4 Ways to Mitigate Disposition Risk

The risk of selling your business in today's market is nothing short of a daunting. The current capital and credit crisis has cooled the frothy M&A markets, which up until very recently, had seen transactional volumes near record levels. Premium valuations are much harder to come by when selling your business into a down market. In the text that follows I'll describe the actions that prudent CEOs and Boards of Directors will take in managing disposition risk in today's market. 

The risk associated with getting deals done in this market might just be at an all time high. Ideally selling a business should really be about taking what the CEO believes is the best deal, however lately it has become more about doing the deal that the CEO perceives as the most defensible transaction when evaluating the impact of the sale across an ever-widening variety of constituencies. As a top CEO coach I've been called in to reduce the risk on numerous transactions on both the buy-side and the sell-side. The following recommendations will help you sell you business at the highest valuation with the least amount of litigation risk

Okay, so you’ve received board approval to put your company in play, but now what? How do you cover all your bases in an attempt to mitigate the risk of regulatory scrutiny and shareholder litigation? Taking the following steps will not only help you maximize transaction value, but will likely insure that the transaction sticks with the least amount of post transaction risk:

1. Pre-sell the deal internally: State your case early on by clearly articulating the business logic for the disposition. Make it known why selling benefits various constituencies and lay-out your game plan to the board, key executives, major shareholders, etc. If you are pursuing a strategic deal that you believe may be in the best long-term interests of shareholders, but may not maximize current valuation, you should definitely trial balloon your thinking very early on and build key support for such a decision. By assuaging potential concerns prior to going to market you will minimize the potential for trouble down the road. 
2. Hire the right sell-side advisors: Retain reputable legal, tax and transactional counsel to insure all the “T’s” are crossed and the “I’s” are dotted. Your investment banker should conduct a comprehensive search for potential suitors that reaches across all genres including strategic buyers, private equity firms, hedge funds etc. A comprehensive marketing approach shows a good faith effort in attempting to solicit the best offer. Good legal and tax counsel can make sure that the appropriate concerns and proper protections/disclosures (i.e. indemnifications, legal and tax opinions, full disclosure provisions, Revlon concerns, SOA provisions etc.) are addressed and included in the documentation.
3. Shop the deal: Make sure that a “Go-Shop” provision is included in any agreement with a potential suitor. Stand-Still provisions are becoming a thing of the past as they set-up the seller for third party allegations that the seller failed to fulfill their fiduciary responsibilities by agreeing to sell the company at a “low-ball’ price, and/or by signing-off on measures designed to dissuade competing bidders. The offset for buyers to induce them into agreeing to a go-shop provision is the provision to pay a break-up fee should the seller unwind the deal due to a better competing offer. A great example of how this plays was a recent transaction involving a large chemical company wherein the CEO terminated a $5.6 billion deal with the initial suitor, paying almost $200 million to break the deal. Instead, a new buyer paid $6.51 billion to purchase the company. The new buyer agreed to reimburse seller for half the breakup fee resulting in a substantial net gain.
4. Seek a third-party valuation: In addition to being a good management tool, by having your company valued on a regular basis you establish a third party baseline for what your company is worth and have something to benchmark any potential offers against. For many companies having your valuation updated annually is standard operating procedure. I suggest that when you order your valuation and subsequent updates that the transaction be ordered by your law firm such that it becomes privileged information and therefore mitigating the risk of a bad valuation surfacing to haunt you at an inopportune time.

Good Luck and Good Selling...