If these employees are subject to existing non-compete agreements, the purchase will have a greater level of assurance that these high value employees will continue to remain and flourish at the new company. For this reason, the majority owner will want to evaluate whether non-compete agreements are in place, or whether they can be added over time to ensure a stable and successful work force will be an attractive, value-add to any sale by the company.

Consideration of Untapped New Markets and/or Pipeline of New Products

Comedian George Carlin said that “Bullshit is the glue that binds us as a nation.” While that humorous aside may have more than a grain of truth, trying to sell a business based largely on BS is a fool’s errand. Buyers are smart enough to see through smoke and mirrors, and base their purchase decisions and company valuations on business metrics such as revenues, sales history, costs and profits. But savvy business buyers will also pay heed to valid sales estimates or projections that are based on legitimate future business opportunities.

What this means in practical terms is that business owners should develop reliable plans for generating additional revenues and profits from untapped markets and/or from the sale of new products or services. The owner can explain to the buyer that these markets have remained untapped and potential products/services have not been developed and then sold, because they would require significant new capital investment. Examples include sales to foreign markets, sales requiring additional manufacturing capacity and sales that require the company to add large numbers of new employees. There are ways to test market each of these new opportunities and products/services, and if the company can demonstrate the success of new markets, products or services, that is likely to have a direct and material impact on the company sales price.

Conclusion

Business owners need to focus right now on providing inspired leadership to help their companies, employees and also their clients survive an unprecedented human and economic crisis. But entrepreneurs are particularly resilient and always look ahead to plan for a brighter future. When business activities are permitted to resume as conditions improve on the health front, there will be opportunities for business owners to maximize the value from the future sale of their companies. The effort to secure top dollar at the time of sale requires entrepreneurs to think of their business holistically to include and present to the potential buyer all of the hidden value and assets that exist beyond the bare metrics of the company’s financial statements.

© 2020 Winstead PC.

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About this Author

Ladd Hirsch Shareholder Chair  Business Divorce Practice Group
Shareholder

Ladd Hirsch is a solution-oriented trial attorney with more than 30 years experience representing companies and high net worth business clients in complex litigation cases and arbitration matters.  Ladd is tenacious and pragmatic for his clients in both the courtroom and boardroom in seeking results that meet their short and long-term business objectives.

Ladd has extensive experience prosecuting and defending complex business litigation matters, including disputes involving claims for breach of contract, business fraud, violations of fiduciary duties, breach of non-compete...

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