IS YOUR COMPANY READY TO SELL?
November 2, 2013 by Brown Fox
As a business owner, it is never too early to begin preparing your business for a sale. Even if you are years away from selling, owners should avoid making mistakes now that can potentially delay or kill a future M&A transaction, or reduce the purchase price. The below list is not exhaustive, but representative of the most damaging pitfalls business owners should take steps to avoid.
1. Finance and Accounting. A potential buyer will almost certainly require a thorough examination of the financial statements and accounting records of the company. When owners omit transactions from financial statements, when personal transactions are run through the business, or when lenders’ security interests are too broad and all-encompassing, potential buyers will likely renegotiate terms or walk away.
2. Stock (Equity) Ownership. In a sale of the equity of a business (stock / membership interests), the potential buyer will examine the seller’s capital structure to attempt to spot certain issues that may create risk for the buyer post-close. Among other things, a potential buyer will scrutinize:
- Whether there is a clear and accurate record of the stock (equity) owners of the company and the equity held by each.
- Whether the issuance of stock (equity) of the company was exempt from registration under state and federal securities laws.
- Whether transfers of stock (equity) were documented properly.
- Whether agreements to issue securities include unusual provisions (such as anti-dilution rights) that can handcuff the company moving forward.
- Whether the company used unlicensed brokers or finders to refer investors to the company.
3. Employee Issues. Potential buyers may have issues with any of the following issues related to a company’s employees:
- Key employees have not signed non-competition / non-solicitation agreements.
- Employees have not signed confidentiality agreements protecting trade secrets and intellectual property.
- The company has promised key employees equity but no documentation exists.
- Stock options to employees were done incorrectly.
- Immigration laws (if applicable) were not followed.
- OSHA requirements not followed.
4. Third Party Contracts. Buyers are also wary of third party contracts that contain the following provisions:
- In an asset sale, Anti-Assignment Clauses in contracts make it difficult to assign contracts to the buyer post-closing.
- Exclusive contracts (territory, customers, licensing technology) may unnecessarily restrict the company.
- Lopsided provisions regarding damages, non-competition, or indemnity.
Although avoiding the above pitfalls will not guarantee you a successful sale, it will go a long way to maximizing your chances of a successful transaction.