WILL YOUR BUSINESS BE READY TO SELL WHEN Y O U A R E R E A D Y?
By Philip L. Chapman, Esq. of
Lum, Drasco & Positan, LLC
Selling a Business
Do the right things now to put your business in a more saleable state when
you will want to sell it. If you don't, a sale may be for less money or less advantageous
terms, may involve a great deal of delay and extra expense or may not even be doable.Check out our online Survey. Also, for buying a
business, see our Buying a Business
section.
Here are some planning issues you should address, if you have not done so already
when you're ready for selling a business.
Form of Financial Statement
Upgrade the Company's financials from compilation at least to review statements. Also,
keep in mind that public companies much prefer to acquire businesses which have audited
financial statements; and, therefore, you should have a cost/benefit discussion with your
accountant as to upgrading to audited statements.
The Company's Accountant
Make sure your accountant is both business and tax savy and is really interested in the
account.
At least twice a year confer with your accountant about the Company's
activities and results of operations and get the benefit of the wisdom the accountant may
have acquired from other clients' experiences.
For example, make sure you get an informed opinion from your accountant as to whether the
Company has to collect sales or excise taxes. Don't be one of the sellers who has played
games or was oblivious to this issue and then found out that a proposed sale triggered a
very large and unanticipated liability.
Having a Lawyer in the Role of
General Counsel when selling a business
No matter what the size of your business, the Company should have a lawyer who fits the
description of general counsel, with whom you confer during the year, not just on a crisis
basis.
Such a lawyer should be is pro-active, not merely reactive; and should with other
professionals who serve your business and who can assist you in engaging the services of
other lawyers in specialty fields.
Protection of Intellectual Property
If a patent, tradename, trademark or copyright is important to the business, make sure you
confer, at least annually, with a qualified intellectual property lawyer to see that you
are doing all that is necessary to protect the Company's investment and rights.
For example, some patent owners, having fallen out of contact with their intellectual
property lawyer, have lost their patents for failure to pay a required annual maintenance
fee.
The Company's Insurance and Insurance Agent
Review, annually, with a qualified insurance professional
(a) the Company's operations; (b) amount and scope of coverage of its public liability,
casualty, product liability, workers' compensation, and employment practices insurance;
(c) the financial condition of the insurers; and (d) whether the premiums are competitive.
Do this review face to face, at your place of business--too many insurance agents just
"mail it in" and lose touch with what their client is actually doing.
Do you care whether your all-cash at
closing buyer has what it takes to succeed?
If you are selling your business and plan to sever your ties to it after the
closing, you may be tempted to strike a deal without regard to the managerial
liability of the buyer. For instance, if the purchase price will be paid in full
at the closing, you may have little interest in whether the buyer runs the
business into the ground in the next year or so after the closing.
Guess what? If that happens the buyer may well go hunting for a scapegoat, the
most likely target being you, with the buyer making claims of misrepresentations
by you. Even if you are blameless, you will still be facing potentially
expensive and emotionally disturbing litigation.
While no one can guaranty this won’t happen, the likelihood of such a lawsuit
could be lessened if you do some due diligence about the buyer before you sign
up. If at all possible, try to make sure that the buyer has what you believe
will be a workable business plan, experience of the kind that is applicable to
your business, and personal character traits that will make for a good fit with
employees, vendors and customers.
Human Resources and Employment Practices
Lawsuits and EEOC complaints as to sexual harassment, discrimination in hiring or
terminating, wrongful termination of at-will employees without following the procedures in
the company's employment manual, elimination of job positions previously occupied by a
mother wishing to return from maternity leave, refusal of the company to offer other
duties to a partially disabled worker----these occur more and more every day.
Failure to handle the above and other HR problems with maximum touch can turn a small fire
into a major conflagration, with high legal costs, even if the Company settles for little
money of consequence or wins; and can expose the business to huge compensatory and
punitive damage awards.
In a proposed sale of your stock or merger, too much uncertainty about contingent
liabilities in the employment practices area can queer a potential deal. Even in an asset
sale, where the buyer is acquiring a work force to continue to operate in place, too many
poor past employment practices which will require the immediate attention of the buyer can
get in the way of a deal.
If you don't have a qualified in-house human resources professional (non-lawyer), engage
the services of such a professional to review your employment manual or to prepare one, to
review your employment practices and be on the other end of a "hot line" when
problems arise.
You should also have as part of your team a qualified attorney in the field of employee
relations.
Confidentiality and Non-Compete Agreements
Long before a potential purchaser comes on the scene, a salesperson who controls a very
significant amount of your company's business might just pick up and leave to go to a
competitor or to establish his or her own competing business. And, even if the salesperson
is still there at the time of negotiations for the sale of the business, the absence of a
non-compete agreement can result in the killing of the deal or the transfer of some of the
monies that would have been paid to you to the salesperson.
For your key employees, obtain reasonable agreements covering confidential information,
and where applicable, non-competition after termination of employment.
Provisions in the Company's Lease Relating to Assignment
The obtaining of third party consents in order to close a sale of a business can cost time
and money and sometimes kill a deal. This is especially true in case of an asset sale
which involves transfer of the seller's lease or leases.
If your company leases property from a non-related third party, make sure the lease
contains provisions permitting, in case of a sale of the business, the free right of
assignment--or at least some reasonable conditions concerning the financial strength of a
proposed assignee, which would restrict the right of the landlord to refuse to consent to
the assignment.
Environmental Investigation of the Company's Facility
When the facility used by the company is an environmental unknown by the time of the Asset
Purchase or Stock Sale Agreement, the negotiations regarding environmental contingencies
and responsibility for clean-up costs, indemnifications and escrows are sometimes so
difficult that deals die because of them; and quite often the buyer does not have time to
delay the closing until all the environmental questions are answered and problems are
remediated.
Accordingly, whether the Company owns or leases its facility, and whether or not New
Jersey's Industrial Site Recovery Act would apply, investigate the property now, long
before a sale is on the horizon, for the presence of hazardous materials, including
asbestos and PCBs, and for the presence of underground fuel storage tanks and possible
leakage.
Important Agreements with Third Parties
If the business depends on any key agreements with third parties (e.g. distributorship,
license, franchise, sales representation, furnishing of a third party's requirements),
make sure that these agreements are in writing and protect against unreasonable
termination.
If you follow the above suggestions, not only will your business be in better position for
sale, but you will be enhancing its opportunities and protecting its interest along the
way.
