Top 10 “Must Do’s” Before Selling Your Business
May 10, 2016
After years of hard work, day after day, night after night, you have decided to part with your “baby”— sell your business.
It can be one of the most difficult decisions of your life, and one of the most consequential. It’s easy for emotion to cloud sound judgment when making the tough call to plant that “for sale” sign into the competitive marketplace.
As a corporate law attorney, I’ve witnessed too many business owners fall into a litany of avoidable traps and pitfalls. Stay safe and follow these 10 steps before signing on the bottom line:
1. Have your financial statements audited by an independent, outside firm
A simple compilation or review is not detailed enough. Audits provide the buyer with the highest comfort level and the most accurate picture of your company.
2. Document and value intellectual property
Intellectual property — names, inventions, tag lines and more – may be more valuable than your company’s fixed assets. Ensure everything is properly registered and that all parties are protected from infringement.
3. Review important contracts
Consider extending any important expiring contracts — for example, sales contracts with your best customer or supply contracts for your key raw materials. Ensure that the new buyer can maintain access to the best quality and pricing.
4. Create written employment agreements for key employees
These agreements, detailing compensation, let a buyer know key people – and their institutional knowledge – will be staying. To build in flexibility for the buyer, consider “evergreen contracts,” which renew on an annual basis.
5. Review your estate plan
If you plan to share some of the proceeds with your children, don’t wait until after the transaction closes. Consider making changes to your estate plan before the transaction and stay ahead of the curve.
6. Clean up the liability side of the balance sheet
A clean balance sheet may enable the transaction to be structured as a stock sale. At its most basic level, there are three ways to structure a business sale: sell stock, sell assets, or in some cases, enter into a merger or consolidation.
A stock sale is usually best for a seller because all gains are capital gains.
One of the principal reasons buyers don’t like to buy stock is because they assume all liabilities of the company. Cleaning up your liabilities will help appease the buyer and give you a realistic chance to sell stock.
7. Pull out assets you want to keep
Maybe there is a personal insurance policy or the company has a car you like, or a vacation home. The company can transfer these assets to you individually before the sale process starts.
8. Review and update corporate minutes and corporate records
It is easy for companies to fall behind in their documentation, or stock certificates can be lost. Go through all records, mindful of the details. This attention to detail reflects well on the company and shareholders.
9. Consider a preliminary business valuation
You may be too close to your business to realize how valuable it is. A business valuation will give you a frame of reference allowing you to make good decisions during the sale process.
10. Conduct a lien and judgment search
Sometimes, unpleasant surprises lurk in the records. Lien and judgment searches should be done at both the county and state levels in advance of a sale so you have time to fix any surprises.
If possible, owners should plan several years in advance of a sale. For the sale process to run smoothly and yield the greatest benefit to the owner, think long-term. If you want to retire at age 65, start these steps at 62 or 63. A market downturn could necessitate delaying a sale, or the buyer may want you to stay for a year or two.
By running through this checklist, a business sale can ease you into a comfortable retirement, and buy you the most important asset of all — peace of mind.
Bradley J. Gunnison co-chairs McNees Wallace & Nurick LLC’s Corporate & Tax Group and is also a certified public accountant. His primary areas of focus are business transactions, corporate finance, tax and business planning. He can be reached at 717.237.5479 or firstname.lastname@example.org
McNees is a full-service law firm based in central Pennsylvania with more than 130 attorneys representing corporations, associations, institutions and individuals. The firm serves clients worldwide from offices in Harrisburg, Lancaster, State College and Scranton, PA; Columbus, OH; and Washington, D.C. McNees is also a member of the ALFA International Global Legal Network. www.mcneeslaw.com | @McNeeslaw | LinkedIn