Selling a business can represent the pinnacle of life’s work, providing the ability to diversify assets and the opportunity to create generational wealth. Preparation and planning will streamline the process and increase your chances of success.
As any successful salesperson will attest, selling a business can be an all-consuming process, the equivalent of a second full-time job for the owner and key executives. While challenging, we’ve laid out seven proven strategies for preparing your business for sale that will minimize transaction expenses, maximize income, and increase the odds of closing.
Before we present our list, sellers should be aware of an evolving trend in corporate transactions. In recent years, more buyers and sellers purchase representation and warranty insurance (RWI) to cover after-closing indemnity obligations. While RWI benefits sellers because it reduces the size of escrow and other holdbacks and limits sellers’ post-closing risk, RWI forces carriers to do a lot of due diligence, increasing the burden of due diligence on the buyer. Is required.
There are seven proven strategies:
1. Consultant. Selling a business is a highly technical legal, tax and accounting exercise that requires experienced professionals who understand market terms and transactions. Some of the most expensive deals we’ve worked on involved unsophisticated sales consultants. Save yourself money, hassle and delay by hiring experienced transaction attorneys, investment bankers and accountants.
2. Financial Statements. Before starting the sales process, make sure your financial statements are up to date and accurate. If personal or family expenses running through the business can be questioned, we strongly recommend that you work with your advisors to resolve those issues before due diligence begins.
3. Conduct lien searches. While banks and finance companies are quick to place liens on property, removing the lien can be cumbersome. Often owners never know about some liens, banks neglect to issue the lien and, in some cases, the secured party that filed the lien has ceased to exist or is part of a separate company where the business owner has no contacts now. These “phantom liens” create unique challenges. Generally, a buyer – and, more importantly, its lender – will not close the transaction when the relevant property is attached to liens. While active liens can be paid at closing, phantom liens can take weeks to be released. By discovering the lien early in the process, you can “scare” the phantom lien.
4. Good condition. We recommend that you verify your legal entity’s state of incorporation/formation and in good standing in each state where your business is eligible to do business. It is very easy – and shockingly common – for an entity to fall out of good standing or even have its charter revoked for failure to file state tax returns or annual reports. For a business with a complex entity structure or one that files a consolidated tax return, tax officials often misattribute tax payments or report missing returns for a subsidiary that is part of a consolidated return. The process of correcting these errors is cumbersome, often requiring someone with the power of attorney to be on the phone for hours. Also, revival of an entity after cancellation of status is not an automatic process in many states.
5. Contracts and other business records. Buyers will not buy businesses without completing due diligence, which is more involved in the era of RWI. You can streamline that labor by locating and collating fully executed electronic copies of all business records. This statement sounds overly broad and cumbersome – because it is. However, handling this work on the front end can speed up the exertion and thus your termination.
As a start, you should obtain fully executed copies of all contracts, such as customer and vendor agreements, leases, software agreements and benefit plan documents. In addition, you should collect all stock certificates and ledgers, minutes and other governing documents. Finally, you should gather all tax returns for the business and your benefit plans, including the relevant Form 5500. The list of documents to be disclosed can seem endless. Sellers often tell us that the documents do not exist or cannot be located. Buyers will not accept that excuse. An experienced transaction attorney can provide you with a standard due diligence checklist to jumpstart the process.
6. Clutter. Many businesses have obsolete, slow-moving or other unsellable inventory. Instead of debating the value of such material, disposing of such items will simplify physical inventory calculations and reduce closing working capital disputes.
7. Ordinary course. As a seller, you must run your business as if you owned it until you have the proceeds of the sale. Not only will the letter of intent and purchase agreement require the sellers to conduct business in the normal course consistent with past practice, but the risk remains that a deal falls apart at the eleventh hour. Hence, continue to maintain inventory, process dues and perform other customary actions till the end.
These few action items will save you time, money, and make that celebratory bourbon cocktail at the closing dinner that much sweeter. And if you hire the right advisors, they’ll buy.
Christopher SW Blake Hahn is a partner at Loeser & Parks LLP. contact them at 216-274-2552 or [email protected] John Paul is a partner at Lucy Hahn Loeser & Parkes LLP. contact them at 216-274-2310 or [email protected]