Many business owners have a dream of selling their business one day. For some, the contemplation of selling is not an option because maintaining a business for the family and future generation is the desired goal. Nevertheless, if an enticing offer comes forward, it may be hard to ignore. If you're contemplating selling your business, picture yourself as the prospective buyer. What questions would you ask and what records would you want to see in making your decision?
Looking at a business at face value is always attractive because you imagine the possibilities; however, any potential buyer will want to look behind the curtain and make a determination as to whether or not everything is truly in order. A buyer will not want to assume too much risk in making such an investment if the business is not in good shape from a document standpoint.
Below are some of the things to think about in preparation for an ultimate sale:
1. Are the financial records up to date?
One of the first things that prospective buyers want to review is the financial records of the business for the current fiscal period and at least the previous three annual periods. It is also important to insure that your accounting systems are appropriate for the type of business. Transactions can fall apart when prospective buyers have discovered failings in the financial reporting systems of a business.
2. Are the corporate records up to date?
A prospective buyer will review, among other things, the `governing documents' of the business, as well as any public filings. Sellers should ensure that all of their corporate records are up to date and reflect the current stakeholders, board of directors, members/organizers and officers of the business.
3. Are the material contracts of the business easily accessible?
As part of their due diligence, prospective buyers will want to review all of the material contracts relating to the business. Certain industries have contracts that are very detailed and specific to attract buyers; thus, it is never too early to start collecting signed copies of all material contracts, client lists, licenses, registrations, permits, etc. so that they are easily accessible in a central location. There are many challenges associated with this project, but it is necessary. Any potential buyer will want to conduct an audit and see the status of the deals the potential acquired company is involved in.
4. Are there any outstanding issues with customers or suppliers?
It is important to resolve such outstanding issues as old payables, old receivables, warranty claims, discount or rebate issues, debts, or any other issue that could indicate to a prospective buyer that you have an unhappy customer or supplier.
5. Are the employment terms relating to key employees adequately documented?
Where certain employees are key to the success of the business, ensure that their terms of employment are sufficiently documented in appropriate employment agreements or consulting agreements. Consideration should also be given as to what effect, if any; a sale may have under the terms of any such employment or consulting contracts including applicable restrictive covenants.
6. What consents are required in connection with a sale of the business?
It is important to know in advance what consents are required in connection with a sale of the business. For example, consent may be required from the entity's landlord, from a third party to a material contract or license, or from the lenders to the business. A seller will also need board approval/shareholder approval to ensure a sale can validly take place under its governing documents. An assessment should be made as to when might be the appropriate time to approach such parties regarding obtaining the appropriate consents.
7. When do leases expire?
Review your real estate leases, especially if your business is tied to its location. Make sure the lease does not expire or require renegotiation within the time frame that you plan to sell the company. If the company's location will discourage buyers, consider moving the location before you place the business up for sale. It can be difficult to convince a Buyer to take the properties associated with the business and the Seller will be stuck with those leases, etc.
8. Is there a list of company assets? Fully evaluate and catalog company assets, from property to warehouse inventory to employees.
If company assets include real estate, separate or sell the property before the company hits the market. Real estate can devalue a business simply because it complicates the financial records, which in turn can make potential buyers hesitant to assume a new business with added expense. Be sure all inventory, equipment, etc. is accounted for. It is also important to see if there are any liens on the property because a deal may need to be worked out between the Buyer and Seller about assuming or paying off these liabilities.
9. Do I need to consider any type of tax planning?
It is very important for the sellers to review the current ownership structure with the tax advisors and to discuss any available tax planning strategies. Far too often sellers leave this to the last minute when, in some cases, certain strategies are no longer available. The same can be an issue with a buyer without knowing the tax liability from the purchase.
In general, it is always best to be well prepared for the due diligence process, as this will save time and money in the end. Help of legal counsel and brokers can both be vital towards obtaining good advice and guiding parties through a sale of a business.