Tuning-Up Before Selling Out – Quick Checklist For Selling Your Business

By: Randall A. Denha, J.D., LL.M.

Some business owners, whether small or large, have an eye on “exit” at the start of a venture. They have a business plan that includes an understanding of where they wish to be in, for example, 3 to 5 years’ time. Some have even identified who the potential acquirer may be, whether they are current employees, a competitor or a strategic buyer. I have quietly closed (successfully) many M&A transactions over my 20 year career of substantial size and one item that continues to throw a curve ball at business owners is the level of scrutiny an acquirer will demand of the business owner’s corporate records during their due diligence. In fact, this is one of the key pieces in an acquisition transaction and could result in a sale or the acquirer walking away. The following checklist is by no means exhaustive but will help you clean up the records and documents of your small business as well as provide an overview of the level of detail required by any would be acquirer.

Entity Formation Basics

Your corporate record book or files should contain:

• the articles of incorporation or articles of organization for a limited liability company
• the certificate from the state where the company was incorporated or formed evidencing filing of the articles in the state
• the bylaws of the corporation or an operating agreement if a limited liability company
• stock certificates or membership interest certificates, if a limited liability company, and stock ledger, and
• the minutes from the meetings of the board of directors and the shareholders or the members and managers if a limited liability company

In addition to making sure your corporate minute book has the foregoing, ask the following:

• Are the articles of incorporation and the bylaws up to date or do they need to be amended to reflect changes in corporate governance matters?
• Has the company held its annual shareholders and directors meetings approving and memorializing the corporate actions taken during prior years?
• Have all of the directors and officers been duly appointed for the year?
• Have all of the stock certificates been properly issued to the shareholders and recorded in the company’s stock ledger establishing a clear chain of title of ownership?
• Have the annual franchise taxes or fees been paid in the state of incorporation or have you made note when they will be due this year?
• Are all shareholders in agreement with the strategy? Are the Board authorized to sell? Are there any shareholder or bank consents required?

Registrations and Permits

As your company has grown and business expanded, have your corporate registrations, licenses, and permits been updated to keep up with such changes.  Confirm the following:

• Is the company conducting business in any states in which it is not registered to do business as a foreign corporation?
• Has the company registered all trade names (also known as d/b/a’s or fictitious names) in the states that require such registration
• Does the company have a current registered agent and address in each state in which it is authorized to transact business or does that information need to be updated?
• Are all permits, licenses, and similar authorizations from governmental agencies necessary for the lawful conduct of business renewed and up to date?

Employee Matters

Taking care of the talent at your company is mission critical but ask the following:

• Does the company have a stock bonus plan?  Does it provide the incentives the company needs to build success?
• Has the company considered equity-based alternatives to issuing actual ownership such as phantom stock plans or stock appreciation rights plans?
• Have all employee benefits, handbook, policies, codes of conduct been updated?

Intellectual Property Issues – Trade Secrets and Trademarks

In addition to protecting the company’s “human” capital, the intangible assets such as methods, proprietary information or “secret sauce” must be protected, so check on the following:

• Are employees adequately bound by restrictive covenants such as confidentiality agreements, non-competition, and non-solicitation provisions?
• Has the company taken actions needed to protect its intellectual property such as:
  • using a proper copyright notice on its website?
  • limiting dissemination of confidential information and using written agreements where feasible to protect trade secrets and other proprietary information and know-how?
  • using a TM symbol for the company’s trademarks and/or filing a trademark registration application?

Other Business Matters

• Will the current client contracts survive a sale (i.e. if a share sale is anticipated, is there a change of control clause in the contract; if an asset sale, are you able to assign without consent)
• Does the company own all its assets that are needed for the business or does it hold correct and valid licenses to use such assets?
• Are there any deficits in the pension scheme that would be unattractive to a buyer?
• Have all taxes been properly paid to federal, state, and local authorities?
• Does the company have a clear understanding of what creditors have liens on its assets and what restrictions the company is subject to when trying to qualify for additional credit facilities?
• Has the company checked to make sure that there are no judgment liens against it?
• Does the company have a clear understanding of all its real property owned or leased, and are all title records, lease agreements, and amendments in order?
• Is the company aware of and/or addressing any known environmental, health or workplace safety issues?
• Are all insurance policies up to date, premiums paid, and documents in order?
• Will this be a stock sale, asset sale or require a pre-sale reorganization of the business? Have the owners consulted with tax professionals and competent legal counsel?

When people start a business venture, selling it is often the last thing on their mind.  However, the sale of your business ideally needs to be part of your overall strategy, the one that you develop sooner rather than later. When you decide to work towards exiting you need to make sure the business can work without you. Installing management structures, systems and processes is essential.

As stated above, this checklist is simply a start as there are multiple other items that would customarily be included, but the above highlights some of the most important baseline items that a potential acquirer will want to see. Taking this prudent audit will help your business to be better prepared to get new financing from a bank, to face a challenge to your company’s status or to showcase how well your business is operated should a prospective acquirer come knocking on your door with an offer to purchase your company.