STRATEGY GUIDE: THINKING ABOUT SELLING YOUR BUSINESS? THE BEST EXIT STRATEGY STARTS YEARS BEFORE THE SALE

For many entrepreneurs, selling a business represents the culmination of years—or decades—of work. The company may represent not only an investment, but also the owner's income, reputation, relationships, and a substantial part of his or her net worth.

Yet many owners begin preparing for a sale only after a potential buyer appears.

By then, some of the most valuable opportunities for preparation may have passed.

A business is generally easier to sell when it has clean records, transferable contracts, clear ownership, protected intellectual property, reliable financial information, documented employment relationships, and systems that do not depend entirely upon the departing owner.

At Elkhalil Law, P.C., we believe business owners should think about eventual exit long before they intend to leave. Exit planning is not simply about selling. It is about creating a business that someone else would actually want to buy.

Buyers Do Not Just Buy Revenue…They Buy Risk

A seller naturally focuses on the company's strengths.

A buyer is trained to look for weaknesses.

The buyer may examine financial statements, tax returns, corporate records, litigation history, employee arrangements, leases, customer contracts, intellectual property, regulatory matters, debts, liens, insurance, vendor relationships, and dozens of other areas.

Every unresolved issue becomes a potential negotiating point.

A company generating excellent revenue may still be discounted if its largest customers can terminate at any time, important intellectual property is owned personally by the founder, key employees have no retention arrangements, or corporate records cannot establish who actually owns the business.

That is why one of the smartest pre-sale strategies is to conduct internal due diligence before the buyer does.

Find the problems while you still have time to fix them.

Make the Company Less Dependent Upon You

Many successful small businesses have a hidden weakness: the owner is the business.

The owner controls every important customer relationship, approves every expense, knows every vendor, resolves every employee problem, and possesses important information that exists nowhere else.

That may work while the owner is running the company.

It can be a major concern for a buyer.

The more easily a company can continue operating after the founder leaves, the more transferable the business may become.

That means developing management, documenting procedures, strengthening customer relationships with the company rather than only the owner, and creating systems that can survive a transition.

Selling a business is not simply selling what it owns.

You are also selling confidence that it can continue.

Clean Up Ownership Before Negotiations Begin

Business owners should know exactly who owns the company and whether any other person has rights that could interfere with a transaction.

Review operating agreements, shareholder agreements, investment documents, options, warrants, convertible instruments, rights of first refusal, transfer restrictions, and similar agreements.

A founder who casually promised a former employee “a piece of the company” years earlier may discover that the statement becomes far more significant when millions of dollars are at stake.

Likewise, governing documents may require approval from other owners before a sale can proceed.

Problems concerning capitalization and ownership are much easier to address before a buyer is waiting for an answer.

Understand Asset Sales Versus Equity Sales

A fundamental issue in many transactions is what the buyer is actually purchasing.

In an equity transaction, the buyer generally acquires ownership of the entity itself. In an asset transaction, the buyer may purchase some or substantially all of the company's assets while the existing entity remains with the seller.

The legal, financial, and tax consequences can differ substantially.

Buyers may prefer an asset structure because it can provide greater flexibility concerning which assets and liabilities are acquired. Sellers may have different tax or transaction preferences.

Neither structure is universally better.

Tax treatment can also become complicated because the sale of a business may involve numerous categories of assets rather than a single asset. The IRS generally treats a lump-sum sale of a trade or business as the sale of its underlying assets for purposes of determining gain or loss, and qualifying asset acquisitions can require allocation of consideration and Form 8594 reporting.

For this reason, transaction structure should be analyzed with legal and tax professionals before the parties become committed to a purchase price based on assumptions that may not be accurate.

Protect Confidential Information During the Sale Process

A potential buyer will eventually need sensitive information.

But a potential buyer is still only a potential buyer.

Before providing customer lists, pricing data, margins, trade secrets, employee compensation, product strategies, or proprietary information, sellers should consider an appropriate confidentiality or nondisclosure agreement.

Information can also be disclosed in stages.

A buyer may receive high-level financial information early in the process and more sensitive information only after demonstrating serious interest, financial capability, and progress toward a transaction.

This is particularly important where the potential buyer is a competitor.

A failed transaction should not leave your competitor with a detailed blueprint of your company.

Review Contracts for Assignment and Change-of-Control Problems

A company may look valuable on paper because of its contracts.

But are those contracts transferable?

A commercial lease may require landlord consent before assignment.

A customer agreement may permit termination following a change of control.

A software license may be nontransferable.

A government license or professional authorization may have separate requirements.

A financing agreement may require lender approval.

A seller should identify these restrictions early because a transaction can become dramatically more complicated if important relationships cannot travel with the business.

Protect Intellectual Property

For many modern businesses, the most valuable assets are intangible.

That may include trademarks, domain names, software, photographs, written content, proprietary systems, customer data, designs, inventions, trade secrets, and goodwill.

Before a sale, determine whether the company actually owns what everyone assumes it owns.

Was the company's logo created by an independent contractor?

Was important software developed before the company existed?

Are domain names registered personally to the founder?

Were intellectual-property assignments obtained from developers?

A buyer conducting serious due diligence is likely to ask.

Anticipate Employee Issues

Employees can be one of the most valuable components of a transaction.

They can also create uncertainty.

A buyer may want assurances that key employees will remain after closing. It may ask about employment agreements, restrictive covenants, compensation plans, accrued bonuses, benefits, independent-contractor classifications, employment disputes, and immigration-related workforce matters.

Sellers should determine which employees are essential to transition and whether retention agreements, bonuses, consulting arrangements, or new employment agreements may be necessary.

Think Carefully About Seller Financing and Earn-Outs

Sometimes the headline purchase price is not the amount the seller receives at closing.

The seller may agree to finance part of the purchase price or accept an earn-out based upon the company's future performance.

These structures can help bridge valuation gaps, but they also create additional risk.

If the seller finances part of the purchase, what collateral secures the debt? Is there a personal guarantee? What happens after default?

If compensation depends upon future revenue or profits, who controls the company after closing? Can the buyer increase expenses and reduce the seller's earn-out? How are disputed calculations resolved?

A $5 million purchase price is not necessarily a $5 million deal if $2 million depends upon events the seller no longer controls.

Negotiate Your Life After Closing

A sale agreement frequently regulates the seller long after the closing date.

The seller may agree to consulting obligations, transition assistance, confidentiality, customer introductions, indemnification, or restrictive covenants.

Georgia law treats restrictive covenants associated with the sale of a business differently in some respects from ordinary employee non-competes, including different statutory presumptions regarding duration. For certain seller-related restrictive covenants, Georgia law presumes reasonable the longer of five years or the period during which certain sale payments continue, subject to the statutory framework and circumstances.

The seller therefore needs to evaluate not only how much is being paid, but also what freedom remains after the sale.

Build the Business Someone Else Would Want to Own

The best exit strategy is usually not a document prepared two weeks before closing.

It is years of disciplined business operation.

Clear contracts. Clean books. Protected intellectual property. Transferable relationships. Reliable employees. Documented governance. Reduced dependence on the founder.

Interestingly, all of those steps also tend to make a company better even if it is never sold.

At Elkhalil Law, P.C., we assist business owners with transaction planning, purchase and sale agreements, due diligence, business structuring, contracts, ownership issues, and legal matters arising before, during, and after the sale of a business.

A successful exit begins long before the buyer arrives.