Selling a business often becomes a second full-time job. For first-time sellers, the process can be overwhelming. Often, sellers are perplexed by the volume of document requests and the endless follow up inquiries from buyer’s legal, accounting and tax advisors.
Much like selling a house, sellers can streamline the process by “staging” their business for sale. While the concept of staging a business may not be intuitive, there are several steps sellers can take to make their business a more attractive acquisition target. These steps can save you time, money and eliminate a lot of frustration when trying to track down a document or several under the pressure of buyer’s repeated requests.
First, a seller should create an electronic data room that contains all material documents that a sophisticated buyer will want to review as part of its legal due diligence process. We often receive questions about what type of documents a buyer will want to review, but the simple answer is everything. For example, buyers will want fully executed copies of all written contracts. In the real world, not every business has fully executed contracts or stores them in a centralized location, but investing the time to locate, assemble and track down executed versions of contracts will pay dividends by streamlining the due diligence process and cutting down on overall transaction costs.
A second category of documents are those related to a company’s benefit plans. These documents include copies of the actual benefit contracts and IRS form 5500s, a document filed with the IRS, often by benefit plan administrators.
A third category of documents are those related to any owned or leased real estate. For owned real estate, this would include copies of any title work and surveys, environmental reports, zoning reports and any contracts related to the maintenance or serving of the physical plant at the real property. For leased real property, the company should assemble executed copies of all leases, amendments and extensions to leases and all correspondence with landlords.
A fourth category of records includes all corporate governance documents. For a corporation, this would include copies of stock certificates, stock ledgers and director and shareholder meeting minutes or copies of all director and shareholder written actions. In addition, copies of any shareholders’ or similar buy-sell agreements are critical to a buyer’s due diligence. For limited liability companies, a buyer will want to review a list of all members and the company’s operating agreement.
Fifth, buyers will want copies of the most recent tax returns and financial statements. While these documents are often requested early in the due diligence process, providing these to buyer’s counsel is a critical step of due diligence.
Finally, sellers should assemble copies of all loan documents, guaranties and other evidence of borrowed money. To the extent a business is bonded, such as in the construction industry, copies of all bonding and related documents should also be provided.
In our experience, sellers often wait until they have engaged an investment banker or have begun negotiation with a potential buyer before assembling these documents in an accessible, electronic form. However, in our experience, waiting until that stage of the process causes delay. For example, while assembling executed copies of contracts seems like an easy task, often it requires a company contacting a third party to track down a final version or an amendment. In addition, may businesses often to do not have full copies of their benefit contracts.
If a sale of your business is on the horizon, our recommendation is to begin the process of assembling the above documents before incurring the cost of engaging professionals. Doing so will position your business for an efficient marketing and sale process.
Finally, before any information or documents are shared with a third party, it is essential to require the potential purchaser to sign a non-disclosure agreement. This is standard practice in a transaction and is designed to protect the seller from the improper disclosure of seller’s confidential and proprietary information.
While selling a business can seem overwhelming, taking the above steps early in the process, before your business is fully on the market, will greatly improve efficiencies and cut down on transaction costs.
