Six Things to Think About Before Selling
Your Business

By Pedro Garcia & Ronan P. O’Brien


The rapid expansion of the organic food market is attracting a greater number of parties interested in participating in this growth. Notable brands that have been sold such as Small Planet Foods (Cascadian Farm), Spectrum Organics, Horizon Organics and Stonyfield Farm have greatly rewarded their owners and these successes are encouraging others to buy into enterprises in this dynamic market. Venture capitalists, buyout funds and conventional food companies and suppliers are increasingly looking for similar high growth investment opportunities. The interest in this market is spreading throughout its supply chain with business sales and growth capital investments involving organic ingredient suppliers and food processors. For business owners this means a favorable broadening of financial opportunities, but also a more complex set of philosophical questions and strategic options that are not easily mapped out and executed.

Just as the growth of the organic foods industry opens significant opportunities for businesses, it also brings greater operational and strategic challenges. This market is perhaps the most dynamic sector within the overall food industry and the fast growth of many companies often creates new challenges that may be not be addressed effectively by management tools that proved highly relevant just a few years ago. While companies such as Nature’s Path and Amy’s Kitchen have had great success as independent entities, for other companies the decision to pursue a business combination at the right time could end up being the most astute option for ensuring the continued success of the business and its stakeholders.

Selling Sustainability
Many leaders launched businesses in this industry with the dual purpose of making profit and fostering the values of sustainabil-ity. The huge commercial success of the National Organic Program shows that these values truly resonate with consumers. From a strictly business standpoint, the values proposition (including USDA organic practices) is perhaps the most important reason why other parties are seeking businesses in the organic foods sector.

Regarding the promotion of organic values, being acquired by a larger company can give an organic company an opportunity to inject their values on an even larger scale. In other words, the organic tail can wag the food conglomerate dog. For example, since acquiring Small Planet Foods, General Mills has adopted a company-wide sustainability initiative that, among other things, measures the company’s environmental impact and sets specific goals that are now considered legitimate business performance and success criteria. Sustainability resonates with consumers and will likely be a financial incentive for any buyer to continue to champion these values. You can also seek assurances from the buyer regarding the promotion of these values. There are trade offs, but the more prepared a company is, the more negotiating power it has.

Preparing for a Sale
The emergence of a buyer can be unexpected. Whether or not you think a deal is in your future, having a basic transactional framework could serve you well in the years ahead. The discipline and creativity of a company and its financial and legal advisors prior to, and during, a transaction can mean the difference between reward and disappointment after many years of hard work. In our experience, companies that proactively develop a transactional strategy greatly improve their odds of success. So if you ever plan on selling your company, these suggestions can help you control the timing and identify the best deal partner with respect to the interests of your stakeholders and the fulfillment of your company’s mission.

1. Self-Assessment. Understanding your company’s competitive strengths and weaknesses will help you address shortcomings and also ultimately get rewarded for your achievements. An honest introspection is a good start and you may benefit from outside help for this evaluation. Factors such as customer loyalty and concentration, market share trends, exclusive know-how, depth of supplier relationships, management capability, new product and sales initiatives, among others, will influence whether your business is sold at a premium or a discount.

2. Strategic Environment and Negotiating Tactics. Timing, of course, is critical. When will the most capable buyers consider your company to be a must-have business? The answer will depend on your company’s momentum relative to that of its competition and its critical mass relative to larger players. Staying informed and critical about your company’s role in its market will help you judge the right timing. This approach can cultivate a group of qualified buyers and set the right competitive tone for your company once you decide to pursue a deal. Positioning your company as a scarce asset with several contenders often motivates buyers to put forth their best offer. Also, don’t underestimate the importance of finding a buyer that understands and complements your vision and values, and this often depends on the personality and motivation of particular individuals within the buyer’s organization.

3. Financial Review. Excellent controls and reliable financial reporting are hallmarks of well-run companies. Your ability to efficiently explain your company’s financial profile and growth trends will convey your team’s managerial acumen and impress investors. Are you aware of weaknesses and inconsistencies in your financial record keeping? With respect to reporting accuracy there are often significant gaps between internal reporting and Generally Accepted Accounting Principles (GAAP). Revelations of unconventional accounting practices can jeopardize a transaction’s completion, especially late in the process. Since investors measure opportunities in terms of GAAP-based results, it’s imperative that you understand any deviations in your accounting before you engage in detailed conversations.

4. Ownership. Assess your capital structure. In other words, who owns your business? The answer is sometimes less obvious than it should be, unfortunately. If you operate as a corporation or an LLC, have you maintained your records so that the current owners are clearly identifiable and their equity positions easy to measure? Have you issued restricted stock or options to individuals in accordance with a written plan and pursuant to clear agreements? Has any key shareholder divorced his or her spouse or passed away? Do you understand how that may affect ownership? Is there a shareholder agreement or operating agreement in place that sets forth the equity holders’ rights and responsibilities? Trouble emerges from sloppy record keeping and casual distribution of equity to new employees, consultants and even customers. Former employees, ex-spouses and estranged family members can be like sleeping bloodhounds that are quickly roused by the rumor of a planned sale. Sometimes these problems cannot be solved. However, with proper planning they can almost always be mitigated.

5. The Employee Relationship. How do your employment arrangements compare against peer companies? Are people overpaid or underpaid as the result of family relationships? Are there unwritten understandings about what people may be entitled to in the event of a sale? Are there proper employment policies in place with respect to hiring and firing, sexual harassment, etc.? Do you have a policy with respect to employees’ access to confidential information? Do you have nondisclosure agreements in place? What about invention agreements? Typically, employees sign doc-uments that unequivocally assign their rights in their work product to the employer. These agreements should be obtained from founders as well as rank and file employees. A buyer will insist on seeing these. Do you ask employees to sign nonsolicit or non-competition agreements? If not, why not? You should consider the risk that certain individuals might walk out the door if you sell. Have you thought about how employee ownership in your company might affect that analysis? These considerations mean a great deal to a buyer worried about retaining your talent.

6. The Business Relationship. Are the commercial relationships with your customers, vendors, co-packers, distributors and other contractors in writing? While a happy business relationship might make such formality seem unnecessary, there are dangerous traps for the unwary. The emergence of a sophisticated buyer may compound the dangers by intimidating your longtime “partners.” In the worst cases, existing partners might suddenly refuse to cooperate with the buyer or exact significant concessions that impact the bottom line. If you lack written agreements, especially with respect to critical business relationships, a buyer might withdraw or insist that the “missing” agreements be memorialized at closing. A requirement like that, which is not uncommon, increases costs and creates uncertainty around closing. So gather ye rosebuds while ye may.

Pedro Garcia is a partner with Hadley Partners, Inc, an investment bank that focuses on the all-natural and organic foods industry. D.F. Hadley & Co. has been the financial advisor to leading companies in this sector such as Spectrum Organic Products, Annie’s Naturals and Earth Fare. Garcia can be reached at garcia@hadleypartners.com.

Ronan P. O’Brien is a corporate partner with Seyfarth Shaw LLP, representing entrepreneurs, established companies and private equity firms in the purchase and sale of businesses across diverse industries including all-natural and organic food companies. O’Brien can be reached at robrien@seyfarth.com.