We often tell owners to build their company as if it will last forever, taking no shortcuts and always doing what is best for the long run, and to run it so it could be sold on a moment's notice, even if a sale is not in the cards. Run that way, a company follows best practices, performs at its peak, and gives the owner the flexibility to orchestrate a sale on their own terms when the time comes.
The reality is that owners often do not follow this advice. So when it is time to prepare for sale, or when diligence begins, they may unearth issues they did not know about, problems that cost money or time to fix, or that make the company unsalable, or unsalable at a price and terms that meet their objectives. We call these the unintended consequences of a sale, and surfacing them before or during a process can have serious ramifications.
Because owners are usually unaware of these issues until they appear, hence unintended, the sale process draws unwanted attention to matters that, once known, must be addressed. That might mean professional fees to fix a compliance issue, taxes owed to the IRS or state authorities, environmental remediation, or fines. Discovering an issue is really a heads-up that something must be fixed, whether or not a deal closes, and ignoring it tends to be far more costly later.
This is one of the main reasons we push owners to prepare well in advance, anywhere from three or four months to several years before a transaction. Give yourself a healthy window to deal with these issues, rather than scrambling to fix them mid-sale while also running the company, which is double duty on its own.
Unintended consequences an owner may encounter
Accounting or tax issues that call into question the company's true quality of earnings or its compliance with local, state, and federal tax law.
Fraud within the company, such as a bookkeeper siphoning money, which calls the integrity of controls and systems into question.
Customer and vendor contracts that are not as iron-clad as believed, putting future sales or favorable supplier pricing at risk.
An environmental issue uncovered during a routine Phase I assessment that must be addressed regardless of the deal.
An intellectual property infringement (think Peloton).
Employee retirement plans found to be out of compliance, with costly professional fees to fix.
This is not a comprehensive list; many other issues can surface as an owner prepares for or enters the early stages of a sale. They can affect price and terms, or derail a deal entirely, which is exactly why owners should take steps well in advance to head them off.
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