Preparing your company for sale.

MY LAST TWO COLUMNS ADDRESSED preparing for an initial public offering (IPO) and the process involved when a company decides to go public. While an IPO is a logical step for some, many business owners determine that going public is not the best strategy for them. However, monetizing the value created in their company remains an important objective. In this instance, one viable alternative is selling the company to a third party. This month, I outline my recommended strategies for preparing to sell your company.

Selling your company--or selling anything--is about properly exhibiting its attributes. Advance preparation can help maximize the value of the company at the time of sale. If you are considering selling your company, taking the steps suggested in this column will save you a great deal of stress. At the same time, it will position your company for a positive and successful outcome.

Get your financial statements in order. Financial statements and management reports best describe a business. Audited financials allow the buyer and its advisers to understand exactly what is being purchased. It is commonplace for the buyer to hire an accounting firm to confirm what is reflected on the audited statements, so you should be prepared. I recommend having your company's financial statements audited well in advance of planning to sell your company.

Develop management reports. Building a set of management reports that describe how the business is organized will help you explain your business to potential buyers--while helping you manage it better in the process. These reports should be structured to provide a profit-and-loss (P & L) statement by division and by product within those divisions. Allocating expenses to the appropriate divisions and products demonstrates the control management exercises over the business.

Create a business plan. It is understood that prospective buyers will be focused on what your company has achieved in the past--but they will also be focused on the future. Building a case for future growth and profitability will help increase the value of your company to a buyer.

I recommend developing a detailed business plan when preparing to sell your company. A two-year business plan, which includes the current-year budget and a plan for the following year, is sufficient for purposes of marketing a company. If you can develop a plan for a third year with a reasonable level of confidence, include that as well. The business plan should be thorough, clear and well thought-out, including assumptions, and should follow the format of your management reports.

Understand your tax options. As a general rule, buyers prefer to acquire the assets of a company--especially a private company. This is often driven by the buyer's desire to avoid inheriting potential liabilities that may accompany the purchase of the stock of a company. Buyers also prefer to buy assets, as they can usually write up the value of the assets for tax-depreciation purposes.

On the other hand, sellers generally prefer to sell the stock in the company in order to qualify for capital gains treatment on the sale of the stock and to avoid being left with the corporate shell and potential liabilities of the corporation.

It is important to recognize that while selling assets, in an S corporation a seller can avoid one level of tax, selling assets in a C corporation may involve double taxation for the seller. Under certain circumstances, the Internal Revenue Service (IRS) allows the parties to elect to treat a stock sale as a sale of assets, which may allow both parties to accomplish some of their objectives. You must understand the tax basis in the stock and the assets of your company. If you don't know this information, you may have difficulty understanding a bid received from a buyer. As with the other areas of a potential transaction, you should seek expert advice regarding the tax consequences, because what matters are your proceeds after tax--not the gross price.

Examine outstanding litigation. Outstanding litigation should be thoroughly examined and addressed in anticipation of a sale of the company. As mentioned earlier, many buyers are skittish about taking on the potential liabilities of another entity. Demonstrating that any litigation has been dealt with in a timely and--to the extent possible--expeditious manner will give comfort to prospective buyers that your legal matters have been well-managed.

Keep in mind this is not meant to imply you should settle litigation in a disadvantageous manner; rather, it must be settled in a way that is appropriate to the matter at hand. Unfortunately, if a buyer is asked to take over outstanding litigation, any purchase price reduction determined by the buyer to adjust for this will likely be larger than a seller thinks it needs to be.

Settle employee matters. Employee matters should be in good order when embarking on a sale of the company. Good employee relations--and a track record that proves this to be the case--are a positive attribute for any company. In the context of a sale process, a history of problems with employees may lead to a reduction in the purchase price or, depending on the nature and severity, even the loss of buyer interest.

Focus on your facilities. Corporate facilities are important for a couple of reasons: well-organized and clean facilities are a consideration when determining how the company is managed, and your facilities are a reflection of your company. In this instance, it is important to consider the appearance of your facilities. Are they overly opulent? Conversely, do they appropriately represent the success level the company has achieved? You should also consider any lengthy and expensive leases, which may be costly to terminate if the buyer sees benefits to consolidating operations with its existing business.

Review your technology. A company's technology can be divided into two categories. The first--the technology necessary to run the business--includes things like accounting systems and, in the case of a mortgage bank, a loan origination system or pipeline management solution. This technology needs to be adequate for the company to operate in a well-managed manner; however, it does not necessarily need to be state-of-the-art. A buyer will probably not pay extra for this type of technology and may look to replace it with systems currently in use at its company.

The other type--technology that a company has invested time and money to develop and is unique--is viewed from a different perspective. A company would be well-served to investigate patenting and copywriting this type of intellectual property in order to protect its value. Some forms of legal protection may enhance value to a buyer. For that matter, intellectual-property issues are not limited to the company's technology. Trade names, research and development, and brand names may also require protection through copywriting and trademarking. If you have "trade secrets" you would like to protect, seek advice from an adviser who is skilled in this area.

Hopefully, this column has provided a helpful overview of what's involved when preparing for a sale. Remember: Advance preparation is critical to maximizing the value received. Next month, I will outline the sale process itself, and provide advice on pitfalls to avoid.

Brenda B. White is a principal at Deloitte & Touche LLP, New York. She has been an investment banker to the mortgage banking industry since 1984. She can be reached at [e-mail]. (Note: The views expressed in this column are those of the author and do not necessarily represent the views of Deloitte & Touche.)