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BUYING OR SELLING A BUSINESS – PART 1 OF 3:  THINGS TO CONSIDER FIRST

So you decided to buy or sell a business.  Congratulations!  Before you grab that pen and start signing away, there are many aspects of a business sale that you should consider before committing.

In this three-part post, we will provide some tips to guide you as you navigate the following:

  1. Preparing your business for the sale.
  2. Determining which steps and professional team will best protect you along the way.
  3. Determining the value of the business.
  4. Addressing due diligence.
  5. Deciding what type of sale is best for you.
  6. Considering a post-sale plan.

The process of buying and/or selling a business can take a year or more.  If you are the seller, before you decide which type of sale best suits you and your business, there are some housekeeping matters you should tend to, including:

Reviewing Employment Contracts

Will your best employees stay once the business is sold to a new owner?  What incentive do they have to stick around instead of leaving and/or competing with the business?  Review employment contracts and work with key employees to implement a successful transition.  Do your best during this conversion to ensure that your management team is focused on the business and not the sale/deal. Many owners want to keep their employees in the dark until the last minute before the sale occurs. They fear their best employees will bolt to a competitor because the employee has better leverage there than with the new, unknown buyer.  This can sew distrust among employees, but it is a common practice. Good communication with employees early and often is a better practice, in my opinion. It avoids rumors, which are never positive.

In addition, the buyer is going to be very interested in the employee contracts. If you have contracts that run for a long time, that puts the buyer in the position of having to keep employees. At a minimum, that needs to be disclosed early, because many purchase contracts specifically say all employees are terminated at the closing, and each employee needs to negotiate a new contract with the new buyer, who has the right to refuse to retain employees. This depends a lot on the buyer. If it is someone in the business who is expanding their business, they may be making the purchase, in part, because they can gain efficiency by cutting out some middle management, usually from the company being acquired. If it’s purely an investment for the buyer, they are more likely to want to keep the employees.

Ensuring Financial Records and Reports Are Ready for Due Diligence

Before considering a sale, it is of utmost importance that your books and records are in order.  Prepare in advance by having them reviewed by legal counsel and/or a CPA – you will want to resolve any issues before the selling process commences.  We will delve a bit more into due diligence documents in Part 2 of this article.

Put Together the Right Team of Advisors to Develop a Plan

By assembling the right team of professionals early on, you can have a plan in place before attempting to sell.  Your team will help you understand the vulnerabilities of your company, protect you along the way, and spot issues early on that can hopefully be resolved to keep things on track.  You may want to consider employing legal counsel, an investment banker, CPA, and a business broker, among other professionals.

Have business contracts reviewed by legal counsel to make sure that the legal structure of your business is most efficient for a sale.  Make sure that all of your intellectual property arrangements are in writing and that it is clear who owns what in those arrangements; when ownership is ambiguous, the value of the business can be lessened.  Further, by ensuring that the legal structure of the ownership of your business is the best structure for a sale, your transaction may be simplified and you won’t end up paying more taxes than necessary. We will expand on this more in subsequent parts of this article.

In addition, you should separate out different lines of the business if you are not selling the business as an entirety.  It is also wise to consider whether you will transfer some ownership of the business to family or others in advance of selling.

Sign a Nondisclosure Agreement and Letter of Intent (LOI)

As soon as you have an interested buyer and before you discuss any details of the business, you should enter into a solid nondisclosure agreement that holds the potential buyer in confidentiality for a period of at least five years regarding any information you disclose.  Further, your legal team should prepare an exhaustive letter of intent (LOI).  The LOI outlines the structure of the sale, the purchase price and closing costs/dates, and addresses other issues such as indemnity and escrow.  You should ensure that everything you want is set forth in the letter of intent before you sign, as this document is your best leverage for negotiation and options as the sale proceeds.

Consider Your Tax Exposure Well in Advance of the Deal

Many factors will affect your tax liability when you sell your business.  Carefully plan with your tax advisors in advance regarding the structure of the transaction and what you should expect and prepare for.

Conclusion

Whether buying or selling a business, there are many preparations and aspects to consider along the way.  In the next portion of this article, we will address how to value a business and addressing due diligence considerations. In the final section, we will explain some basic differences between an asset sale vs. stock sale when it comes to tax reasoning and liabilities, as both options have benefits and drawbacks.

Article Written By:
Jill-Ann Weickhardt
Business and Commercial / Real Estate
jaweickhardt@nullwaterfallattorneys.com

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