Thinking About Selling Your Business?

Written by Scott Eden

For many business owners, selling a company may be the largest transaction they will ever undertake. Yet owners often spend years building their businesses and comparatively little time preparing them for a potential sale.

Ideally, that preparation should begin well before a buyer makes an offer. Taking a few steps in advance can make the sale process more efficient, reduce surprises during due diligence, and put an owner in a better position when it is time to negotiate a transaction.

Get Your Corporate Records in Order/Corporate Governance

One of the first things a buyer and its attorneys will examine is whether the company’s basic corporate housekeeping is complete. Organizational documents, ownership records, meeting minutes or written consents, amendments, and other company records should accurately reflect how the business has actually operated.

Problems that seemed insignificant over the years can become much more important when a buyer is conducting due diligence. Cleaning them up before the sale process begins is generally easier than trying to resolve them while a transaction is moving toward closing.

Review Your Important Contracts

Owners should also know what their major contracts say about a potential sale. Customer and vendor agreements, equipment leases, real estate leases, loan documents, and other material contracts may contain restrictions on assignment or provisions requiring consent when ownership of the company changes.

Identifying those requirements early can prevent an unexpected consent issue from delaying a transaction.

Understand What You Are Actually Selling

Not every business sale looks the same. A buyer may acquire the ownership interests of the company, substantially all of its assets, or only a particular portion of the business. In some transactions, what the buyer is primarily acquiring is an established revenue stream, customer relationships, contracts, goodwill, and the other assets necessary to continue operating the business.

It is equally important to identify what is not being sold. In an asset sale, the seller and buyer will typically identify both the assets being acquired and any assets specifically excluded from the transaction. Those excluded assets might include cash, certain accounts receivable, particular vehicles or equipment, personal property, or other assets the owner intends to retain.

Closely held businesses can present another issue: the business may use assets that it does not actually own. An owner might personally own a vehicle or piece of equipment used by the company, for example, or the real estate may be owned by the owner individually or through a separate entity. Those arrangements should be identified before negotiations progress too far.

Real estate deserves particular attention because it can significantly affect the structure of a transaction. The parties need to determine whether the property will be sold with the business, retained by the seller and leased to the buyer, or handled through a separate transaction.

These decisions can affect valuation, financing, taxes, third-party consents, and the structure of the transaction. They should be considered early rather than after the parties have already agreed on a purchase price.

Expect a Thorough Due Diligence Process

A prospective buyer is likely to request considerably more than financial statements and tax returns. Depending on the business, due diligence may include contracts, employment matters, litigation, insurance coverage, licenses and permits, real estate, intellectual property, environmental matters, taxes, liens, equipment, and regulatory compliance.

Preparing this information in advance can make the diligence process significantly less disruptive to the day-to-day operation of the business and can help identify issues while there is still time to address them.

Think About the Deal Beyond the Purchase Price

Purchase price is obviously important, but it is only one component of a transaction. Owners should also consider how and when the purchase price will be paid, whether any amount will be held in escrow, whether there will be an earnout or seller financing, how working capital will be treated, and what obligations the seller will retain after closing.

The representations, warranties, indemnification provisions, restrictive covenants, and other terms of the purchase agreement can also materially affect the value and risk of the transaction.

Build the Right Team Early

Selling a business typically requires coordination among the owner’s legal, accounting, tax, and financial advisors. Bringing those advisors into the process early can help identify issues before they become obstacles and allow the owner to evaluate not simply the headline purchase price, but the transaction as a whole.

A successful sale often begins long before the purchase agreement is signed. For an owner who believes a sale may be in the future—even if that future is several years away—some advance planning can make a significant difference when the right buyer eventually comes along.

Preparing your business for sale takes more than finding the right buyer. Corporate records, contracts, ownership structures, real estate, due diligence, and transaction terms can all affect the process and the outcome. MPL’s Business Law attorneys help business owners plan for and navigate mergers, acquisitions, and business sales. Whether a sale is on the horizon or several years away, contact MPL Law Firm to start preparing for your next chapter.