Selling your business involves some corporate house cleaning. You will want to do some due diligence before you unleash a prospective buyer on your books and records. Getting your business ready for the transaction includes a lot of steps.
Update your minutes!
If you operate your business as a corporation, you must have formal approvals by your board of directors and your shareholders of certain acts.
- Approve things that you did in the past:
- Electing your officers and directors
- Entering into leases or loans
- Adopting employee benefit plans, including 401k plans, profit sharing plans, and health benefit plans
- Issuing stock or stock options
- Approve new transactions:
- Letter of intent to sell your business
- When you have negotiated the definitive agreement, the board and the shareholders must sign off on those documents.
- Stock - You need to have a stock book with all the stock certificates that have been issued to shareholders copied front and back and signed by corporate officers, with a stock ledger that indicates what stock certificates were issued to whom and when they were canceled and reissued.
Get your organizational documents in order
Make sure you have all your organizational documents in order, and that you are registered with the states and local jurisdictions where you operate. Include copies of all amendments to these documents, which may include:
- Articles/Certificate of incorporation
- Bylaws/Operating agreement – If you operate as a limited liability company (LLC), you'll have an operating agreement. If you're a corporation, you need to have bylaws.
- Shareholders agreement - If you're a corporation with 2+ shareholders, you may need a shareholders agreement as well.
- Annual reports - The buyer is going to want to make sure that the business they're buying is in good standing and in compliance with current law. That means you must file annual reports and pay any required fees to the states and local jurisdictions where you are registered.
- Foreign registration - If you were formed in Delaware and you're operating in another state like Maryland or Virginia or Florida, make sure you have registered as a foreign entity in the states in which you're operating. If you have an employee or an office there, selling from that location, keeping inventory at that location, or you've got equipment or other property at that location, make sure that you filing tax returns and paying taxes in all jurisdictions.
- S corporation election - If you are an S Corporation (or treated as one) make sure you have the official letter from the IRS when you were granted S Corp status.
Update and upgrade your financial statements
The buyer is going to want you to make sure your books are accurately stated. They are looking to make sure your financials are:
- Prepared in accordance with generally accepted accounting principles (GAAP) - this requires accrual basis accounting.
- There are no hidden liabilities - Your financial statements will account for liabilities of all kinds, including ones that may not be officially recognized on your balance sheet, but may be disclosed in footnotes to the financial statements.
- Your footnotes show the details - how you're recognizing revenue and accruing expenses, depreciating your assets, maintaining your leases (and accounting for them), and how you're accounting for your equity in the company.
- Overseen by an accountant
- Compilation - If you just hand your books to your accountant at the end of the year and have them prepare financial statements, that's known as a compilation and doesn't give the buyer any assurance of the validity or accuracy of your financial information.
- Review - If you have a review done by your accounting firm, they may perform some analytical procedures to make sure there's nothing unusual about the numbers, but the assurance is very limited.
- Audit - If your CPA performs an audit, then you're receiving assurance that your financial statements are prepared in accordance with GAAP, hopefully in the form of an unqualified opinion, which is what buyers are really looking for.
Ensure legal compliance, conduct due diligence
Get your attorneys involved early to help you start your due diligence and complete your corporate cleanup to get your business ready to sell. Your housekeeping should include:
- Board approvals – Approvals of stock issuances and option plans and any issuances of stock or stock options under the plan need to be documented in your company minutes.
- Contracts – Copies of all your active contracts. Make sure they are assignable in a sale of the business, and if you sell your stock, that you can do so without requiring the consent of your contracting party.
- Taxes –Make sure you've paid and filed all your sales, payroll, income, and any other tax that is owed by the company to the taxing authorities. You want to have good records of all the returns that you've filed. You also want to make sure you have copies of all the returns and have evidence of the actual filing.
- Employees -You want to make sure you have the following in place:
- Do you have I-9s and W-4’s for every employee?
- Do you have signed copies of all non-compete, nondisclosure, and noninterference agreements with your employees?
- Have you accounted for and reported properly for all the employee benefits that you're providing to your employees?
- Are you categorizing workers properly (i.e., are your contractors really employees)?
- Are employees truly exempt versus non-exempt where they would be required to be paid overtime?
- Litigation - Do you have any litigation pending against you or any threats of litigation or any governmental investigations? Any IRS audits? You need to disclose current and prior litigation and investigations to the buyer.
- Intellectual property - When it comes to intellectual property, privacy laws, and data protection, the buyer is going to want to make sure you have valid licenses to everything that you are using in your business that would constitute intellectual property (software, software licenses, trademarks, patents, copyrights, trade secrets, and know-how) and that you comply with data privacy and other laws that regulate the control and disclosure of customer information.
- Real estate - If your company owns real estate, you need to have copies of the deeds and mortgage information, proof that the property complies with current zoning and environmental regulations. If you're leasing the real estate, you are going to have to give reps and warranties regarding environmental issues, particularly depending on the type of business that you operate. Your lease may require landlord approval for you to sell your assets or stock and you will need to ensure your are in compliance with the lease terms.
- Current customers and major vendors - A buyer will want to know who is in your pipeline of existing and prospective customers and will want to review all your contracts with customers, vendors and suppliers. The buyer will want to know if there are any warranty liabilities to customers and if you have adequate sources of supply from your vendors
Start building your data room with all these items now – and keep it up to date - in preparation for a possible sale of your business. For more information on this topic or to schedule an appointment, please contact us at zelllaw.com