THINGS TO REMEMBER WHEN SELLING YOUR BUSINESS: A CLIENT’S PERSPECTIVE
November 20, 2012
By Ken Hollis
I recently was involved in selling a company where I was the CEO and was a majority stakeholder. It was a robust operation focused on providing health-related services for seniors (i.e., podiatry, vision care, continence care, etc.). Providing those types of services to seniors is a highly-regulated industry driven by multiple payers. We averaged anywhere between $8-10 million in annual revenue through the efforts of over 70 employees.
Despite my best efforts, as well as those of my advisors, selling my company was still one of the more difficult experiences of my entire life! Selling a business is complicated stuff, and when you’re on the selling side of the transaction, there are so many unforeseen challenges and obstacles, all of which run against a game clock that winds down toward the agreed-upon closing date. In addition, you have numerous people objectively analyzing your business……..your baby that you’ve poured time, money and energy into over the years. That process isn’t always comfortable.
I really enjoyed, however, working with the Forrest Firm and primarily James Forrest, as my corporate transactional counsel. Recently, James asked me to compile some thoughts for his blog audience, to provide a client’s perspective on the process of selling a business. I know that no two deals are alike, but I’d like to share some thoughts that may help people, whether they are selling a really small business or a multi-million dollar operation.
The Almighty LOI
I can’t stress enough the importance of spending the proper amount of time and attention on getting the Letter of Intent fleshed out correctly in the early stages of the transaction discussions. The Letter of Intent, also known in legal shorthand as the LOI, is the non-binding document that outlines the fundamental aspects of the transaction of selling a business. It serves as the basis for the voluminous transaction documents that are typically negotiated heavily by the parties and executed by the parties at closing.
From a technical standpoint, the LOI is where the parties outline areas such as how they intend to structure the purchase, as well as any points of negotiation, including pricing, conditions, warranties, liabilities, and more. To me, after being immersed in a transaction for several months this year, the LOI is the deal. Even though the LOI is technically non-binding, you’ll have a tough time negotiating points differently than how they are clearly spelled out in the LOI for purposes of the definitive and final transaction documents. From the minute you receive any kind of notification that you have a potential buyer, you should get your corporate attorney and investment banker involved in properly structuring and outlining the deal. Transactions are two-sided, and you need people protecting your interests early and often. The better your inputs for the LOI, the greater your outputs at closing is a main lesson I learned from this process.
Deploy Your Specialists
While having a great quarterback for the transaction in the form of your corporate attorney is essential from day one, I can’t stress enough the importance of bringing in multiple specialists to represent your interests. The more you get into the meat of a deal, you see that there are areas where you need drill-down expertise at your disposal.
For example, when you’re selling a company with several dozen employees, you’d better have a great employment law specialist on board to review the employment agreements and ensure a smooth transfer to the new ownership. We also needed attorneys and accountants to review multiple areas of the business. As another example, the business of senior care is one that is highly regulated, especially in light of third-party payers like Medicare participating in the relationship between provider and patient. Any time you have government involvement in your business, it begs that you have a highly-skilled compliance lawyer in your arsenal of advisors.
There are many more examples I could give outside of these rather large, obvious ones like employment and compliance. Skilled advisors can really save your deal when it comes to reviewing agreements such as options plans for executives, agreements in place with vendors and service providers, and so much more.
The bottom line here is that just as it’s so urgent to involve your lead corporate attorney from day one, the army of specialists should follow closely behind with very early involvement in the transaction. Don’t walk onto a landmine by trying to conserve costs as it relates to specialists. This is an extremely critical moment for your business and the right people should be engaged and deployed.
Read Those Representations and Warranties Carefully
You’ve invested years of your life building your business. Don’t zone out at a critical moment and forget or fail to read and analyze carefully the representations and warranties that the purchaser is asking you to provide in the transaction documents. These are statements such as “there are no liabilities related to the business” and “the assets are not subject to any liens or encumbrances.” There are many different types of representations and warranties that focus on each individual part of your business (e.g., employment matters, litigation, tax, contracts, corporate structure, etc.). These representations and warranties give the purchaser comfort in fully understanding exactly what they are buying.
What you don’t want to have happen is for you to collect your purchase price, and then have the purchaser come back to you post-closing with breach of contract or indemnity claims based upon your breach of the representations and warranties described in the agreement. Your corporate attorney should be intimately involved in the process of helping you understand and negotiating these representations and warranties.
One thing to note is that disclosure is the key to success in this situation. The natural reaction in the midst of due diligence is to minimize liabilities and bolster successes in order to make your company seem as marketable as possible so that the purchaser will proceed with closing. While there is some element of truth to this, from a legal liability perspective, you should disclose EVERYTHING that might be considered a liability. The more disclosures you make, the less likely that the purchaser will have a viable claim against you post-closing.
In summary, get your corporate attorney in place from the point of initial interest from a purchasing party. Have that attorney as the center of your transaction, serving as the primary point of contact for the buyers’ advisors, as well as the coordinator for all of the experts you need during the transaction, from legal specialists to investment bankers and corporate accountants.
Finally, with the help of a great team of advisors at your side, make that Letter of Intent mean something—have it protect you throughout the transaction, laying out the points of the deal, both broad and fine, in such a way that will enable you to have a smooth closing. Then who knows maybe you can move on to your next endeavors in life, professionally and personally! Selling your company is an arduous process with so many people involved no matter how you slice it, but the better job you do as the executive, enabling those on your team to help you, the happier and more successful you’ll be!
About Ken Hollis
Ken Hollis currently serves as the Chief Administration Officer for TridentUSA Mobile Clinical Services, LLC. Ken works primarily out of Trident’s Rocky Mount, North Carolina location, and he and his wife live in Chapel Hill, North Carolina.