How To Sell a Business
If you are contemplating selling a business, or wondering how to sell a business, planning ahead can save you significant time and expense. It can also help you avoid unnecessary hiccups that could delay getting to a closing. Most importantly, preparing a business for sale can go a long way in maximizing the value you receive and increasing the chances that you will sell your business. Questions or comments?
Listed below are some issues that may complicate a transaction if not planned for in advance. The list is by no means exhaustive, but should give you a sense of some of the important issues impacting the sale process. Also as important is Preparing a Business for Sale, which a business attorney can assist with.
If you are a buyer, you should check out Buying a Business.
Seek Out a Business Lawyer.
Before you discuss selling your business with a third party, you should sit down with your attorney to discuss your plans and objectives. It likely took you many years to build your business, and getting legal advice will help you maximize value.
Business law attorneys who have experience in buying and selling businesses will often spot issues before the sale process begins. A business lawyer can also work with you, your accountant, and your financial and insurance advisors to help you select the most advantageous structure for your transaction. A business lawyer can also prepare a confidentiality agreement for you to use prior to engaging in discussions with a potential purchaser. Most importantly, a business attorney can help you understand how to sell a business in the most efficient way.
In some cases, business owners start discussing a deal with a potential buyer prior to discussing the deal with their own advisors. Some business owners will even execute a letter of intent or memorandum of understanding without first consulting a business lawyer. They often believe (sometimes incorrectly) that the document will not be binding. So, if you are thinking about selling your business, consult with a business lawyer first.
Identification of Potential Issues when Selling a Business.
A business lawyer can help identify potentially problematic issues before a buyer begins its due diligence process. This often includes making sure that the company’s books and records are up to date.
A business lawyer can also work with you to identify third party issues. For example, if the business has a credit line, the business may need to arrange for pay-offs and the clearance of liens on the assets of the business.
In addition, the contracts of the business should be reviewed to determine whether they contain provisions that could impact the sale transaction. Some contracts have assignment or change of control provisions that may be triggered by a sale. These may require that the business first obtain consents from third parties before the sale closes. These types of provisions are common in commercial leases, but also in many day to day business contracts.
By identifying these issues in advance, a business lawyer can help you develop a plan for addressing them prior to or as part of the transaction.
Title and Ownership Issues; Known Claims.
As part of their due diligence process, buyers of businesses often focus heavily on title and ownership issues as well as pending claims against the business. Whether the transaction is structured as a sale of equity or assets, a buyer will often request documentation evidencing a chain of title to equity and key assets.
Where there are gaps or missing documentation, these can often be collected or addressed before they become issues that can delay a transaction. These documents can range from bills of sale and contracts, to equity certificates and transfer documents. They can also involve agreements with employees and independent contractors that address ownership of intellectual property (e.g., copyrights, trademarks, patents, etc.).
In cases where documentation is insufficient or missing, new documents may need to be put into place. If the business is subject to any claims, a lawyer may be able to assist in their settlement. Part of learning how to sell a business is educating yourself on how to deal with common issues that arise in sale transactions.
Employee Issues when Selling a Business.
Buyers often seek comfort that key employees (and sometimes owners) will remain with the business to ensure a successful transition. If employees are “at will”, this often means that the buyer will want firm commitments from key employees or owners at closing.
These sometimes are new employment agreements with the buyer that take effect only at closing, or transition services provisions in a purchase and sale agreement. For each, business owners need to think through what they are willing to commit to a buyer and also develop a plan for dealing with key employees.
A business should review its insurance early on in the process. Insurance often forms an important funding source for issues that might otherwise be subject to claims between the parties.
Business owners must work with their insurance advisors to minimize any adverse impacts from a potential transaction. In certain instances, “tail” policies can be purchased to cover the business for pre-transaction losses that fall under claims-made policies. Tail policies can be expensive, so reviewing insurance issues early in the process is important.
Depending on the type of business involved, government approvals may need to be obtained in connection with a transaction. If a business is licensed, it may need to seek approval from the appropriate regulatory authority.
In some cases, individuals are licensed as well. Identifying and planning for these issues in advance can help avoid delays. This is even more important when the buyer entity or principals must obtain their own licenses to operate the business.
Business Broker/Investment Banker for Selling a Business.
Business owners often consider using a broker or banker in connection with a potential sale. A key factor is whether a broker or investment banker would be able to materially increase sale proceeds.
Whatever the case, a business should negotiate a written agreement with the broker or banker. This agreement should clarify when and what amounts will be payable, and when the obligations to pay will cease. Brokers and bankers, like all advisors, have their own perspectives on how to sell a business. Ultimately, as the owner, you have to digest all of the guidance provided and make business decisions on your objectives for your business sale.
The New Jersey Bulk Sale Act.
The sale of a business typically is subject to New Jersey’s Bulk Sale Act (N.J.S. 54:50-38). A seller of a business should understand the requirements of New Jersey’s Bulk Sale Act as it can affect the timing and other aspects of a sale transaction. Following New Jersey’s dissolution instructions are key, but reference to the statutory provisions is necessary as well.
Dissolution after Selling a Business.
If the sale of your business was structured as an asset sale and the sale closed, congratulations! However, your work is not done until you have closed out your business. Your counsel can assist you with the dissolution of a New Jersey corporation or other entity.
Building your business took time, money and a lot of hard work. Start your sale process right by working with a business lawyer with experience. When you have questions about how to sell a business, an experienced business attorney is a great place to start.
Copyright 2016-2017, 2020 Geoffrey G. Gussis, Esq.. All Rights Reserved.
Shared by Geoffrey G. Gussis, Esq., a business lawyer and technology lawyer licensed in New Jersey and New York. Learn more about me, the legal services I provide, and articles I have written. Contact: firstname.lastname@example.org or (732) 898-0549 or (646) 389-2946 for a free consultation.
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