5 Most Important Factors For Smooth Sale-ing

When someone wants to buy your company, it’s often too late to get your legal act together. Make sure you do these 5 things first.
May 18, 2011

When the phone rings and someone is interested in buying your company, it’s often too late to get your legal act together. LawPivot co-founders Jay Mandal and Nitin Gupta, and Yusuf Safdari, an attorney providing advice to companies on LawPivot, provided me with this list of the most important factors to make closing a sale go smoothly.

1. Corporate history

Your corporate documents tell the story of the company’s history. From the date of incorporation through the date your company is sold, corporate actions are reflected in your certificate of incorporation, bylaws, board of director minutes, stockholder minutes, and other corporate governance documents. You should ensure that your corporate records tell a complete and uninterrupted story of the company’s history from the point of inception. In particular, review your records regarding equity issuances so you are confident in the ownership record and the rights of those holding securities of the company. A completeness of these corporate records will build confidence in a buyer that you have run a “tight ship.” On the other hand, an incomplete set of corporate records will leave them wondering whether other aspects of the company have been run with carelessness. Your corporate attorney can assist you in ratifying actions and events that have not been fully authorized or recorded.

2. Your people

For many buyers, the employees who come with the company form a crucial element of the value that you are transferring in the sale of your company. Are your executives and your workforce motivated to continue to support the business once it is in the hands of the buyer? You will need to review your employment agreements, offer letters and option grants to determine whether they are incentivized to continue on or whether they will be inclined to parachute out, (e.g., if they receive acceleration of equity compensation or other benefits.) Also, have all of your employees signed confidentiality agreements, invention assignment agreements, and non-competition agreements (if applicable)? A buyer may be concerned that the value of the business will walk out of the door with departing employees if they have not signed proper agreements. You have a chance to amend or enter into these agreements prior to selling the company. Do you have a smoldering employment discrimination claim? It might be a good time to reach a reasonable settlement so that a potential buyer is not scared off by the prospect of litigation.

3. Structure of your deal

 Not all sales of a business are created equal. Fundamentally, you can sell stock or you can sell assets. In a stock sale, a buyer will normally purchase all (or nearly all) of the outstanding shares of your company. If they do, they will normally assume all of the liabilities. However, if you sell assets instead of stock (for example, if a buyer only wants, or you only want, to sell part of your business), the presumption is that you as the seller maintain all of the liabilities;  even those associated with the sold assets. Another structuring consideration is the tax impact of a sale of your business. Yes, Uncle Sam is waiting in the wings with his tax collection bag. You can structure the sale such that you either have to pay taxes now, or you can structure it so that taxes will be deferred into the future.

4. Impact of a change of control on your contractual relations

Prior to the proposed sale of your business, you and your attorney should become intimately familiar with the “Change of Control” or “Assignment” clauses that inhabit the end of contracts and are inscrutable to say the least. These contractual provisions cover when a change in the ownership or control of your company occurs. What if all of your key distribution contracts cannot be transferred to the buyer? What if all of your customers have a right to walk out of their contracts? If these provisions are in your agreements, you need to know what they say and what the implications are for transferring your business. It may be easier to negotiate a change to such a provision before the counter party knows that you need their consent before you can ink a sale of your company. What if you don’t bother to look at these provisions, but the buyer’s attorney raises them as a red flag to the buyer and you have no reply? You do not want to find yourself in this position during negotiations.

5. Status of intellectual property rights

Intellectual property is a broad term that covers rights such as copyrights, trademarks, patents, licenses, domain names and trade secrets. A great deal of a company’s goodwill value (that is the value of intangible assets such as brand) can be tied to such rights. Almost every business has such rights associated with its business. A buyer will concern itself with the scope and integrity of these intellectual property rights. Do you own the intellectual property rights necessary to run and expand the business? Or, did you fail to have your personnel assign them such that the intellectual property is owned by someone no longer with the company? Are you infringing on the intellectual property rights of a large and well-armed public company? Any one of these issues could spell trouble in the context of a proposed sale of your company. You should review the range and health of your key intellectual property rights with your intellectual property counsel.

By paying attention to these five factors, you can make a sale much cleaner, faster and easier. As a metaphor, think of packaging your company and delivering something perfectly wrapped with a red bow. If you need more legal advice to make this happen, check out Law Pivot. It is an interesting way to get crowdsourced legal advice for your startup or small business.