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Thinking of Selling? Six Actions to Prepare for a Liquidity Event

Key Takeaways
Business owners can benefit from an increased flow of equity—but, for many of them, the liquidity process remains confusing. CohnReznick has identified the following six issues to consider in positioning your company for a liquidity event and maximizing the value of your company:

1. Have a strategic plan.
2. Shore up your management team – it may be a factor.
3. Get your financial house in order.
4. Polish your operational processes.
5. Prepare for invasive due diligence.
6. Choose the right advisors at the right time.


The liquidity markets have improved considerably since the beginning of the year. Private equity (PE) and strategic buyers, loaded with capital that largely sat idle over the past several years, are now vigorously pursuing growth opportunities.

Well-positioned companies have greater access to the equity markets than they’ve had for some time. In fact, the total capital invested in private equity-backed merger and acquisition (M&A) deals globally through the first half of this year was $318 billion, the strongest level of activity in more than 10 years, according to Pitchbook.

Business owners can benefit from the increased flow of equity—but, for many of them, the liquidity process remains confusing. They’ve invested their blood, sweat, and tears to make their companies successful. Over the years, a business owner or investors in the company may have contemplated a liquidity event, but the traditional entrepreneur has too many competing priorities to be able to properly sort through all the intricacies and nuances of a liquidity event alone. CohnReznick has identified the following six issues to consider in positioning your company for a liquidity event and maximizing the value of your company.

1. Have a strategic plan.

The decision to either raise capital or sell to a private equity buyer should be a tactical response to a strategic need. A liquidity event is not something that companies fall into—it should be something that the management team has planned and prepared for, taking into consideration the long-term implications of the transaction on the company and its owners, the impact on value, and the ability to keep growing the business.

One of the first things that private equity investors look for in an acquisition target is a business that meets their particular vision. Some PE firms focus on buying companies as add-ins to satisfy a particular need for their existing portfolio investments. Others have a particular expertise within an industry and typically only buy what they know. However, most PE firms do both – look at add-ons as well as new portfolio companies that are within their area of expertise. As such, PE firms will closely scrutinize the nature of the business they’re buying, including financial condition, growth opportunities, and strength of the business’ management team. Further, and equally important, PE firms analyze how a company will fit into their overall investment thesis.

It is essential for companies to be in control of their own destiny and have a strategic plan of their own when approaching the market. They need to understand why selling the business makes the most sense at this particular time, and why the company will make an attractive acquisition target. The business plan needs to be crystal clear, explaining – and supporting – the long-term value of the company as well as the strategies and opportunities for growth.

2. Shore up your management team – it can be a factor.

In real estate, the mantra is location, location, location. In private equity, it is people, people, people. Some PE firms will only invest in companies with strong management teams, while others will look to replace management with their own hand-picked team. Firms that require a strong management team from the outset do not want to get involved in the day-to-day operations of the company. They want an established management team they can trust to run the business.

Target companies need to ask themselves whether they have the best people on board who can impress a private equity investor. Does every person on the management team possess the proper skill set required to keep growing and reinventing the business? If not, some difficult decisions may need to be made.

So what do private equity buyers look for in a leadership team? They weigh whether a management team has been able to grow the business, from both a top and bottom line perspective, and attract new customers year after year. From an operational perspective, they also want to see that a team has been able to develop new products and stay responsive to a changing marketplace. Product teams that have succeeded in continually reinventing the business and keeping it relevant in the marketplace are worth their weight in gold.

If the private equity firm’s plan is to grow its portfolio companies 15 percent each year for the next three years, the buyer will want to ensure that your company has the internal talent to achieve that goal. The PE firm will generally be able to identify any weak links in the management chain. For example, does the CFO only act as a glorified controller who does not have the skill set to think creatively? Does the management team have the vision and insight required to make strategic decisions and take the business to the next level? Those are questions any potential acquirer will be asking.

3. Get your financial house in order.

In financial reporting, two concerns are paramount: the quality and reliability of the financial statements and supporting financial data. When potential buyers analyze a target company, they want to know that the right systems, processes, and internal controls are in place to ensure that the numbers they are scrutinizing are accurate.

For instance, does the company have an employee who has the ability to both create new vendor accounts and approve invoices? If so, there is a risk – from an investor’s perspective – that this employee has set up dummy vendors and made fraudulent payments. You need to have the appropriate internal controls in place to guard against fraud and bolster the validity of your financial data.

Some companies may not have a CFO who has the experience required to execute a liquidity event.  Accordingly, it is important that a company recognize this limitation in its CFO capabilities and turn to its financial and legal advisors for appropriate advice. For those that do have a CFO with the appropriate liquidity capabilities, it is critical that the CFO identifies the critical indicators that drive the business—such as margin by product and customer—and creates a structure that allows for the measurement and reporting of those success factors.  A strong CFO should be the architect of the liquidity event and offer insight into how it should be executed, including everything from negotiation approaches to how the deal will be financed. The CFO is the manager of the right-hand side of the balance sheet – which is important in determining the ideal balance of debt, equity, and capital of the business.

Also important is the ability to close the books quickly. Buyers are not impressed with companies that cannot close their books swiftly and accurately. However, it is not just speed that investors require, it is also quality. A private equity firm will want to have confidence that your company is closing the books on a timely basis, but not at the expense of compromising needed analyses and management reporting packages. They want to ensure that your financial department is not just pushing a button every month but rather is conducting the proper analyses to understand the results of operations.

Audited financial statements are another must-have. Many companies think they will deal with having an audit conducted once they actually have an offer on the table. That is not true. Buyers often want to see at least two or three years of audits before they will even consider pursuing an acquisition so CohnReznick encourages clients to consider having an audit performed well in advance of a liquidity event. In addition, some PE firms may require at least two years, sometimes three years, of audited financial statements due to their banking arrangements with a lender who may be financing the transaction.

4. Polish your operational processes.

When a potential acquirer is contemplating an acquisition, it wants to know that the target company is running its operations efficiently, including everything from information technology (IT) and finance to corporate governance and compliance.

With IT, for instance, a private equity firm wants to see that all business systems, including customer support, manufacturing, and HR applications, are modernized, and hopefully well-implemented and integrated. Is your company using the current version of software packages that render your information safe and is your software still supported by the manufacturers? Are the systems suitable for a company of your size? Is the technology scalable and can it grow with your business? Are your systems operating effectively and producing the timely, accurate information your company needs to stay ahead of the competition?

The same goes for technology used for your company’s financial accounting and reporting systems. Do you have executive dashboards that enable your people to best manage the business? Does your company have the ability to automate financial processes and gain a comprehensive picture of available cash flow—anytime, anywhere?

Regulatory compliance is another hot-button issue with PE firms. Before they acquire a company, PE firms want to know that everything is in order from a regulatory standpoint. For example, companies in the retail or restaurant space need to adhere to the Payment Card Industry (PCI) guidelines for protecting credit card information and safeguarding against fraud. Likewise, target companies in the healthcare space have to be fully compliant with the Health Insurance Portability and Accountability Act (HIPAA) requirements, which place a premium on the protection of patient data.

5. Prepare for invasive due diligence.

The financial crisis changed the relationship between buyers and sellers. Private equity firms are now conducting a degree of due diligence never seen before. They are demanding—and getting—an enormous amount of detail that extends far beyond financials. The due diligence process is no longer a routine check-up – it could feel like a root canal.

The due diligence process is new to most companies that are preparing for a liquidity event—and it usually comes as a shock. The first time through the due diligence process, no one is fully prepared. The first step on the path to a successful due diligence effort is to engage a reputable accounting firm to provide sell-side due diligence and/or audit services, which are the backbone of your credibility.

From there, the potential acquirer may scrutinize every material contract, every document, every settlement and lawsuit, every vendor agreement, and confidentiality agreement your company has signed in the recent past. Maintaining a document file that provides easy access to documentation is one of the most productive due diligence support measures any company can take.

Companies need to be meticulous about managing paperwork and holding onto all contracts. Otherwise, they will find that the diligence process becomes extremely painful as they attempt to reconstruct years of records. Consider using a Virtual Data Room that allows you to securely store and share files between team members and prospective buyers.

For any company contemplating a liquidity event, now is the time to start preparing for the diligence process. If it is not performed now, it will have to be done later. Analyze all your major agreements. Contemplate going back to investors and banks to renegotiate terms that may become problematic. If any agreement is open-ended, if any terms are not crystal clear, clean them up.  The due diligence process is likely to uncover that hastily written contract of several years ago. Consider engaging competent legal expertise to determine whether contracts and agreements should be cleaned up for problem areas.

To streamline and increase the chances of a more efficient due diligence process, sellers should designate a representative from their group to drive the due diligence process. Ideally, this should be a detail-oriented person who can compile the necessary documents and data while also managing the day-to-day interaction with your advisors—while keeping all of these tasks on a reasonable timeline.

6. Choose the right advisors at the right time.

The right investment banking, accounting, and legal advisors are crucial to the liquidity process. In choosing the right advisor, it is critical to select those who possess specialized expertise so that you can maximize the return on what can be the most important transaction in the life cycle of your organization. Start by finding a banker, financial advisor, and attorney with whom you can establish a rapport. The right attorneys can have invaluable input on the “representation and warranties” terms of the contract and can be an instrumental part of the negotiation process. You will be spending a significant amount of time with these resources, so CohnReznick recommends setting up a “dating period” to get to know them. During that period you will need to decide which of them you can work with and whether they share your strategic goals.

It is difficult to contemplate a liquidity event when you are busy building a business. However, the most successful transactions are carefully planned events.  It is important to engage advisors earlier than you might think, perhaps even a couple of years ahead of a planned sale. It can take six months to prepare for a liquidity event and another six months to complete it. CohnReznick recommends that management teams spend at least a small portion of their time getting in touch and staying in touch with talented, compatible bankers and accountants at least six months to a year before beginning the prospecting process for a sale.

About CohnReznick’s Liquidity Expertise:

CohnReznick’s Transactional Advisory Services  professionals deliver a full range of services focused on liquidity and capital formation related to all stages of the acquisition process. The value the firm provides is designed to equip buyers and sellers with the intelligence required in order to make informed risk/reward decisions. Each business attribute is carefully analyzed on both a stand-alone and deal context basis. Our due diligence team applies a highly disciplined approach which identifies unseen opportunities and potential risk exposures, maximizing value for our clients. Our full range of due diligence, acquisition integration, and other transaction advisory services includes:

  • Due diligence: We conduct both buy-side and sell-side due diligence that covers quality of earnings, tax and tax structuring, process/controls, information technology, human resources and benefits, and strategic and operational analysis.
  • Sell-side preemptive due diligence: By working with potential sellers early in the process, we help mitigate unexpected due diligence findings that can derail a transaction. This analysis can also help sellers secure a higher price by uncovering the true value of the entity.
  • Purchase price disputes: Whether raised by the buyer or the seller, we are experienced in handling post-acquisition purchase price issues, including working capital and earn out disputes.  Additionally, we serve as a neutral third-party arbitrator.
  • Special situations: We are experienced in working with companies in financial distress, and can work with all stakeholders in a compressed timeframe to preserve the going-concern value of the target entity.
  • Acquisition integration: We have the processes and tools to appropriately plan for, execute, monitor and assess the success of acquisition integration. We assist management in all aspects of acquisition integration from financial planning to assessment to business improvement opportunity assessment.
  • Deal Flow: As the trusted advisor to over 1,000 owner-operated companies, we often have the opportunity to consult with our clients when a liquidity event becomes part of their strategic plan. Frequently, we can match our clients’ objectives to our network of potential investors. This complimentary deal flow introduction results in a win/win for our clients and investors.


For more information, please visit CohnReznick’s Private Equity and Venture Capital Industry Practice webpage and contact Ira Weinstein, Co-Office Managing Principal of CohnReznick’s Baltimore, MD office and a member of the Firm’s Private Equity and Venture Capital Industry Practice, at 410-783-8328 or

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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