Corporate

Advance preparation helps drive efficient business sales process

By AdvocateDaily.com Staff

Selling a business is a significant undertaking — but by doing advance preparation in-house in collaboration with a team of advisers, owner/managers can ensure the process runs as smoothly as possible, says Toronto corporate lawyer Kobi Bessin.

“It’s important to do a lot of advance prep work in-house to get yourself ready and assess whether or not you’re really ready to sell,” Bessin, a partner with Torkin Manes LLP, tells AdvocateDaily.com.

This preparation, he says, will include ensuring that books and records, contracts, financial information, business systems and inventory are up to date, organized and in a place where they can be easily produced.

“To the extent that you can get those organized in advance, it will make the process a lot easier both for your advisers — from a cost perspective it becomes much more efficient — and then for the other side, for the prospective buyer.”

Specifically, says Bessin, companies should look at whether contracts are properly organized for the different segments of the business, whether they are up to date and have all the amendments to those contracts and executed versions.

Businesses should also have two to three annual periods of financial records readily available.

“To have those accessible and ready is very important, as that’s something that a prospective buyer would be very interested in,” Bessin says.

In addition, he says, corporate records need to be up to date, reflecting the current shareholders, board, officers, and any corporate governance matters that would be of interest to a buyer.

“It is also important to have your permits, licenses, material contracts, client lists, suppliers, and customers, all of those things easily accessible and organized, and doing it in a way that’s confidential as well,” says Bessin.

In addition, he says, not possessing the proper accounting systems or having certain deficiencies in the financial reporting systems of the business could be problematic for a transaction. “Ensuring those are up to date and taken care of in advance, that’s going to be something that would be important to have right at the very beginning,” says Bessin.

Bessin says companies also need to ensure their employment arrangements are up to date and sufficiently documented.

“Many times, there are key employees that have been working with the owner/manager for an extended period of time, and the relationship is really good, but a new buyer doesn’t have that type of relationship, and there may not be a formalized contract. It’s important to have that, as some of the terms may not continue if they were oral, and you need to ensure that the terms are formalized,” he says.

Although some businesses may wish to carry out this part of the process internally, Bessin says it is important to keep your advisers close, so that they are aware and can assist where needed.

“You want to have your accountants, lawyers, and business adviser all retained, ready and understanding your business and working together to ensure a smooth process, and to achieve your desired result and very importantly, to alleviate some of the burden that is inevitable when undertaking a sale process,” says Bessin.

“The more you can do internally the better, but I think many people make the mistake of trying to do a lot of these things in advance on their own because they don’t want to spend money on counsel or advisers when it’s just in initial stages, but really, you may end up getting further down the road without having considered certain factors,” he adds.

For example, depending on the nature of your business, Bessin says, there may be certain third-party or regulatory consents and financing considerations that are beyond a business owner’s control and may affect the timing of the sale.

“Had you engaged with your various advisers along the way, not necessarily to take over the negotiation, but just to give you a little bit more perspective in terms of different considerations of third-party approvals and consents or things of that nature that would really help guide you,” says Bessin.

“Third-party matters, landlord consents, third-party material contracts or licensing, lenders — all of those things require time, and it is important to have them mapped out in advance. Discussions with your adviser are certainly a good starting point to ensure that that happens,” he adds.

Also, he says, business owners should be sure to engage with their tax advisers — whether tax lawyers or accountants — to discuss any available tax planning strategies well in advance of the sale, as it may impact how they go to market.

“Sometimes people only consider the tax planning strategies after they’ve reached an agreement, but the structure of the agreement they’ve reached may not be compatible with the tax planning strategies that would be appropriate for their particular situation. And so, the sooner you do that in advance, the better off we suggest you’ll be,” says Bessin.

Engaging legal advisers early in the process can also help sellers avoid unrealistic expectations.

“I spend a lot of time managing people’s expectations for better or worse, as to the timing and in terms of the deal. You’ll often be in discussions and negotiations, and someone will say ‘We have a really simple business, this shouldn’t take that long. I want something really simple and straightforward.’

“It just doesn’t always work that way. It’s our job to manage the expectations and to make the sale process really efficient, and experienced advisers can certainly help with that,” he says.

Ultimately, says Bessin, taking the necessary time to prepare for a business sale will make the process easier, save time and cost and also help to combat deal fatigue which can be a real concern through the transaction process, as it often leads to inefficiency and frustration.

“The more you can do in advance in terms of preparing your business and working with your advisers, the better off you’ll be, and then you’ll be able to answer the question of whether you are really ready to sell,” says Bessin.

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