Selling a business can represent the pinnacle of a lifetime’s work, offering the ability to diversify assets and the opportunity to create generational wealth. Preparation and planning will simplify the process and increase the likelihood of success.
As any successful seller will attest, selling a business can be an exhausting process that amounts to a second full-time job for the owner and key managers. While daunting, we’ve come up with seven proven strategies for preparing your business for sale that will reduce closing costs, maximize yield, and increase your chances of closing.
Before we make our listings, sellers should understand where business deals are going. In recent years, an increasing number of buyers and sellers have purchased representation and warranty insurance (RWI) to cover post-closing indemnity obligations. While RWI is beneficial to the seller as it reduces the size of escrow and other impediments and limits the seller’s exposure post-closing, RWI operators require very thorough due diligence from the buyer, thereby increasing the due diligence burden on the buyer .
Seven proven strategies are:
1. Consultant. Selling a business is a highly technical legal, tax and accounting exercise that requires experienced professionals who understand the terms of the market and transactions. Some of the most expensive deals we’ve worked on involved immature seller advisors. Save yourself money, hassle and delay by hiring experienced transactional lawyers, investment bankers and accountants.
2. Financial statements. Before starting the sales process, make sure your financial statements are current and accurate. Where personal or household expenses of a business may be called into question, we strongly recommend that you work with your advisors to resolve these issues before due diligence begins.
3. Conduct a lien search. While banks and finance companies are quick to place liens on assets, removing a lien can be cumbersome. Often the owner never knows about certain liens, the bank neglects to release the lien, and in some cases, the surety party that filed the lien no longer exists or is part of another company with which the business owner no longer has any ties . These “phantom liens” present unique challenges. Generally, the buyer — and more importantly, its lenders — will not close the deal while the underlying asset is secured by a lien. While valid liens can be paid off at closing, virtual liens can take weeks to discharge. By doing a lien search early in the process, you can “scare off” phantom liens.
4. Good reputation. We recommend verifying that your legal entity is in good standing in its state of incorporation/formation and in each state in which your business is eligible to do business. It’s very easy — and very common — for an entity to be in bad standing or even have its charter revoked for failing to file a state tax return or annual report. For businesses with complex entity structures or filing consolidated tax returns, tax authorities often misapply taxes or report missing returns for subsidiaries that are part of the consolidated return. The process of correcting these errors is cumbersome and often requires someone with a power of attorney to be on the phone for hours. Also, restoring entities after revocation of status is not an automatic process in many states.
5. Business records such as contracts. Buyers don’t buy businesses without completing due diligence, which is more involved in the RWI era. You can simplify this due diligence by locating and assembling fully executed electronic copies of all business records. This statement seems overly broad and burdensome – because it is. Still, tackling this drudgery on the front end speeds up the hard work, which in turn speeds up your finishing touches.
First, you should obtain full, executed copies of all contracts, such as customer and supplier agreements, leases, software agreements, and benefit plan documents. Additionally, you should collect all stock certificates and ledgers, minutes and other administrative documents. Finally, you should collect all tax returns for the business and your benefit plan, including related 5500 forms. The list of documents that must be disclosed is seemingly endless. Sellers often tell us that files do not exist or cannot be found. Buyers will not accept this excuse. An experienced transactional attorney can provide you with a standard due diligence checklist to jump-start the process.
6. Organize. Many businesses have obsolete, slow-moving or otherwise unsalable inventory. Rather than arguing about the value of such materials, disposing of such items will make physical inventory counts easier and reduce working capital disputes after the transaction closes.
7. General courses. As a seller, you should run your business as if you own your own until you get the proceeds from the sale. Not only does the letter of intent and purchase agreement require the seller to conduct business in the ordinary course of business as it has done in the past, but the risk of a deal falling apart at the last moment remains. So, continue to maintain inventory, process accounts payable and do other usual operations until close.
These few action items will save you time and money, and sweeten the flavors of celebratory bourbon cocktails at your closing dinner. If you hire the right consultants, they will buy.
Christopher SW Blake is a partner at Hahn Loeser & Parks LLP.Contact him at 216-274-2552 or [email protected] John Paul Lucci is a partner at Hahn Loeser & Parks LLP.Contact him at 216-274-2310 or [email protected]
