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WILL YOUR BUSINESS BE READY TO SELL
WHEN YOU ARE READY?

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 salable 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. In addition, check our Sellers/Buyers Beware page.


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 savvy 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.

 

Business Intermediary

If you do not have significant experience in negotiating for and closing the sale or purchase of a business, you should seriously consider engaging the services of a qualified business intermediary (i.e. a business broker) to assist you in valuing your business and marketing it for sale.

 

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 pro-active, not merely reactive; and should work 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.