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Selling a business takes preparation: Owners should address legal, financial and tax issues

Posted On: February 15, 2011

Business owners should do their homework before planning to sell their businesses, taking particular care of the legal aspects, financing, and tax issues in order to avoid pitfalls.

That was an important message at a recent seminar titled “How To Prepare To Sell Your Business” presented by Fennemore Craig, William & Henry, and Henry & Horne.

More than 35 business owners attended the event and learned what to do in preparation for selling a business.

Susan Wissink, chairwoman of Fennemore Craig’s Business and Finance practice, said business owners can take immediate steps to prepare for a sale. According to Wissink, foremost among the pre-sale tasks are to. 

  • Prepare your books and records for a potential sale
  • Obtain buy-in from owners and key executives
  • Remove potential deal breakers and correct weaknesses in your business from a legal standpoint
  • Consider a third-party appraisal
  • Consult with the proper advisors, including investment bankers, accountants and legal counsel
  • Prepare a comprehensive summary of the business.

“Taking these steps in the beginning can help identify potential problems or issues and avoid headaches down the line,” she said.

Wissink said business owners should review their governance documents and update them to reflect the correct owners and business operating procedures, formalize agreements among owners and put them in writing, and ensure that legal requirements for holding meetings, filing annual reports, and updating the business address and statutory agents have been met.

In addition, business owners should make sure their business documents, such as supplier contracts, real estate and equipment leases, permits and licenses are in order. Lists of assets belonging to the business, as well as personal assets belonging to the owner that will not be conveyed in a sale, should be made. Company policies, procedures, employee benefit plans, staff position summaries, salaries, employee agreements, customer and supplier lists and employment agreements also should be reviewed and updated.

Business owners also should meet with key executives and co-owners to formulate a business sale plan and determine who will respond to inquiries about a potential sale. Also, owners should understand the legal rights of minority shareholders and obligations to them.

Resolving potential deal breakers, such a pending or threatened litigation, also is important. Business owners also should focus on removing restrictive covenants against the company, resolving contractual disputes, and evaluating and resolving outstanding legal, tax, banking or financial issues.

Protecting intellectual property is an important, but sometimes overlooked, aspect of selling a business, Wissink said.

Business owners should be sure they have title to all intellectual property assets, including patents.

 “Intellectual property is not just patents or processes, it can the business name. Determine if the name of your business will convey with the sale. Do you want your name associated with a business you no longer own? If not, decide whether you need to restrict the use of the name or take it off the table,” she said.

David Iannini, Chairman of William & Henry, an investment banking firm, told seminar attendees they should consider the structure of their companies, whether they be C-Corp, S-Corp or LLC. Financial reports also should be in order, including year-end reports with audited financials, reviewed financials or year-end inventory counts, he advised.

In addition, business owners should be sure to determine the value of the business and price the business for sale accordingly – pricing it too high before value is determined can derail the sale. Pre-qualifying buyers also is key, Iannini said.

Brad Dimond, a certified public accountant at Henry & Horne, said business owners should not overlook tax implications of a sale and due diligence, including representations in historic tax filings, property taxes, payroll taxes, sales taxes, unclaimed property, escrow and holdback.

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