Successful mergers and acquisitions (M&A) exits have become increasingly difficult to achieve and are taking longer to complete as a result of recent economic headwinds and regulatory constraints. That being said, many private equity funds and strategic buyers still have significant dry powder that needs to be put to use, and M&A outlook is improving. As deal flow picks up, business owners looking to sell should do everything they can to maximize the value of their business and otherwise position themselves for a successful sale transaction.

Planning early and evaluating often

The best exits are often formulated early in the process of exploring a sale transaction, but it is crucial to routinely review your options, analyze your business through the lens of a potential buyer, and remain flexible and creative to reach your end goal of a successful sale. If a business owner is thinking of selling his or her company, there are certain actions and steps that should be taken early on to present a well-organized and attractive company that is ready to be sold to potential acquirors.

For example, owners should attempt to uncover and address or remedy any issues with their business before going to market, including capitalization issues, deficiencies in corporate books and records, or potential non-compliance with applicable laws and regulations (including, for example, employment laws and data privacy and security regulations). They should also make it easy for the buyer to complete its due diligence by providing a fully populated, well organized, and complete legal and financial due diligence data room. Diligence performed for buyers in advance of going to market, such as obtaining a Phase I environmental site assessment for owned real property or a Quality of Earnings report, can help smooth the process, as can reviewing and addressing any issues in the company’s corporate records and material contracts.

In order to minimize the perception of risk and foster trust with a potential buyer, owners should consider obtaining audited financial statements and ensure they have fully executed and complete copies of all contracts. Potential sellers should also ensure they have taken appropriate steps to document ownership of, and to adequately protect, their company’s intellectual property and to comply with all applicable laws and regulations.

Presenting a company for sale that is well-organized, with no known issues, will ensure that you receive the highest purchase price with the fewest strings attached (e.g., smaller escrows with shorter terms, fewer specific indemnities, etc.).

Continuing to enhance business value

Do not delay operational improvements during an exit process and always keep in mind market expansions, product innovation needs, sustainability, and transformational opportunities. Likewise, many potential acquirors, particularly financial buyers, want to invest in great management teams, so it is critical that business owners make a commitment to building a strong team around them in order to maximize value in a sale process.

Many owner-operators who have built great businesses make the mistake of being too important to the continued success and growth of the business (e.g., being responsible for all innovation, “owning” all of the key customer/vendor relationships, etc.). Owners who build and empower talented management teams, on the other hand, are typically more successful in maximizing value in a sale transaction. Further, it is critical to put in place a framework to ensure that your team will be aligned with you through a sale process and beyond.

It will also be important for a seller to identify any working capital issues. Depending on a deal’s structure, most buyers require sellers to deliver a normal (based on the company’s recent financial history) amount of working capital at closing with an adjustment to the purchase price if the amount of working capital actually delivered at closing differs from that normal amount. As a result, sellers should manage their working capital to avoid having a shortfall that results in a negative adjustment to the purchase price.

Engaging with strong advisors and proceeding deliberately

Owners should include an investment banker, M&A lawyer (as well as an estate planning lawyer), and accountant to help navigate the complexities of the exit process and create an exit structure that will maximize value.

In the sale of a business, every seller will need to consider what key deal terms are critical to him or her. These key terms will naturally include purchase price, but often also encompass things like the seller’s role in the business post-closing (if any), the ability to make a “rollover” investment of a portion of the deal proceeds back into the post-closing business for a “second bite at the apple,” the acceptable scope of a non-compete restriction, and the like. While it is important for you to consider what your key terms are, it is equally important to clearly communicate these key terms to the buyer early on in the process. Being clear (both internally and externally) about these key terms will help avoid misalignment that can have the potential to ultimately kill a deal.

It is also vital to negotiate a robust and thoughtful Letter of Intent (LOI) at the outset of the process. A seller will never have more leverage at any point in a sale process than they have at the LOI stage (before the buyer has begun its due diligence investigation). Once the LOI has been signed, that leverage flips. Therefore, a seller should work closely with their advisors to negotiate an LOI that captures all of the key deal terms that are critical to the seller (and this means engaging a skilled M&A lawyer prior to negotiating the LOI, not after it has been signed).

By following these tips and looking ahead with an exit-focused mindset, you can increase your chances of planning and executing a successful exit.

Eric Tanck is a partner in Nixon Peabody’s M&A and Corporate Transactions group. He focuses his practice on business and corporate law matters, with an emphasis on mergers and acquisitions, commercial transactions, and the formation, financing, and growth of business enterprises.