If you were selling your car, you’d probably have it detailed or, at least, take it for a car wash. If you’re considering selling your business, it is worth doing likewise. Even before offering the business for sale, there are a number of steps you can take to make your business more attractive and prepare to move quickly once a potential buyer is ready to make an offer. Consider the following issues…
Finances and Taxes
What makes the company valuable? In some cases, a company has significant traditional, tangible assets (e.g., inventory, supplies, equipment, vehicles and property). In other cases, a company’s most valuable assets are intangible (e.g., intellectual property, trade secrets, contracts and goodwill). The seller should evaluate and prepare a list of all of it assets.
Are the company’s financial records current and accurate? A potential buyer will typically want to see the company’s financial records (e.g., tax returns, balance sheets, income and loss statements, and cash flow statements) for at least the previous three fiscal years.
How did you arrive at the selling price? Unlike publicly traded corporations, the “stock price” of privately owned businesses is not readily available. There are many ways of valuing a privately owned business. In certain industries, there are widely recognized formulas for valuing a business. If an industry-specific formula is not available, a variety of generic formulas and methods may be used to establish a value. In some cases, a formal business valuation may be necessary.
Does the company have any warts? You should be prepared to address questions regarding any material developments that have negatively affected the company in recent years (e.g., decline in sales, loss of a major customer, uncollectible receivables, etc.).
Are there loans to the company from the owners? It is not unusual for owners to lend money to their company. However, such loans should be properly reflected on the company books and should be properly documented by promissory notes and/or loan agreements.
What are the tax consequences of a sale? The sale of a company can be structured in several ways, including an asset sale, an equity sale, or a hybrid structure. Each structure has distinct tax consequences. It is very important to assess potential tax consequences before seeking out a potential buyer. Otherwise, you may propose or consider a structure, only to later learn that the structure is disadvantageous from a tax perspective.
Are the company’s corporate books in good order? If you conduct business through a limited liability company (LLC), a buyer will typically want to know that the LLC was properly formed and that it is in good standing with the state. A buyer will also want to review the LLC operating agreement. If you conduct business through a corporation, a buyer will, in addition to seeing evidence of incorporation and good standing, want to confirm that the corporation has issued shares of stock, that the shareholders have elected directors, and that the directors have elected officers. Whether the company is an LLC or a corporation, a buyer will also want to know that the sale is duly authorized by those in control of the company.
Customer and Other Key Contracts
Are customer and other key contracts in writing and can they be transferred? A buyer will typically prefer that the company’s customer and other key contracts are written, rather than oral. Also, if the deal contemplates the transfer of customer and key contracts, the contracts should be reviewed to determine whether the contracts permit a transfer.
Will the company’s current contracts affect a potential sale? A sale of the company may require the consent of third parties or may trigger covenants in major contracts such as commercial leases and loan agreements. Such agreements, as well as personal guarantees (if any), should be reviewed to assess their potential impact on a deal.
Business and Professional Licenses
What business and professional licenses are needed to operate the company? A buyer will typically want to know whether the company is fully licensed and whether the licenses can be transferred or issued.
The Launching Pad
Are you ready for a buyer? If there is one common theme in the sale of a company, it is that everyone wants to close fast. If you want to sell your company, your feet should be firmly on the starting blocks. The sooner you can start, the sooner you can finish. In addition to having addressed the points discussed above, it may be helpful to have a letter of intent (LOI) and a non-disclosure agreement (NDA) prepared and ready-to-go.
A non-binding LOI typically describes the contemplated transaction and expresses the parties’ desire to negotiate a deal. The LOI may help a seller gauge the seriousness of a potential buyer and may help a buyer find potential investors and lenders.
It is not unusual for a buyer to insist upon undertaking due diligence even before a definitive sale agreement is signed. Although the request may not be unreasonable, the seller should be sure that the buyer signs an NDA before disclosing proprietary and confidential information to the buyer. A properly drafted NDA can contractually limit the buyer’s ability to publicize its intent to purchase the company or disclose or use the seller’s sensitive information in the event the deal is not consummated.
Of course, every sale is unique. The sale of your company many raise any number of considerations not touched upon in the above list. Please feel free to contact me if you want more information about preparing to sell your company.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, Suite 102
Springfield, New Jersey 07081
DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.