The early days of entrepreneurship are all about proving your concept and turning that concept into a profitable business. Then you start thinking about growing and scaling and what that means both for you, the individual entrepreneur, and for your larger team. But eventually your thoughts will extend to the long term:
Whatever you might be envisioning, what do you need to consider to position your company for sale or investment? You may be surprised to learn that you need to spend a year or two getting your house in order before the business is ready for a potential sale.
1. Plan for Emergencies and for the Business to Thrive Without You
Whether you need the money right away because you or a spouse have suddenly fallen ill, or the business is in shambles because of ongoing disputes with your business partners, or you’re simply burned out and at your wit’s ends, that desperation will come across and hamper you in any negotiations. Before life’s major surprises (like global pandemics) cause a train wreck in your business, you need to have a succession and emergency plan in place. Otherwise, you may find yourself selling at a low point in your business and not getting what it might otherwise be worth.
You should also make sure that your internal processes and procedures are well documented. If all of the information necessary to run the business successfully is only in your head, then the business will be in major trouble if something happens to you, even if it’s only a short-term absence. If the plan is to ultimately sell the business, will new ownership be able to step in without major hiccups?
2. Make the Business Financially Attractive to Potential Buyers
It should go without saying, but just because you love this business and are happy to work as many hours per week as it takes to make everything run smoothly, that doesn’t mean a potential buyer will be interested in doing the same. Think about it from an outsider’s perspective:
Are there any outstanding debts, security interests, or other liens that could hinder a sale? Will you need your bank’s approval for a sale of the business’s assets or to bring in a new investor?
3. Review Your Operating Documents and Clean Up Outstanding Legal Issues
Make sure your operating documents are in order and up to date. This is especially important if you have business partners. Your operating or shareholder agreements may dictate whether or how any interest in the business can be sold to a third party. If a buyer does do their due diligence, would you be able to show that you’re actually abiding by the terms of your operating agreement or corporate bylaws?
While reviewing your business governance practices, resolve any outstanding litigation if at all possible and settle any pending or threatened claims. This is also a good time to make sure that you have the appropriate amounts and types of business insurance coverage in place. The last thing you want a prospective buyer worrying about is the possibility of being sued for something that happened under your watch and that insurance won’t fully cover.
4. Review Any Material Contracts
Major agreements that are material to the success of the business should be in writing, signed, and readily available for review by potential buyers and their attorneys. But you should also assess:
Similarly, review the business’s key relationships. If your business gets special terms because of your unique relationship with a vendor or strategic partner, those terms may not carry over to new ownership. Now is the time to clean up any areas where you’ve been operating on a handshake.
And review your customer or client base. Particularly in service-based businesses, are the clients tied to the business, or are they only interested in working with you, the entrepreneur? If possible, get your major customers and clients signed to long-term contracts.
5. Protect the Intangible Assets
Review the intangibles that make your business valuable. If those assets aren’t legally protected, then they won’t be worth it to an outsider to purchase.
Trademarks: If you have built a strong brand, are your trademarks registered with the USPTO? Have the registrations been renewed? Do you police and monitor your trademarks? Do you have both licensing agreements and branding guidelines in place for anyone that might license your trademarks?
Copyrights: If your business has developed valuable content, have the copyrights been registered? Do the copyrights belong to the company and not you, the entrepreneur?
Trade Secrets: If your business has trade secrets (information that is commercially valuable because your competitors don’t know it, then what have you done to protect those trade secrets? Have your employees signed confidentiality agreements? Do you have a strong trade secret policy in place?
By cleaning up your business’s operations, both legally and financially, you better position your business for long term success and dramatically improve its value should you ever decide to sell or seek investors for growth. Our team can help small businesses of all sizes navigate these legal challenges.