| You are a business owner, small
or large, it does not matter, you are the lifeblood of your business. You
have invested years of your life, countless weekends and untold amounts of
money building, growing and marketing your business. Now, you are in the
position that many entrepreneurs find themselves in, you children are
neither interested nor capable of taking over you business. You have
estate planning needs, business succession needs, and most likely need to
diversify your portfolio. After much consideration, you have decided to
sell your business, either outright, or by selling the assets.
There are many phases to a business sales transaction. Keeping these phases separate will protect you from inadvertently agreeing to that which you do not want to agree. The first phase generally is the initial contact by a prospective buyer, either individually or through a broker, lawyer or accountant. If mutual interest is piqued, this initial discussion will be followed by some level of written communication requesting more detailed, and often confidential, information. The information generally sought is financial information, information that should be considered by you to be proprietary in nature, and confidential. You have protected your financial information from your competition and customers for years, and now someone is asking you to give it away so they can analyze your business. To protect yourself and your business you should first require the prospective buyer (all prospective buyers) to sign a confidentiality and non-disclosure agreement. This protects you from any disclosure of the financial information by the prospective buyer, or his agents, and also provides for remedies, such as injunctive relief, damages and attorney fees. You want to restrict a buyers use of the information received only to himself and those that assist him in evaluating your business as a potential acquisition. After disclosure is made through a confidentiality agreement, the prospective buyer should provide to you a letter of intent from to purchase so that you will have some indication that he is serious about buying your business. This letter should set forth the parameters of the prospective purchase, such as assets, stock, or both; intellectual property, patents, trademarks; accounts receivable; debts; real estate, etc. The prospective buyer may want you to forego marketing the business to other prospective buyers during the process, this is generally called a standstill agreement. I would not advise doing this as this takes an important negotiating tool out of your hands, that is the buyer’s knowledge that he is competing for a business. It may have an impact on the price, terms and possibly on the speed of the sale. Upon completion of the letter of intent, the buyer will want to begin his due diligence to determine exactly what it is that you have, what you do not have, and how much it is worth, as well as the relative liabilities involved. This information includes providing the buyer with copies of your customer list, sales and pricing practices, key employee names and compensation, contingent liabilities, potential tax or administrative law issues (EPA, DEP, EEOC), and other detailed information. Although you have a confidentiality and non-disclosure agreement in place, you should try to give such information in coded form, that is refer to customers with arbitrary numbers. The next stage is a definitive agreement which contains extensive representations and warranties about the company whether or not the transaction involves a sale of shares or a sale of assets. After the agreement is signed, the buyer will conduct an extensive investigation (due diligence) in order to know exactly what he is buying. As you get closer to the closing, you a will have to prepare schedules describing critical information about your business. Generally, this period from negotiating a definitive agreement to the closing takes about 30 days, therefore it is going to dominate your time during that period. Plan now to assemble key documents in case the possibility of a sale arises quickly. It is much easier and cheaper to assemble corporate records now in the regular course of business. If they are not "in place” when the possibility of a sale arises, it will be much more stressful and expensive to gather them under the tension of a pending closing. Assign someone like your CFO to have ongoing responsibility for maintaining the following corporate documents: article's of incorporation; charter; by-laws; minutes of shareholders and directors' meetings; qualifications to do business in other states; and a current certificate of good standing from the Secretary of State. Real estate records are always important, therefore gather in one file deeds, title insurance policies, mortgages, leases; and environmental audits. A buyer will want to know everything about existing loan transactions, therefore, your file should contain notes, statements of the balances due on the notes, security agreements and guarantees. Employment records are essential because of the large liability that they control, therefore all of the following should be in one file: employment contracts; a list of employees, their job descriptions and their compensation; age and sex discrimination policies; retirement plans; 401(k) plans; health and life insurance programs; and compliance with ERISA. Insurance policies are major contracts in most companies, therefore you should have current policies and premium information relating to your products liability, public liability, property damage, key-man, officer and director errors and omissions and workers' compensation insurance. Tax returns will be asked for, therefore you should keep in one file your federal and state income tax returns as well as capital stock and sales tax returns. Finally, all of your principal contracts should be in one place. Set the size of what is a "big" contract for your company, such a $50,000.00 or more. Make sure they are all signed, dated and the exhibits are attached. Include in this file warranties that your company has given and received, distributorship agreements, licenses and the like. It is inevitable that your company’s ownership will change some day. Good Iong-range planning anticipates the sale. Taking small steps now to get the company ready wilI save time and money in the end. |