Entrepreneurs put in an immense amount of effort to build profitable businesses. However, at a certain point, they may decide to cash out and move on. When that day arrives, they don’t want any issues to arise that could ruin the sale and cause the potential buyer to walk away. With over four decades of experience in business law and M&A, I’ve helped over 1,000 buyers and sellers navigate the complexities of buying and selling small businesses, with most of them ranging in size from under $1 million to $10 million.
From my experience, there are six key tasks every business owner should undertake to prevent a future sale from going awry.
1. Address personnel issues: Losing a key employee before the sale closes can affect the value of the business or even kill the deal. To prevent this, business owners should have legal measures in place to keep employees engaged and onboard. Leadership and essential team members should sign non-compete and non-solicitation of customer agreements, and employees should receive a financial incentive, like a phantom stock agreement, to stay until the closing date.
2. Protect intellectual property: A company’s intellectual property, such as patents, trademarks, copyrights, and trade secrets, is crucial to its value. Failing to protect them can reduce the sale price or cause the deal to collapse. Businesses need to identify which rights need protection and file the appropriate forms. It’s essential to ensure that all intellectual property rights have been assigned to the business and that any necessary software licenses are obtained.
3. Address lease complications: A lease can be a critical asset for businesses that don’t own their property. However, many lease agreements include clauses that make it challenging to transfer the lease to a new owner. Business owners should ensure that their leases grant them the right to exercise renewal options, and any future purchaser of the business can also exercise these options.
4. Keep corporate records up-to-date: Poorly maintained corporate records can lessen the purchase price or even negate the sale. Business owners should ensure that ownership arrangements are clear, shareholder agreements are executed, and other contractual obligations are in writing.
5. Resolve outstanding liens: Business owners can find that creditors have failed to release liens even after they’ve paid off loans. This discovery can delay a sale, so it’s essential to search for any liens that could affect the sale.
6. Ensure all contracts and agreements are in writing: Written contracts and agreements are essential for proving the legality of the agreements’ terms. Therefore, business owners must ensure that they have fully executed contracts and licensing agreements with vendors, suppliers, customers, and consultants. Further, they should be able to assign these relationships to a purchaser.
By addressing these areas, business owners can improve their chances of avoiding any surprise issues that could ruin a profitable sale.