If you are thinking about selling your business, there are a number of steps that you can take now, prior to negotiating with a buyer, that will make the sale process easier and may even make your business more marketable. Here a few steps you should take:
- Identify Key Employees: Are there employees that are vital, or very important, to the day-to-day operation of the business? Are there employees that would be difficult to replace and whose absence would render the business less valuable? If so, it would be wise to at least explore the possibility of providing those employees additional incentives beyond their normal compensation to remain with the business. This could include bonuses or equity or non-equity equivalents. Employees do not typically like uncertainty, and a pending sale (without the possibility of payout to the employee) may cause important employees to jump ship, leaving the business reeling at the exact time it should appear most buttoned up. Also, after identifying the select key employees, if any, it may be wise, with the advice of counsel, to broach the idea of a sale with them and feel out their reaction prior to pursuing a sale.
- Solidify Your Ownership of Intellectual Property: It may come as a surprise to business owners that individuals involved in the development and creation of the business’s software, materials, and processes prior to the formation of the business could claim an ownership right over those intellectual property assets. Additionally, work done on the business’s behalf since its formation may have ambiguous ownership depending on the agreements the business entered into with the service providers, contractors and employees. Best practice calls for the business to receive assignments or transfers of any and all intellectual property rights used in the operation of the business from all members, employees and independent contractors that were involved in the creation of the business’s intellectual property. The buyer in the sale of a business will almost certainly require these type of assignments, and getting them on short notice with a sale pending may be impossible or expensive (requiring incentive payments).
- Contracts. Begin reviewing (and listing) each of the contracts that the business is a party to, and identify those contracts that are absolutely essential to the operation of the business (i.e., an exclusive licensing agreement). Can those contracts be assigned to a new purchaser without the consent of the other party? Is it likely that the other party to the contract will want to build a relationship with the buyer prior to consenting to an assignment? With the advice of counsel, raising the possibility of an assignment with the other contract party may provide some peace of mind or let you know in advance what will be needed during the sale process.
- Ensure the Books and Records are Complete and Match Ownership. Prior to marketing your business for sale, it is advisable to make sure your books and records are complete and accurately reflect the current ownership of the business. In a long-running business with multiple owners that have transferred interests back and forth over the years, often times those transfers and assignments have been misplaced, lost or damaged, and the transfers may not have been recorded properly in an ownership ledger. Even if all current owners are in agreement as to the ownership and receive K1’s accordingly, it is important that the business records also reflect the assumption of all of the parties. Getting this buttoned up prior to presenting the business to buyers will make the business appear more professional and create less headache during the sale process.
The four steps listed above are only a few steps that could be helpful to take prior to selling a business. Other steps may be necessary or advisable depending on the nature of the business and how that business has been run since formation. If you are contemplating selling your business and need assistance with any of the foregoing or advice on what other steps could be taken now, please reach out to me directly.