Key Legal Strategies For Maximizing The Likelihood and Value Of A Future Business Sale
This article lists key legal strategies and practices for business owners considering a company sale as a potential short- or long-term exit strategy. These practices are intended to minimize red flags that may derail or adversely impact a company sale. Whether or not a sale is achieved, these practices will create a strong legal foundation for sustainable business growth.
- Incorporate Properly. When handled properly, incorporation of the business protects owners from uncertainty and potential disputes about basic matters such as ownership of the business, company management and decision-making, the transferability of stock, and buy-sell arrangements in the event of intractable shareholder disputes. Effective incorporation also helps ensure that assets and other contributions of the company's founders are effectively vested in the company. Finally, incorporation may help owners realize more favorable tax treatment in an eventual company sale.
- Exercise Caution When Raising Capital. Outside investment introduces substantial risk and complexity into a business. Matters such as the economic and governance rights of the investors need to be carefully considered. Failure to comply with securities laws creates substantial legal risks that raise red flags for potential buyers. Companies raising capital, whether from friends and family or professional investors, should ensure the offering is handled properly and in compliance with applicable federal and state securities laws.
- Perfect Title In Key Assets. Buyers want to know they are getting good title to a seller's business assets. Companies should take care to clear up uncertainty in chain-of-title and liens or other encumbrances on company assets, including real properties, proprietary software or other intellectual property, and other tangible assets. The presence of such factors erodes confidence.
- Protect Your Intellectual Property. If a company's value is tied to its intellectual property, owners should take steps early on to establish sound IP portfolio practices. Valuable IP may include a recognizable brand or trademark, patentable inventions, copyrighted content, or proprietary formulas, business methods or customer or supplier lists. In each of these cases, a company should establish clear ownership to (or rights in) all core IP assets and maintain the value of those assets through appropriate monitoring and enforcement activities.
- Establish Reliable Finance, Accounting and Reporting Systems. Apart from their value to business decision-making, reliable metrics facilitate the due diligence process and often enhance the sale price of the business. Verification of financial data is a principal buyer concern, and reliable metrics help greatly with that.
- Establish Standard Agreements That Protect Your Company. Recurring contracts in a business, such as standard customer agreements, represent an opportunity to enhance value and minimize risk. Provisions addressing express or implied warranties, term and termination, changes to the agreement, damage limitations or dispute resolution processes, all can minimize liability exposure and impact a company's risk profile and bottom line.
- Use Well-Drafted Employment and Consultant Agreements. Proper employment and consulting agreements used organization-wide help protect the company’s intellectual property and business secrets, secure the company’s clients against improper solicitation, and create valuable certainty around the scope and duration of employment and consulting arrangements.
- Maintain Good Employment and HR Practices. Given the prevalence of wage and hour and other class actions in today’s business climate, it is important that growing businesses introduce sound employment policies and practices to ensure compliance with basic legal requirements.
- Maintain Adequate Insurance Coverage. A clear track record of appropriate coverage against risk is good business and reassuring to buyers.
- Keep Up With Compliance and Regulatory Matters. Maintain corporate books and records and required business licenses and permits. Keep up with regulatory and compliance issues. Don't let the small stuff accumulate through neglect.
- Long-Term Contracts. Long-term business arrangements should be drafted with a possible company sale in mind. Such agreements will ideally give owners flexibility to pursue a sale without triggering additional legal or consent requirements or other adverse consequences.
This list is by no means exclusive but it represents a basic set of sound legal practices that, if implemented consistently, will help owners build sustainable organizations well-positioned for strategic exit.
Barbera Corporate Law advises family-owned and lower middle market business on these matters. We also help new companies launch themselves on proper legal footing. If you have questions, please contact us.