Preparation of the Business’ Organizational Documents
Most businesses, whether it is organized as a limited liability company or a corporation, will already have in place the necessary organizational documents reflecting how the internal operations and affairs of the company are operated and structured. However, some businesses, especially small businesses, have not maintained the businesses organizational documents over the years. These business organization documents, such as the operating agreement, bylaws, shareholder agreement, articles of organization, articles of incorporation, sales agreements, client agreements, and the like, need to be updated to reflect the current internal operations and affairs of the company. The business owner must engage a corporate lawyer prior to beginning the acquisition process to ensure the business’ house is in order, so to speak. This is often overlooked and can be detrimental if it delays or even kills the deal because the organizational documents were not in order.
Preparation of the Business Financials
A potential buyer will likely want to receive up to five years’ of financial statements, including balance sheets, income statements, cash flow statements, profit and loss statements, bank statements, tax returns, commercial leases, customer or client contracts, vendor and supplier contracts, among other business financial documents. These business documents will be requested by the potential buyer during the early stages of the acquisition so it is critically important that these documents are appropriately prepared and do not contain any misleading statements. If this is accomplished, the potential buyer will know they are working with a well-managed company.
Valuing the Business: Purchase Price
After the decision to sell a business has been made, a business owner must determine the purchase price. There are many factors that can go into calculating the purchase price. At the end of the day, a business will sell for an amount that a potential buyer is willing to pay for the business. That said, there are a number of ways a business may be valued. The three most common methods include: 1) the asset-based approach, 2) the market approach, and the 3) income approach. Once a price for the business has been determined, the seller must understand that a potential buyer may want to pay the purchase price over time and may even want an earn-out. Whether the seller will want to finance the purchase price over time or accept an earn out structure should be considered prior to selling the business. It is been our experience that the best way to receive the purchase price is always in one lump sum at closing.
Some of the most valuable assets of any company involve its intellectual property, especially in today’s highly competitive and brand-driven marketplace. These intellectual property assets could include copyright, patents, trademarks, trade secrets, licenses, and domain names. It is critical that any business pursuing an acquisition conduct a thorough due diligence of the target business’ intellectual property. Our Charleston trademark lawyers routinely counsel buyers and sellers in this area. If a company purchasing a business (or even selling a business ) chooses to ignore the intellectual property due diligence, it could lead to unforeseen issues after the deal is consummated, such as a limitation in the right to continue use of the intellectual property, or worse, expensive infringement litigation.
Seller’s Transition Services
It is often the case that the buyer will negotiate certain transitions services from the seller after the closing. The primary reason for compensating the seller to stay on and provide support and services after the acquisition has been closed is because nobody understands the business better than the individual that just sold it. Therefore, in order to position the company for future success, the buyer will most always request that the seller stay on for a period of time after the closing of the transaction. The transition services provided by the seller may be either paid as an employee of the new acquiring company or as an independent contractor. Additionally, the seller’s transitions services may be paid or provided for no compensation. The seller should be prepared to negotiate these transition services during the early stages of the acquisition process.
Call Our Charleston Corporate Attorneys
Our Charleston corporate attorneys have significant experience in handling a wide range of business transactions, including representing individuals and businesses selling a business in South Carolina, in a wide range of business industries. To schedule a consultation with one of our corporate lawyers today, please contact us online or give us a call at 843-564-5115.