Preparing to Sell a Business

By: Donna M.D. Thomas | 12.6.17 | Media

If you are contemplating the sale of your business, there are several steps you should take before engaging with potential buyers that can maximize your net sales proceeds, make the sale transaction process smoother, and avoid potential concerns on the part of the buyer.

First, you should consult with your company’s accountant and attorney (or with an experienced mergers and acquisitions (“M&A”) accountant and attorney if your company’s advisors are not versed in such matters), to understand the various ways in which the sale transaction may be structured (asset sale, stock sale, merger, etc.) and how such structures can impact your net after-tax proceeds from the transaction and your post-closing liability.

You should also consult with these professional advisors before you hire a business broker and before you sign a letter of intent (“LOI”). An M&A attorney can help you negotiate the terms of your agreement with a business broker (as brokerage fees and commissions are often negotiable) and ensure that the agreement clearly sets forth the obligations of the broker, the duration of the agreement, any exclusivity, the consideration that is subject to brokerage fees and that which should be excluded, and the amount and timing of payment of any fees and commissions (which should be paid as and when the seller receives the sales proceeds, with payment deferred on contingent consideration such as an earn out).

It is likewise important to have an M&A attorney represent you in negotiating an LOI. Although most LOI’s are non-binding, the terms of the LOI set the parties’ expectations and it is often difficult to alter these material terms in negotiating the definitive purchase and sale documents. For example, the purchase price should often be subject to adjustments (such as adjustments for actual versus a target net working capital, or prorations for taxes and other expenses). The LOI should also limit any period of exclusive dealings for the benefit of the buyer and include restrictions against soliciting or hiring the seller’s employees and limitations on the term of the seller’s representations and warranties and on the amount of its indemnification obligations.

Sellers should also have prospective buyers sign a non-disclosure agreement (“NDA”) before engaging in any sale discussions or negotiations with them.

Before dealing with prospective buyers, it is also advisable for a seller to undertake the following steps:

  1. Consult with a valuation expert who has experience in your company’s field/industry to obtain an objective range of the fair market value of the company.
  2. Review corporate/organization documents to make sure they are up to date. Make sure that the company is in good standing in its state of formation, has qualified to do business as a foreign corporation in all other states where necessary and is current on all personal property returns, annual reports and information returns required to be filed by it. Make sure the company’s minute book is up to date, well organized and complete, with resolutions that reflect the current board members, officers and/or managers and approval of corporate actions, as appropriate. Make sure the company’s stock/ownership ledger is current and complete, and reflects all historical transactions in the company’s stock or membership interests and the current stock/ownership distribution, and address any missing stock/unit certificates.
  3. Run a lien search on your company (UCC financing statements and liens recorded with the U.S. Patent and Trademark Office and Copyright Office) to determine whether there are any old, outstanding liens associated with paid off debts that should have been released by lenders, and contact any such lenders to clear and terminate the liens before prospective buyers begin their due diligence.
  4. Itemize and organize your material contracts for buyer’s due diligence and review material contracts for any transfer restrictions or required consents to assignment.
  5. Review and organize, for buyer’s due diligence, documentation regarding intellectual property (“IP”) owned by the company, and ensure there is proper documentation and chain of title of the company’s ownership of its IP. Make sure all maintenance filings are up to date for trademarks and patents.
  6. Make sure you have agreements and non-solicit/non-compete agreements with key employees to incentivize them to continue employment with the buyer post-closing (particularly if the sale transaction will involve an earn out).
  7. If you have an incentive plan (stock options, stock appreciation rights, etc.), review the plan documents and agreements and formulate a plan for paying the participants and cancelling the plan in connection with the sale transaction, as buyers are not interested in assuming or dealing with such obligations.

If you have questions about selling or buying a business, Goodell DeVries can help. Contact Donna Thomas, Esq. at 410-783-3522 or