By John Seasholtz, Seasholtz Consulting

Small companies that are confronted with the possibility of a merger or acquisition may not have the luxury of an investment banker at their disposal. As a result, a small company's controller may need to wear many hats during this complicated process.

As the controller, you will need not only to provide the critical financial information required during the courting process, but you may be asked also to lead discussions with a potential buyer, provide strategic advice to your management, or even help employees transition to the merged company. Follow these guidelines to meet the challenges that accompany the sale of a small company.

 Note   This article applies primarily to small, privately held companies. If one or both parties in a potential sale are publicly traded, the transaction is subject to U.S. Securities and Exchange Commission regulations that are not covered within the scope of this article.

Key tasks that you may be asked to lead

As your company's controller, you may be asked to take the lead on much of the work surrounding the sale of your company. Be prepared to handle the following key tasks during the merger or acquisition of your company.

1. Screen the buyer

Your company's management team may ask you to assess your company's strategic and financial fit with the potential buyer. Considerations might include the following issues:

• Does the potential buyer have a sustainable business model?
• How does your company fit into the potential buyer's business model?
• Does the potential buyer have adequate resources to finance a deal?
• Has the potential buyer conducted other deals successfully?
• How does your company's culture mesh with that of the potential buyer's culture?

2. Gather due diligence data

The potential buyer will want to investigate and evaluate your company's past performance and future projections. You may be asked to provide a comprehensive list of company information, which might include the following:

• Finances   Provide current, historical, and projected (pro forma) financial statements, including balance sheets, income statements, and statements of cash flow.
• Stakeholder and incorporation information   Identify your company's stakeholders, and provide the articles of incorporation, bylaws, relevant business licenses, and capitalization table.
• Customers and contracts   Provide information about your company's ongoing revenue streams that will need to be transferred after the sale, including a customer list, dollar amounts per customer, and profitability per customer. You may also be asked to provide a detailed sales pipeline and forecast of sales. The potential buyer will likely investigate your sales pipeline to determine whether it supports the sales numbers in your projected financial statements.
• Human resources  Human capital is often considered the most important resource in a company. Provide a list of key employees and their professional experiences. Document employee compensation, including salary, benefits, bonuses, and stock options.
• Intellectual property (IP)  IP is an increasingly important asset, especially within the high-tech industry. You may need to document company patents, trademarks, and copyrights and verify that IP rights can transfer to the buyer.
• Inventory and assets   Provide a list of your company's inventory and tangible assets, such as equipment, buildings, computers, software licenses, and furniture. Explain how these assets are tracked, and provide proof that your company has a clear title to all documented assets.

3. Review deal terms, and advise management

If a potential buyer makes a formal purchase offer, you may be asked to evaluate the terms of the offer. Considerations might include the following issues:

• Structure   Will the deal be structured as an asset sale or a stock sale? What impact will the proposed sale have on taxes and other financial issues?
• Valuation  Is the valuation that is placed on your company fair? Was the valuation calculated by using income, market, asset, or another valuation method? How does this valuation compare with recent sales of comparable companies in your industry?
• Payment   What is the form of payment for purchasing the company (for example, stock, cash, or notes)? Is this payment contingent on future performance (earn-out agreement)? Is there an installment plan for payment?

4. Help transition to new owner

If the deal terms are accepted by your company, you may be asked to assist in the transition process. Transitioning tasks might include the following:

• Reconciling accounts   Work with the buyer's finance team to discuss your company's previous accounting policies and to merge accounting records.
• Employee transition   Inform employees about how their jobs will be transitioned. You may need to participate in employee layoffs or communications about changes in compensation and benefits.
• Transfer logistics   Assist in the transfer of assets, inventory, or IP to the buyer. This may include canceling, renewing, or amending contracts or leases; moving your company to a new location; or coordinating an auction for unwanted assets.
• Postmerger task force   Participate in a postmerger task force that includes members from your company and the buyer's team. This task force should address cultural differences between the two companies and solve operational and process problems.

Typical challenges

Selling a business can be a complicated and emotional transaction. As a potential leader in the evaluation and due diligence process, you may encounter some of the following challenges:

• Time constraints   You may be pressured to make the due diligence process and information transfer move at a lightning pace.
• Organization problems   Often, the requested due diligence information resides in disparate systems, making it difficult to gather and compile the necessary data.
• Financial restatement   In some cases, a company will practice accounting policies that don't mesh with the policies of the buyer. This can cause problems because the buyer needs to analyze the projected financials of a combined entity. Some accounting policies that small businesses might use might trigger restatement that include the following:
  • Cash-based accounting   Your small business may use cash-based accounting, whereas the buyer would prefer to see financial statements that use accrual-based accounting.
  • Minimizing income for tax purposes   This can understate the real earnings that your company can contribute to the combined entity. Financials may need to be restated by using market-level information — for example, market average salaries, and eliminating avoidable expenses such as executive perks.
  • No independent audits   Small companies might not have their financial statements audited on a regular basis. The buyer may require that several years of financial records be audited by an independent accounting firm.
• Poor communication   It's possible that your counterpart on the buyer's side will not be open about concerns uncovered during due diligence, thus delaying tough discussions until later in the process.
• News containment   Particularly in smaller companies, the rumor mill can get started early. News of a potential merger or potential acquisition can hurt employee morale and cause a significant distraction, negatively affecting company performance.
• Contract issues   Some contract issues may complicate a transfer to the buyer. For example, customer contracts may require a special assignment clause in order for the contracts to be legally assigned to a new owner. If this clause doesn't exist in the current contracts, customers may need to sign a new contract that has different terms. Look out for other potentially sticky issues in employee contracts, union agreements, and exclusive supplier contracts.

Recommendations

Follow these tips to help lessen the challenges that you may face during a company sale:

• Create a due diligence team   Gather a team of key players that can help with the complicated details of the due diligence process. This team may include your accountant, attorney, or business consultant. A helpful addition to the team may be someone who is not involved in day-to-day operations, but is a person who understands the history of the company and its culture, such as a company founder.
• Establish a project plan   Your project plan should identify key responsibilities and milestones for deliverables. Assign tasks from your plan to each team member, and monitor when each task is completed.
• Continue to operate normally   If rumors about a sale spread, your employees may become worried about job security. If necessary, have a frank conversation with your company's employees about the potential sale. Encourage them to keep the company operating at its peak during the sale process.
• Keep an open dialogue with the buyer   Develop a strong working partnership with your counterpart on the buyer's team. Work together to establish key milestones. Ask questions about any due diligence requests that aren't relevant to you or that use unfamiliar terminology or processes.

If you are asked to be an active participant in the sale of your company, take a structured approach to the due diligence process and develop contingency plans to deal with potential pitfalls that may jeopardize the deal. Whether or not the sale goes through, you may be surprised about how much you learn about your company's strengths and weaknesses. What you uncover may help you strengthen your company's position.

About the author   John Seasholtz is the founder and principal consultant of Seasholtz Consulting, Inc., in Seattle. Seasholtz Consulting provides strategic and operational planning services to clients in the consumer products, high-tech, financial services, and retail industries.