The first part of the six-part series on Selling Your Small Business provides an overview of the steps a small business owner should take to best prepare and position the business for sale once he or she has determined to sell. The subsequent five installments will discuss related steps to be taken during or after positioning such as: fiduciary considerations for controlling shareholders (in the case of a corporation), and key terms and concepts in typical term sheets and sale agreements, among other things.
In this overview, we assume that: (i) the business is closely-held, meaning that its shares or interests have no ready market for sale and that there are a small number of shareholders, (ii) the controlling shareholder controls the board of directors if the business is a corporation or that he or she is the manager or managing member if the business is an LLC, and (iii) the owner holds a majority of the shares or interests, as well as the attendant majority voting power.
If there is more than one shareholder or member and any shareholder or member opposes a sale, a business owner should consider consulting an attorney to assist in reviewing the governing documents, including any liquidation preference or other right given to specific investors or classes of shares or interests. The owner should also review any key loan agreements or other key contracts for provisions dealing with any required advance notice, acceleration of loan repayments, or termination rights in the event of a sale transaction and change of control.
The owner should go through all corporate documents, minutes, reports, incentive plan drafts, option grants, certificates, employment agreements, contract and other materials to determine that final, signed copies of all documents are available, and that corporate actions have been duly authorized and papered. In many cases, officers can go back and create paper transactions that were taken without disagreement or discussion, provided that there is no attempt to post-date any document or agreement involving a third party where the post-dating would constitute a fraud or material misrepresentation.
The owner will eventually need to provide a potential buyer with a great deal of information about the business’s inner workings: including proprietary methods, products, clients, service providers, and financials of the business. The potential buyer may not be willing to enter into a confidentiality agreement at first, prior to reviewing at least a basic set of financial statements and other materials, but the owner should hold back truly important information until the buyer executes such an agreement either separately or as part of a term sheet. A confidentiality agreement must be carefully drafted to ensure that it is comprehensive in the information it covers; as a result, the owner will want to create a strong form to ensure he or she enters into consistent agreements and knows what information is protected and how it is handled and maintained.
Selling a business is a major step and it is often a very personal process, as the sale places a price on the time, emotional energy, hard work and self-sacrifice that the founder has put into the enterprise. A sale must be carefully considered and each step planned, as it represents the owners’ last chance to recognize value from the business, and even minor missteps can have significant consequences. For this reason, a business owner should consider consulting legal counsel or another professional early in the process.
Notably, certain consultants offer business sale consulting services on a fixed fee basis, helping business owners to consider all aspects of a sale or other exit and, if desired, serving as a point person for the various service providers involved in an ultimate sale (e.g., lawyers, accountants, business broker, financial advisor, etc.).
Preparation and positioning of your business at an early stage can save significant time and money and can prevent mistakes later in the process. In addition, the preparation outlined above can help to show the business in its best light, and ultimately could result in a higher initial offering price.
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