When a business owner is thinking about selling her business, there are many factors to consider and steps to be taken. In the months and years preceding an exit, an owner usually focuses on driving financial performance to maximize a potential sales price. Indeed, buyers are often enamored by profitability measures, so the laser focus is rational and understandable; however, through our experience in representing a variety of sellers, we have identified several other areas that should be considered when planning an exit. While these factors are not all glamorous, they are critical to a successful and efficient exit, and they should be addressed in the early stages.
To our clients who are contemplating transactions, one best practice we recommend is to locate, organize, and assess key organizational and business documents well in advance. Depending on the structure of the company and nature of the business, these documents may include bylaws, operating agreements, loan documents, customer and vendor agreements, services agreements, and/or employment or independent contractor agreements. The business should identify discrepancies or gaps in the materials, including expired, missing, incomplete, and unsigned documents. Reviewing these key documents in advance will allow the business to address discrepancies or gaps in the documentation. This can prove particularly useful in two key phases of the acquisitions process: due diligence and disclosures.
Most business owners are aware of the concept of due diligence. In a typical acquisition, a potential buyer sends the seller a due diligence checklist, detailing a variety of documents the buyer wants to review prior to closing. Depending on the buyer, this list of requested documents can be rather extensive, and it tends to be broader in scope than many sellers anticipate. Clients on the selling side are usually able to quickly provide most of the requested documents; however, there are almost always certain items that are tougher to track down. While buyers generally understand that full and complete documentation may not always be available, there are times when certain materials are crucial to a buyer, and a transaction cannot be completed until formal documents are produced. Ultimately, a buyer must be satisfied with its due diligence, and being able to quickly respond to requests can ease that process, keep fees down, and help maximize the sales price.
A lesser known part of the acquisition process is disclosures, which typically consist of a set of schedules attached to the purchase agreement, known generally as disclosure schedules. As a general rule, the disclosure schedules offer sellers an opportunity to make caveats about certain representations and warranties in the purchase agreement, which can serve to limit potential liability following closing. Where due diligence helps buyers evaluate transactions, disclosures help sellers protect themselves. Despite their different purposes, the disclosure schedules in a typical transaction contain much of the same information that was requested in due diligence. Due to the similarities in content, many sellers find the process of completing disclosure schedules redundant and frustrating, contributing to what we term “deal fatigue;” however, thorough disclosure schedules are critical to protect the seller. On the bright side, because much of the same material is utilized in due diligence and disclosure schedules, addressing the key documents ahead of time is akin to killing two birds with one stone.
In addition to just being a good business practice, there are tangible benefits to having an organized library of fully executed documents well in advance of a transaction. While every deal is different, clients often end up burning the midnight oil, tracking down key documents in the midst of a transaction when their efforts could better be spent focusing on specific deal terms and structure. This is particularly true when a missing document or signature requires the cooperation of a third-party, who may or may not have any incentive to respond in a timely fashion. We can certainly take steps to help our seller clients when gaps in documentation are identified, but the process can delay closing, cause frustration, add to deal fatigue, and increase legal fees. Getting ahead of this process can ultimately save a business stress and money, and it will likely lead to a more successful exit.
If you have questions regarding how to start an internal review of your documents, or for any other Business Related matter, please contact an attorney in our Business Planning & Transactions practice group.