By: JOHN N. FLEMING
As an attorney who has assisted clients with the sale of their businesses or the purchase of new businesses, I have observed that the process of selling a business can go more smoothly and can result in more money for the seller if the seller plans for the sale or otherwise considers certain legal issues in advance. I have set forth several areas of pre-sale legal planning that a seller should investigate well in advance of any sale to help maximize the value received.
Advisors: Prior to selling your business, visit with your accountant and attorney to discuss the specifics of your business and a general timeline and deal structure that you can expect. You may also consider visiting with a business valuation advisor, a business broker and an estate planning attorney.
Type of Entity: The type of entity, whether it is a corporation, sole proprietorship, limited liability company, or partnership and the applicable tax-election, whether it be subchapter C, subchapter S or other pass-through classification, will have a great impact on the overall deal structure. You should meet with your advisors to understand the implications of these issues. Does your structure maximize value? Can anything be done to maximize value by planning ahead?
Deal Process: In the typical sale transaction, the following documents and steps are often utilized: (1) The potential buyer often enters into a Nondisclosure Agreement pursuant to which the buyer agrees to keep the information confidential, to return the information when finished and to only utilize the information for the evaluation of the business and the due diligence process; (2) The buyer and seller often enter into a non-binding Letter of Intent pursuant to which the basic deal terms are agreed to and which restricts the seller from talking to other potential buyers during the continuing sale process; (3) The parties negotiate an acquisition agreement such as an Asset Purchase Agreement, which is the critical document containing the terms of the actual transaction; and (4) Ancillary documents such as a Non-Compete Agreement, Promissory Note, Security Agreement, Escrow Agreement and Consulting Agreement may be utilized as well. Review the process with your advisors.
Deal Structure: Typically a business is sold either through the sale of the stock in the company or through the sale of its assets. Often, the buyer prefers an asset purchase transaction to attempt to isolate and leave the unwanted liabilities with the seller and to receive a step-up in the basis of the assets purchased. In an asset purchase, the specific assets that are purchased are identified along with the specific liabilities to be assumed. Alternatively, in a stock sale, unless otherwise stated, the purchaser generally receives everything the company owns including its assets and liabilities. Discuss the types of deal structures with your advisors. What structure would be best to maximize your value? What structure would attract more buyers and what structure is the most realistic to expect?
Review Documents: Meet with your professional advisors and review sample documents that would govern a potential transaction. For example, in an asset purchase agreement, the seller will be expected to make certain representations to the buyer relating to the business such as litigation, taxes, compliance with law, financial statements and ownership of assets. Do your answers maximize value or communicate complexity, disorganization, and problems and issues that lower value? Discuss what you would need to disclose. In addition, are you willing to be subject to restrictive covenants, including a non-compete, non-piracy or non-solicitation agreements? These agreements add or preserve value for a potential buyer and are often expected.
Taxes: Discuss with your attorney or accountant the tax consequences of the transaction so that you can maximize what you receive. Once again, the type of entity and the applicable tax election will both impact the deal structure, deal flexibility, taxes due upon sale and how much the seller receives and keeps. Additional tax issues, among others, include the amounts allocated to the assets being purchased and the estate taxes that apply with respect to the seller’s plans for his or her family.
Company Cleanup: To attract and keep potential buyers interested, review your corporate records and minute book to make sure that they are complete and accurate. Sloppy or incomplete records communicate the wrong message. Consider separating your personal items, if any, from the company. Are there personal assets that have become intertwined with the business? Perhaps the company owns a house or boat or artwork that needs to be segregated from what will be sold or otherwise impacts the operational performance of the company. Should land be separated from the business and held in a separate entity which leases the property back to the company? Conduct a lien search on yourself and the company to see what is on file. Perhaps a financing statement relating to an old paid-off loan hasn’t been terminated. Have your advisors review your records with you.
Contracts: Inventory all of your material relationships and contracts. As part of the due diligence process that the buyer will require, the buyer will expect lists and copies of these documents. Review your business to see if you can formalize personal relationships that can be valuable to the buyer. Do you have written contracts with your customers or are they based on course of dealing and history? Can these important contracts be assigned to a buyer or do you need the consent of a third party? Consider the use of employment contracts with non-compete clauses and restrictive covenants for key employees if they are appropriate and add value. Analyze your customer base and supply chain and whether the relationships are reflected in contracts that can be assumed by a buyer.
Estate Planning: Is your estate planning in order and what are the implications of the transaction on your estate planning? Can your estate planning goals be achieved with pre-sale estate planning efforts?
Business Valuation: What are your expectations regarding how much you should receive in a sale? Discuss with your accountant and attorney the value of seeking a rough or more specific business valuation. A business may be valued a number of ways including the value of the assets, use of benchmarks and multiples related to sales or revenue and the use of earnings multiples. Your advisors may also have worked with business brokers that have successfully assisted their clients in sale or purchase transactions.
Shareholder/Owner Issues: How many owners are there? Are all of the owners or a majority in agreement that the sale should occur? Are their shareholder agreements that are in place? State law may provide that the sale of substantially all of the assets will trigger appraisal or dissenter’s rights for the shareholders of the company. Your attorney should be consulted regarding these issues.
Approval Process: What approvals are necessary to sell your business? In the case of a typical corporation, the applicable state statutes along with the Articles of Incorporation and Bylaws set forth the framework for approval. Generally, in the context of the sale of a business, a sale of assets would be characterized by state law as a sale of “all, or substantially all” of the assets “other than in the usual and regular course of business” and approval must be obtained from the Board of Directors and Shareholders of a selling company. Also, have you entered into agreements or loans or mortgages that are implicated by a sale, restrict a sale or require a third party to approve the sale? Speak with your attorney regarding the approval process necessary to complete the sale transaction.
Conclusion: As with most things, a little planning can help a seller maximize the value received and otherwise make easier what is often a difficult experience. If selling your business is a possibility or a goal, then planning ahead is a wise investment. When forming an entity and starting a business, it is not unwise to even ask at that time what your exit strategy will be. Often it is the sale of the business. While the aforementioned list is not exhaustive, consideration of these issues ahead of time will help you when it comes time to sell.
For help concerning the sale or purchase of a business, contact John at (828) 254-8800, or for more information, please visit http://www.mwbavl.com/attorney?id=13#details.
________________________________________________________________________
John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law. John has been named to the 2014 Business North Carolina magazine’s Legal Elite list of the top lawyers in North Carolina and was named in the in Corporate Counsel category. The Legal Elite recognizes the top lawyers in the state in specific business-related practice areas as voted by their peers, and only about 3% of the state’s attorneys are awarded the distinction.
Subscribe