I recently attended an event in which the discussion turned to the topic of owners selling their businesses. At one point during the conversation, I introduced the concept of recommending to clients the creation of an independent board of directors as a way to enhance the value of the business in the eyes of prospective purchasers. Although a myriad of comments ensued, one comment in particular caught my attention (and I am paraphrasing): “That in 20+ years of helping owners sell and buyers acquire companies, they have never encountered a seller that had any board, interested or otherwise, that functioned as a true board of directors.”
Although I realize that everyone’s experience is unique, I found it incredible that this commentator had never come across a board of directors, other than in name only. Please don’t misunderstand what I am suggesting. I certainly believe what he said, but what I found incredible is the pervasiveness of that situation. As a corporate attorney involved with all phases of a business from its inception to its ultimate transfer, I am constantly advising clients to observe the formalities of the entities that have been set up to insulate their personal assets from third party liability. Within that bucket of “To Do’s” is the establishment of a board of directors that has meetings, telephonically or otherwise, and records and logs its minutes. The advice goes a long way in providing the umbrella of protection that they have come to expect from the establishment of such an entity. However, it also serves another purpose, perhaps just as valuable, which is to enhance the value of that company in the eyes of a prospective purchaser. (Please note, that there are many other reasons for the creation of a board of directors, but describing those is beyond the scope of this blog).
During my 35 years of practice, it has become almost second nature to recommend establishment of a board of directors, and indeed might be malpractice to neglect to so advise. At different times, I am involved in discussions with other advisors who have various ideas about how to create value in the eyes of prospective purchasers. I suggest that this is one of the simplest ideas to implement, enhances the seller’s attractiveness to a buyer, and is part of what I would consider to be “best practices”. It may even represent an increase of a small percentage in the multiple actually used in calculating the purchase price, although I will leave that to the investment bankers and others involved in the financial end of the sales transaction. It says to a buyer that this is a company that is run as a real business, and provides the buyer with a certain level of comfort in engaging the seller.
One final point, many buyers will look to continue management of the acquired company for a period sufficiently long enough to insure maximum transition as a condition of the acquisition. It may also account for a portion of the sellers’ purchase price in the nature of rollover equity. In this regard, the way in which the management team conducted the business of the seller will be telling as to whether a buyer will feel comfortable with that team as its assurance that the transition of the underlying business will be successful.