Selling Your Company
Many of my clients are interested in learning about the process that they will have to go through in the event they sell their company. In this article, I will provide a few simple steps to get your company ready to be sold. Then, I will discuss the major parts of that sale process, namely the letter of intent, due diligence and the definitive purchase agreement.
Corporate Documents: In the due diligence process, the buyer will want to see a number of documents that are crucial to your business such as your corporate records. By making sure those documents are all in order before you find a buyer, you can make the sale process move along more smoothly, increase the chances that the sale will eventually be successful and potentially increase the sale price for your business.
Many companies neglect to keep their corporate records up to date. They fail to update the corporate records to reflect the current officers and directors for instance. Getting your corporate records up to date is not difficult. Even if you have not done the required annual minutes for many years, you can still prepare them to complete your corporate minute book before you start the sale process. You can update the minutes for important purchases and changes in the shareholders, officers and directors of the company. Buyers want to make sure your corporate records are complete and reflect the true ownership, officers and directors. If you can accomplish that goal, then there is one less thing for the buyer to worry about.
Important Contracts: Another important group of documents a buyer wants to see is your important contracts. These contracts set forth the critical provisions that govern the main products and services you sell and the compensation you can expect to receive. A buyer will want to see a number of different types of agreements. The following are some of the key types of agreements you should gather: 1) office leases; 2) supplier agreements; 3) other long term leases (office equipment, cars, etc.); 4) any other revenue producing contracts; and 5) any employment agreements. If you just ask yourself what relationships bring you revenue and where you spend money, you will be able to identify most of the relevant agreements. Once you have all the complete documents, place them all in a 3 hole binder all tabbed with an index for easy reference.
Financials: Probably the most important documents in any sale of a business are your financial records. A buyer will want to review and dissect the financials if the buyer is going to make an offer for your business. Therefore, all your financial records must be in good order before the sale process begins.
Buyers will want to see as much financial information as you can provide them. You should be ready to provide 3-5 years worth of financial records. These should include monthly income statements and balance sheets as well as yearly compilations. The financials should be consistent in their appearance and preparation so that figures from one time period can easily be compared with those from another time period. If a buyer cannot follow the logical progression of your business from a financial perspective, that will be one more reason not to buy the company.
A buyer also generally expects you to provide pro forma financials setting forth your reasonable estimate of how your company will perform in the future. The more you can show the buyer it may be able to make in the future, the better the sale price for your company. Most buyers are looking towards the potential of your company when they decide to buy, not necessarily how much you have made in the past. For that reason, the pro forma financial projections are critical to getting a premium price for your company.
This is a broad overview of the main areas to be concerned with when gathering the documentation to sell your company. Like most things in life, the key to selling your company is preparation. Next I will discuss the actual process that you can expect to go through when you sell your company.
Letter of Intent: The letter of intent is the document wherein the buyer provides the seller with the broad terms under which the buyer may be willing to purchase the seller’s company. The letter of intent generally includes things such as the price for the purchase, the assets that are being purchased, the liabilities involved in the transaction, confidentiality provisions and exclusivity provisions.
The first, and most important part of the letter of intent, is the statement of the purchase price. The seller, through the letter of intent, can usually determine whether or not the buyer believes the company is worth as much as the seller thinks it is. Another important provision in the letter of intent is the exclusivity period associated with it. What this means is that the purchaser generally requests the seller negotiate exclusively with the purchaser for a stated period of time, usually anywhere from 3 to 6 months. This means the seller is not allowed to try to solicit any other offers for its company or negotiate with any other potential purchasers.
Of note most of the provisions in the letter of intent are specifically identified as not being binding on the parties. This is particularly true of the purchase price, which most letters of intent do not hold as a binding provision on the purchaser. Instead, the letter of intent can be seen as more of a statement of interest by the buyer but neither the buyer nor the seller is obligated to follow through with the sale. Given the fact the letter if intent is not binding on the parties, in many transactions it is not used at all.
Due Diligence: The due diligence process is where the buyer obtains information about the seller in order to allow the buyer evaluate the overall nature and value of the transaction. There are a number of different parts to the due diligence process including evaluation of financial information, contracts, corporate information and intellectual property. An important part of the due diligence process includes a review of documents. The purchaser will provide the seller with a list of documents that the purchaser wishes to see. This is usually an exhaustive list, many pages long, that covers every possible document that could be relevant to the transaction.
Once the documents are compiled, they are forwarded by the seller to the purchaser for review. The review is usually performed by a team of people assisting the purchaser such as accountants and lawyers. The due diligence process also usually involves a visit by the representatives of the purchaser to the offices of the seller. A team of different members of the management of the purchaser generally review the different categories of documents related to finance, legal and operational issues of the seller. The financial member of the team will review and audit financial records, while the operational members of the team will validate and verify the operational matters of the company, such as confirming all intellectual property assets are as represented by the seller.
The due diligence aspect of the process can be very frustrating given the intrusive nature of the demands made by the purchaser. The purchaser’s demands for information often seem overbroad given the nature of the transaction. Also, the due diligence process can have a disruptive impact on the seller because the seller’s management staff is working on the sale transaction and not attending to the day-to-day operations of their business. However, the purchaser needs to make sure that it thoroughly evaluates the seller before it can make a binding offer to purchase the company in the definitive purchase agreement.
Purchase Agreement: The definitive document that is binding upon the parties is the Purchase Agreement, whether it is an Asset Purchase Agreement or a Share Purchase Agreement. The sale of a company generally takes one of two forms, either an asset sale or a share sale. In a share sale, the ownership equity of the seller, usually shares of stock, is sold by the shareholders of the seller to the purchaser. In this instance, all the assets and liabilities of the selling company are transferred to the purchaser by virtue of the fact that the purchaser is acquiring the seller’s entire company.
The other method of accomplishing the sale is through an asset sale. In an asset sale, the assets of the seller are purchased from the seller and most, if not all, of the liabilities will stay with the selling company. The shareholders of the seller consent to the sale in this case but do not sell their shares in the seller. Instead, the shareholders continue to own the selling company and all the associated obligations of that company. This type of transaction is usually favored by the purchaser since it does not have to assume the debts and obligations of the seller. Conversely, the seller’s owners will usually want to have the transaction operate as a share sale in order to make sure that the seller is not liable for the debts and obligations of the company on an ongoing basis.
Unlike the letter of intent, the definitive Purchase Agreement is binding upon the parties. The Purchase Agreement will generally contain a binding purchase price along with a number of representations and warranties made by the seller. The representations and warranties in the Purchase Agreement are very important. They cover things such as lawsuits, the accuracy of the financial statements provided by the seller, the ability of the seller to enter into the transaction and other information on the existing liabilities of the seller. If any of the representations and warranties made by the seller and its shareholders, are untrue, the seller and the shareholders are obligated to pay any damages that result from untruthfulness of the representation and warranty. Therefore, it is imperative for the seller to provide full disclosure to the purchaser of the company.
The process of selling a company can be difficult and time consuming. However, the payoff in the end for the seller, and hopefully the purchaser, are well worth the effort.
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.
