Selling Your Business

By: Christiaan D. Horton

Business sales and acquisitions have been on the rise post-pandemic. There could be many systemic reasons for the upsurge, and it appears that momentum will continue into the near future. Business owners need to plan ahead if they wish to have a smooth transaction. Here are some areas that should be considered with any decision to sell:

1. Corporate records. It is very important that all corporate records and minutes are updated along with any ownership ledger that will trace the ownership history of the business through time because this information will be requested early in the due diligence process. All parties want to make sure that agreements are properly executed with the necessary authority for the corporate officers already in place. It can be embarrassing to learn that your company has been administratively dissolved should that catch you off guard as negotiations begin. Housekeeping on the corporate side will eliminate that risk and others.
2. Nondisclosure Agreements. These agreements should be in place as the parties begin the preliminary information exchange. Intellectual property and company trade secrets must be protected from misappropriation. A solid nondisclosure agreement will prevent uncertainty in this area and will also provide strong enforcement mechanisms for the protection of company property. Begin with an NDA!
3. Letter of Intent. Often parties will begin their negotiations by outlining principal deal points that must be aligned before the expense of the transaction and the due diligence process is triggered. Letters of Intent, non-binding in nature from a contractual perspective, have a very vital role to play. They serve as a great opportunity for the parties to outline the important aspects of the transaction that will also form the framework for the formal purchase agreement. Having a well negotiated Letter of Intent will also make the commencement of contract drafting more streamlined for the attorneys called upon to accomplish that task.
4. Purchase Agreement. Deals can be structured in many ways. Most commonly they take the form of an asset purchase or a stock/membership interest acquisition. There are pros and cons with each type of structured deal—and tax consequences are a key consideration on the front end as is post-sale exposure to company liabilities. These topics could be expanded in a separate article for sure. Suffice to say, time and effort should go into the drafting of the Purchase Agreement to avoid misunderstandings, both financial and legal, that could result in litigation down the road.
5. Disclosure Schedules. Purchase Agreements commonly have detailed exhibits or schedules attached with specific seller disclosures that buyers desire. These disclosure schedules are usually very time-consuming to assemble and are part of the due diligence process. Buyers want to learn as much as possible about the operational aspects of the company and will dive into data and information about financials, policies, third-party contracts, inventory, and asset lists, and many other subjects that will ultimately form the basis of contractual representations from the seller. Adequate time needs to be set aside for the assembly of this information. With the advent of our digital age, using a secure Data Room, which operates much like a library depository for this information, can be a great way to manage the volume of documents the buyers desire to inspect and review and to limit access to only those who need that sensitive information.
6. Closing Checklist. The Closing Checklist is a great way to organize the timetables and deliverables that each party will need to provide to the other for Closing. Legal counsel usually assists with this detail, so all boxes are checked, especially with longer lead-time items. The Closing Checklist is often used as a tool during organized team calls as the parties advance toward Closing to make sure everything stays on schedule.
7. The Closing. For most large transactions, Closing is usually set off 60 to 90 days after the execution of a Letter of Intent and/or Purchase Agreement, so the parties have time to complete due diligence, inspections, and secure financing if that is a contingency of the deal. Tax considerations should also be evaluated during this time, as numbers are starting to crystallize. The parties must evaluate their respective financial positions and confirm strategy on purchase price allocated among the various asset classes. It is during this phase that 1031 exchanges are also explored to determine if any tax shelter could be achieved and implemented with an exchange of assets through an intermediary, allowing the buyer to roll in or seller to roll out assets to achieve capital gains tax avoidance. Usually, this requires cooperation with the exchange of information, but timelines can be critical, so responsiveness is very important.
8. Post-Closing Activities. After Closing, it is strongly advised that a Closing binder be prepared with all of the transaction documents for future reference. This binder serves as a historical record of the transaction, and an easy reference source for looking up those documents, contracts, and information that may be needed once the deal is done. The due diligence documents uploaded to the Data Room can be part of the Closing binder as well, with a digital archiving of that record so all parties have the exchanged information supporting the covenants and representations in the Purchase Agreement. The assembled schedules leading into the Closing, some of which survive closing and have very significant relevance after the deal is done, need to be accessible. Taking an inventory of insurance related matters that may require a change is also a good idea in the final check down process along with the continuation of human resource efforts for the transition of the workforce.

The attorneys at Carnahan Evans PC work very diligently to make sure that transaction documents are well drafted, target deadlines are met during the transaction, and that the Closing goes smoothly. If you need assistance in this area, let us know how our transactional group attorneys could make your sale a pleasant experience!

© Christiaan Horton, 2024

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Christiaan D. Horton is a shareholder in the Litigation/Dispute Resolution Practice Group and the Transactional Practice Group of Carnahan Evans PC. He can be reached at chorton@carnahanevans.com.