HOW TO PREPARE YOUR BUSINESS FOR SALE: LEGAL CONSIDERATIONS AND ESSENTIAL STEPS FOR SUCCESS
Selling a business is a significant decision that requires careful planning and execution. Whether you're a small business owner or a seasoned entrepreneur, preparing your business for sale involves several crucial legal considerations to ensure a smooth and successful transaction. In this blog post, we will explore the key steps you need to take to prepare your business for sale, while highlighting the legal aspects that demand your attention throughout the process.
I have been advising clients starting, buying, selling, operating, financing, and investing in businesses for over 20 years in Los Angeles and Ventura County, CA, and in New York City. Whether you want to purchase or sell a business, I will guide you through the steps and proactively address legal and related financial and other business issues.
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Conduct a Comprehensive Business Evaluation
Before shopping your business for sale, it's essential to conduct a thorough evaluation. This evaluation involves reviewing your financial statements, assets, liabilities, contracts, intellectual property rights, labor and employment matters, regulatory compliance, and any potential legal risks. Engaging the services of a qualified business valuator and an experienced business attorney can help you accurately determine the value of your business and identify areas that require attention from a legal perspective.
Evaluate your financial statements to ensure they are accurate and up to date. Potential buyers will closely examine your financial records, so it's crucial to present a clear picture of your business's financial health. Additionally, review your assets and liabilities to identify any potential red flags or outstanding debts that may impact the sale.
Examine your contracts and agreements to ensure they are valid, enforceable, and transferable. Identify any critical contracts that may require consent from third parties for assignment or change of control. This includes reviewing leases, supplier agreements, customer contracts, and any other material agreements.
You should engage a management-side employment law attorney before you get to the due diligence review phase with a potential buyer. Employment law is strict, and violations can be expensive, even draconian, especially in California, New York and certain other states.
Clean Up Your Legal Documentation
Prospective buyers will scrutinize your legal documentation to assess the risks associated with the business. Ensure that your corporate documents, internal governance, licenses, permits, contracts, leases, and any other legal agreements are up to date, well-organized, and readily accessible. Review these documents with your business attorney to identify any gaps, ambiguities, or potential liabilities that may arise during the due diligence process.
Reviewing your corporate documents with your business attorney should including the charter (articles of incorporation or certificate of incorporation), bylaws, shareholder agreement, operating agreement, buy-sell agreement, and/or partnership agreement. Confirm your internal documentation accurately reflects current ownership and management structure of the business. Address any discrepancies or outdated provisions to avoid confusion during the sale process. Be sure to note whether any person as a right to acquire shares or membership interests in your company, or whether anyone (e.g, a lender) has a right to approve the sale of your business before it closes.
Address Compliance and Regulatory Matters
Ensure your business is compliant with all applicable laws, regulations, and industry-specific requirements. This includes updating obtaining necessary permits, licenses, and certifications. If any licenses or permits are set to expire soon, initiate the renewal process in a timely manner. Additionally, review any industry-specific requirements and ensure that your business meets all necessary compliance standards. Assess and resolve any outstanding compliance issues promptly to avoid complications during the sale process. Your business attorney can guide you through the regulatory landscape and help address any compliance gaps.
Perform a comprehensive compliance audit to identify any potential violations or gaps in your business operations. This includes reviewing employment practices, environmental regulations, data protection and privacy laws, and any industry-specific compliance requirements. Address any identified issues promptly to minimize potential legal risks and enhance the appeal of your business to prospective buyers.
Protect Intellectual Property Rights
Intellectual property (IP) assets, such as patents, trademarks, copyrights, and trade secrets, play a vital role in many businesses. Safeguarding your IP rights is crucial when preparing for a sale. Review and update your IP portfolio, ensure that all IP registrations are in order, and consider seeking legal advice on IP valuation and potential infringements. Protecting your IP strengthens your negotiating position and enhances the overall value of your business.
Conduct an audit of your intellectual property assets to ensure that they are adequately protected. Review your patents, trademarks, copyrights, and trade secrets to ensure that registrations are up to date and that you have implemented necessary measures to maintain their secrecy and exclusivity. If there are any licensing agreements or royalty obligations tied to your IP, review them carefully and ensure they are transferable or can be renegotiated with the buyer.
Note in particular whether there are any persons who are not currently an owner of the business who has reason, or thinks she or he has reason, to claim ownership or other rights to any of your company's IP. Be sure to organize all employment agreements or other agreements that provide for any employee, contractor or other party to assign ownership or licensing rights to your company for any key IP or other properties.
Engage a Business Valuator
To accurately determine your business's value and set a competitive asking price, enlist a qualified business valuator or appraiser, who is familiar with your industry in your location. They analyze financial statements, industry trends, and other factors to provide an objective valuation. This assessment serves as a basis for price negotiations with potential buyers. I can also highlight areas for improvement. A business valuator's expertise helps navigate financial considerations and strengthens your position. Look for accredited professionals with industry experience. Their insights enable informed decisions and increase the attractiveness of your business to potential buyers. Incorporating a business valuator's analysis into your preparation strategy enhances the chances of a successful sale. The fee you pay an appraiser can more than pay for itself in terms of time saved in negotiating a price, and in lost money for agreeing to a price offered by a buyer if you don't know whether it is fair market value.
Involve Your CPA and Business Lawyer
In addition to engaging a business valuator, it is crucial to involve your Certified Public Accountant (CPA) and business lawyer throughout the process of preparing your business for sale. Your CPA will play a vital role in analyzing your financial statements, conducting tax planning, and ensuring compliance with tax obligations during the sale process. Collaborate with your CPA to review financial records, identify tax implications, and develop strategies to maximize your financial gains from the sale.
Your business lawyer will provide invaluable guidance and expertise in navigating the legal complexities of selling your business. They can assist in negotiating and structuring the sale agreement, drafting and reviewing contracts, addressing any legal issues or disputes that arise during the due diligence process, and ensuring compliance with applicable laws and regulations. Furthermore, an experienced business lawyer can spot issues that a non-attorney cannot, which can save major headaches, delays, and avoidable costs. Legal counsel's involvement will help protect your interests, minimize legal risks, and help ensure a smoother and more successful sale.
TAKEAWAY
Preparing your business for sale is a meticulous process that requires careful attention to legal considerations. By conducting a comprehensive evaluation, addressing legal risks, ensuring compliance, protecting your intellectual property, and involving your CPA and business lawyer, you can enhance the value of your business and increase your chances of a successful sale. Collaborating with experienced professionals will provide you with the necessary guidance and expertise to navigate the complexities of the sale process. By taking these essential steps, you'll position your business for a smooth and successful transition while safeguarding your interests along the way.
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A.I.
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Disclaimer
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.