In a company’s life cycle, several situations can prompt its sale. The owners may need to fund their retirement or succession from sale proceeds. A tempting, unsolicited offer may come across the transom. Or an entrepreneur may simply be ready to sell the business, either because the market timing seems right or something else seems more attractive.
The sale of a business should never be a spur-of-the-moment decision, however, and with careful advance planning, an owner can take steps to optimize the business’s value.
It is best to start thinking about the process at least two to three years prior to any sale. Preparing for a sale should start with a thorough understanding of one’s long-term financial plan and objectives, along with a careful tax analysis of the effect of a stock sale versus an asset sale. These analyses can yield important information about the needed sale price and the tax implications of different types of deals. If financial and tax advisers have not already been hired, hire them.
Long before a potential buyer begins due diligence, an owner will want to review the business from a buyer’s perspective and conduct due diligence in key areas.
Intellectual property protection
Review intellectual property assets to confirm that ownership is accurately reflected, that assets are properly protected and that appropriate license agreements are in place. When significant intellectual property, in particular, is at stake, a buyer will want to be certain that it’s clearly owned by the company.
Be sure that the company’s corporate structure is clean. Know the company history of ownership and the disposition of any stock held by legacy shareholders. Understand who owns what. Make sure official corporate records are in order (i.e., the corporate minute book) and that all stock certificates and any options or warrants are located.
If the company owns or leases real property, expect a buyer to require a preliminary environmental assessment to determine whether any issues exist and whether any remedial work will be required. Not dealing with known issues will affect any purchase price.
Employee benefits and pension liabilities
Review employment compensation packages and benefits for any potential liabilities, such as issues regarding payroll withholding, 401(k) contributions or unfunded pension liabilities.
Contract and lender diligence
Understand whether there are any liens on company assets. A buyer will want any liens released prior to a sale. Review agreements with key customers and vendors to determine whether they contain any unusual provisions that may be objectionable to a buyer, such as noncompetition, most-favored nation pricing, exclusivity or nonassignability clauses. There may be agreements that require parties to consent to transfer the contract to the buyer. Know in advance what may interfere with a transaction closure and try to negotiate the provisions now.
Be prepared to identify and deal with any transactions between the company and the owner or relatives. Are there any personal assets listed on the books? Is compensation being made to a relative who isn’t actually performing work for the company? Are owners being compensated at an arm’s length, market rate? Handle these issues before a buyer identifies them.
Not all of these considerations will apply to all companies, but it pays to carefully review each one to be sure there are no hidden problems or easy solutions that need to be implemented before a sale.
Look at the business from the perspective of a buyer, and resolve any outstanding issues proactively. It is disheartening to see businesses lose potential value because of failure to prepare adequately for thorough due diligence by a buyer.
Finally, while preparing to sell the business, line up a team of trustworthy professionals. This includes a financial and tax adviser, as well as a lawyer experienced in negotiating deals – particularly when special issues arise. Continue to work with regular counsel, but in a sale process, business owners do better with specialists who represent sellers on a regular basis.
Sherrill Corbett is chairwoman of Tonkon Torp’s mergers and acquisitions practice group. Contact her at 503-802-2049 or at firstname.lastname@example.org.