Below are five straightforward tips a business owner should consider with an eventual sale of their business in mind. At the risk of stating the obvious, the further away an anticipated sale is, the more opportunity for planning you’ll have.
1. Financial Statements. Buyers want to see well-organized financial records and statements. Financials audited by an outside accounting firm is the gold standard, but that tends to be prohibitively expensive and unnecessary for most businesses. Financials “reviewed” or “compiled” by an outside firm are adequate in most instances — in fact, internally prepared and maintained financials will likely be acceptable if well organized. What is most important is that they are consistently maintained in a professional manner.
2. Corporate Book. This one is low-hanging fruit… do you have a corporate book? If so, do you know where it is? Whatever the situation, in most cases it’s relatively easy to address any shortcomings — but you want to do so prior to a prospective buyer conducting due diligence and pointing out, for example, that you haven’t had any corporate minutes in ten years or that formal stock ownership records suggest your now-deceased grandfather is still the owner. The lack of minutes can usually be easily addressed, but lack of clear ownership can present potential for disruption of a proposed transaction.
3. Contract Assignment Clause. As discussed in a prior article, most sales of small to mid-sized businesses are asset sales. This means substantially all of the assets of the selling business must be transferred to the buyer, including key contracts — and for some businesses the majority of value will come from customer contracts. It’s imperative that the “Assignment” clause buried within the boilerplate terms is either silent as to your ability to assign the contract, or better yet, expressly permits an assignment in the context of a merger or sale of all or substantially all of the assets of your business. Without the ability to assign your agreements, three likely alternatives exist: written consent will need to be obtained from each contracting partner; the sale will need to be restructured as a merger or stock sale; or the deal dies.
4. Bank Pre-Payment Terms. At the time of securing or refinancing bank financing, if your loan arrangement has “yield maintenance fees” (a/k/a pre-payment penalties), ask your banker to add an exception so that those fees will only apply if you refinance with another banking institution. With this exception, you won’t incur those fees if you’re able to pay off the loan with excess cash flow or in the event of a sale. I’ve found that most banks are willing to accommodate this request, though they may insist upon some minimum period of time before the loan can be repaid — for example, 12 or 18 months.
5. Co-Owner Conversations. Lastly, if there is more than one owner of your business, have you ever talked about an eventual sale of or exit from the business? This seems like a no-brainer issue to some, but I’ve had more than one conversation with business owners anxious about a possible sale, but they don’t know how to broach the subject with their co-owner(s). Consider this: whether or not the matter is discussed, an ownership transition is inevitable, and if not discussed and planned for, the front-runner exit scenario is likely a business dissolution with a sale of assets for pennies on the dollar. It’s worth facing whatever concerns you may have and bringing it up. Bringing in an advisor to guide the conversation and assist in brainstorming options may be helpful, and may also buffer some of the anticipated awkwardness.
Ander Smith is an accomplished attorney with a practice dedicated to assisting clients on a wide range of business transactions. Prior to his current solo practice, Ander worked both in-house and at national law firms. You can contact him at [email protected].
Information contained in this article is not intended to and does not constitute legal advice, recommendation, or counseling under any circumstance. This article does not create an attorney-client relationship. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.