FUNDAMENTALS OF CORPORATE LAW: SELLING YOUR BUSINESS
July 21, 2011
By James Forrest
One of the key ways that corporate counsel can bring value to a business relationship comes at the end of an owner’s tenure in a business, when he or she wishes to sell the business to another individual, group of partners, or another company altogether. Selling a business can be an exciting time—a time when you expect to “cash out” by recouping your initial investment and sell at a profit, or when you find someone better equipped to take your company to the next level of success.
There are several key topics that must be visited when considering a potential divestiture. These different areas include, among other things, issues related to pricing and method or schedule of payment, due diligence, and liability. Each topic requires a thorough collaboration between counsel and company to be able to provide a fair assessment of the company to the prospective buyer, as well as to protect the interests of the seller throughout the process. According to Clint Bundy, who leads the Charlotte office of Bundy Group, a 20 year-plus M&A firm, strong legal counsel, when combined with solid investment banking advice, is indispensable to the process of selling a business: “A good, experienced M&A attorney offers the client and the client’s investment banker objectivity, legal insight, and problem-solving capabilities in the negotiations. In addition, an investment banker – M&A attorney combination can provide a client with the right mix of experience, ideas, and ‘good cop/bad cop’ strategy when navigating the negotiation process.”
The first key topic you must consider when selling your business is the different options for pricing and selling the business. While a corporate accountant can help with determinations for book value of the company based on components such as the product inventory, residual sales, client relationships, and the like, corporate attorneys can help in the negotiations of the sale contract. While many companies sell outright at the time of purchase, through transfer of cash and/or stock by the buying entity, counsel may be able to draft creative arrangements when an outright sale is not feasible for either party. F or instance, as opposed to a up-front cash transaction, counsel may recommend an “earn out” scenario, whereby the buyer invests a percentage of the initial sale value up-front, and then follows a buyout schedule of payments over a set period of months or years that both parties find amenable to not only their respective financial positions, but to the health of the company itself.
Due diligence is also a critical aspect of a corporate sale. A business attorney can, among other things, assist you in providing information to the potential buyer in an organized manner, creating schedules to the definitive transaction documents, and can certify many areas of interests for prospective buyers, such as the company’s good standing with the Secretary of State and various taxing and regulatory entities. As well, representations and warranties concerning the company’s respective accounts receivable, payables, and tangible assets are fundamental to the buyer’s understanding of the health and perceived continued well-being of the company. Providing organized and detailed information during due diligence can fuel a much more competitive sale as a result.
Finally, as always, good corporate counsel can protect you with regard to liability, particularly after the completed sale. The goal of any corporate sale should be to eliminate any lingering liability once the seller turns over control of the business to the buyer. Once you have handed over the keys, you should be able to move on to your next venture, whether it’s a new business or retirement. Proper execution of the sale contract and examination of all of the representations and warranties goes a long way to properly securing a liability-free future for the seller.