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Ten Planning Issues in Preparing a Business for Sale
Ronald P. Adams
In today's competitive market, in Arizona and elsewhere, business owners are
increasingly busy concentrating on the issues needed to make their business
successful. Plans are made for marketing, manufacturing, distribution, customer
service, financing and all of the other issues a business owner must address.
Unfortunately, this means the typical business owner may not address issues
necessary to successfully sell a business until a prospective buyer has been
found. This lack of planning and preparation can often delay a potential
business sale, or result in the loss of a sale altogether. Doing the right
things now, and on a continuous basis even if the owners have no present plan to
sell, will mean more money and advantageous terms when it does come time to
sell.
The following ten planning issues will help prepare the business for sale and
reduce unanticipated problems that may arise when a prospective buyer begins
investigating the business for possible purchase. Regardless of whether the
business is operated as a corporation, a limited liability company, or through
some other type of entity, addressing these issues now will not only help
facilitate a sale, but may bring to light areas in which the business can be
operated more efficiently and profitably.
1. The Accountant. If the company does not have a good accountant, get one. At
least twice a year, business owners should confer with the company's accountant
regarding the company's activities and results of operations. An experienced
business accountant can share the wisdom acquired from other clients'
experiences. For example, the accountant can ensure the business avoids costly
mistakes over issues such as the proper collection and reporting of sales and
excise taxes, and can help guide the owners through compensation and employment
tax minefields. If not addressed early, unpaid tax liabilities can result in
liens that may sabotage any prospective sale of a business.
2. The Lawyer. No matter what the size of the business, the company should have
a lawyer with whom the owners can confer throughout the year, not just when a
crisis arises. Such a lawyer should be pro-active, not merely reactive. The
practice of "preventive law", the thorough review of, and consultation
regarding, business operations and procedures, leads to litigation and dispute
avoidance and cost savings. The Company's lawyer should also consult with other
professionals who serve the business to bring a team approach and fast,
responsive answers to business problems.
3. The Insurance Agent. Business owners should review a number of issues, at
least annually, with a qualified insurance professional. Items to be reviewed
with the agent include (a) the company's operations; (b) amount and scope of
coverage for 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. This review should
be done in person. Often, whether it's with the company's accountant, insurance
agent or lawyer, in person discussions result in the exchange of better
information and responsiveness.
4. Forms of Financial Statement. Upgrade the company's financials from
compilation to at least reviewed statements. Also, keep in mind that public
companies much prefer to acquire businesses that have audited financial
statements. You should therefore have a cost/benefit discussion with the
company's accountant as to upgrading to audited statements.
5. Confidentiality, Non-Disclosure and Non-Compete Agreements. The existence of
confidentiality, non-disclosure and non-compete agreements are not only
important considerations for a potential buyer, but are critical to the
protection of the operating business. Long before a potential buyer comes on the
scene, key employees having intimate knowledge of your customers, customer
lists, methods of doing business, pricing and other similar proprietary
information might be tempted to leave for a competitor or to establish their own
competing business.
Even if a key employee has not left by the time the owners are negotiating for a
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 the owners to the employee. For key employees, reasonable agreements
covering confidential information, and, where applicable, non-competition after
termination of employment, are highly desirable to both current owners and
potential purchasers.
6. Protection of Intellectual Property. If a patent, trade name, trademark or
copyright is important to the business, its owners should confer, at least
annually, with a qualified intellectual property lawyer to see that they 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.
7. Human Resources and Employment Practices. Lawsuits and EEOC complaints seem
to occur more frequently each day over issues such as sexual harassment,
discrimination in hiring or termination, wrongful termination, wrongful
elimination of job positions and refusal of the company to offer other duties to
a partially disabled worker. These and other HR problems can turn a small fire
into a major conflagration, with high legal costs, and exposure to potentially
huge compensatory and punitive damage awards. In a proposed sale or merger of
ownership interests, rather than a sale of assets, uncertainty over contingent
liabilities in the employment practices area can quell a potential deal. Even in
an asset sale, where the buyer is acquiring an in place work force to continue
to operate, poor past employment practices can hinder a deal. It is imperative
that business owners have policies in place and review their employment
practices with a qualified professional to ensure they do not let inattention to
these matters destroy a pending deal.
8. Assignment of Leases. Real property and equipment leases typically contain
provisions restricting or prohibiting transfer or assignment absent the consent
of the landlord or lessor. Usually, this consent can be obtained only upon
satisfaction of certain requirements, which can cost time, money and sometimes
kill the deal. This is especially true in the case of an asset sale, which will
usually involve transfer of the seller's equipment and property leases. If the
business leases real or personal property from a non-related third party, be
sure these leases contain provisions permitting free assignment in case of a
sale of the business, or at least impose only reasonable conditions concerning
the financial strength of a proposed assignee and limit the right of the
landlord to refuse to consent to the assignment. Negotiation of these lease
provisions with a future sale of the business in mind will help ensure these
agreements will not be the stumbling block to that sale.
9. 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 these
agreements are in writing and protect against unreasonable termination. Business
owners need to be sure that such agreements, like property and equipment leases,
are freely assignable, or only have reasonable restrictions against assignment,
and cannot be terminated upon a sale of the business.
10. Environmental Investigation of the Company's Facility. When a facility used
by the company is an environmental unknown, or the company engages in operations
that give rise to environmental concerns, negotiations regarding environmental
contingencies and responsibility for clean-up costs, indemnifications and
escrows are sometimes so difficult that the deal dies. Quite often, the buyer
does not have time to delay the closing until all the environmental questions
are answered and problems resolved to the buyer's satisfaction. Accordingly,
whether the company owns or leases its facility, investigate the property now
for the presence of hazardous materials, long before a sale is on the horizon,
so that any problems can be dealt with in a timely manner and no surprises turn
up during the buyer's investigation of the business.
Following the above suggestions will not only better position a business for
sale, but will also enhance its opportunities for sale and protect its interests
along the way. Hoopes,
Adams & Alexander, PLC, is a Chandler, Arizona, law firm offering services to
Phoenix-area clients in the areas of estate planning, entity formation,
commercial and real estate transactions, and civil litigation. |
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