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Good morning and a belated Happy New Year!
These days I seem to be spending just as much time helping baby boomers turn decades of hard work and risk-taking into liquidity for the next phase of their lives as I am on the drafting and reviewing of contracts. It is fun, challenging and no two transactions are ever alike! And so the multi-part series that I began last Fall continues and I hope it is useful to you as you contemplate the next step.
I look forward to seeing you tomorrow morning at SBANE's first breakfast meeting of 2015. Join me for good conversation and strong coffee!
Cordially,
Marijo McCarthy, Esq.
President, Widett and McCarthy, P.C.
Good contracts for growing small businesses
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| I Just Accepted An Unexpected Offer to Buy My Business! What's Next? |
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Now that that unexpected offer to buy your business has landed on your desk AND you have decided to accept it, it's time to take a deep breath and get ready for the next step… due diligence… two little words that can send shudders through your professional team of advisors unless someone (probably you) grabs the bull (no pun intended!) by the horn and begins to manage the process.
What does it take to "manage" the due diligence process? Let's answer that question with a quick primer on what constitutes due diligence.
Due diligence can best be defined as the next stage in the sale and acquisition dance… it's where the rubber hits the road when it comes to the purchase price the buyer has put on the table. That purchase price is almost always subject to confirmation of all of the variables that make up your business through the due diligence process. Therefore, due diligence is very, very important and should be respected as an essential element of the final purchase price.
Think of it as you would if someone made an offer to buy your home. The buyer has offered $1,000,000.00, based upon the advice of a buyer's real estate agent who has surveyed comparable properties in your neighborhood to reach that number. Your real estate agent has gone through the same process to recommend a selling price.
BUT, the buyer's offer is subject to some contingencies, including an inspection (think "due diligence") which, depending upon the report, may result in a lower number than first offered. The inspector may find that the house needs a new roof, or a new boiler, or suffers from some other deficiency which lowers the value to the buyer (and possibly the buyer's lender's appraiser).
So, after the buyer's due diligence, the buyer may attempt to re-negotiate the price downward. You may or may not be willing to accept that, depending upon the variables on your side of the transaction. In any event, the home inspection report is analogous to the due diligence process and should be viewed similarly.
What are the "boiler and roof" items in the business sale transaction? First of all, don't be intimidated by that 10-page due diligence list sent by the buyer's lawyer. If the buyer is savvy and sophisticated, he will review and cull that list before allowing his lawyer to send it out with the goal of narrowing it from a "generic" list of all the candy in the candy store to the relevant items which will confirm (or change) his preliminary offer. If the buyer is a first time novice, I always recommend that buyer and seller schedule a conference call, with their lawyers participating, to narrow and refine that due diligence checklist. It is time well worth spent upfront by both parties.
Here are a few broad categories you can expect:
- General corporate records. This is an easy one since, if you and your lawyer did your homework during the preliminary "housekeeping" phase when the unexpected offer first hit your desk, you are able to supply a copy of the contents of your newly-up-to-date corporate record and stock book to the buyer's lawyer. Always a good feeling to start out being able to deliver promptly what is requested.
- Financial information. Again, this should be an easy one if you and your accountant reviewed and discussed financial statements and related financial documents as part of preliminary housekeeping when that offer first floated in.
By the way, if the due diligence list asks for audited financial statements, do not be afraid to tell the buyer you have management-prepared financial statements, particularly if that is what your lender requires of you each year. You won't have everything requested and that's okay; you will have what is necessary to operate your successful business and get it to the point where someone else is interested in buying it!
- Taxes. In addition to seeing several years of tax returns, the buyer will want to know about any past or pending tax audits.
- Real property. Whether you own or lease your space, the buyer will want a copy of the Deed (and any mortgage) or the lease (and any amendments or extensions).
- Personal property. This is where it starts to get time-consuming. Most small business owners own or lease furniture, fixture and equipment, but many do not have up-to-date lists of all that personal property (after all, it changes as the years go by). So start digging and create one. It will be important as the process evolves.
The due diligence list will go on and on and may also include:
- Material contracts and financing documents
- Management and employee matters
- Regulatory matters and compliance with laws
- Litigation
- Insurance
- Intellectual property
Well, you get the picture. The buyer, understandably, wants to examine anything about your business which may affect the price or growth-potential. How the parties handle due diligence disclosures will also have an impact on what the sale documents will say or disclose as the transaction proceeds.
Here's the take-away from all this:
- The purchase price is rarely final until due diligence is final (and satisfactory to the buyer);
- Due diligence is just another part of the sale process. Better to know and accept it now, since it is probably looming in your future, near or far.
Selling your business is exhilarating and exhausting, with highs and lows as you proceed. But then, so was starting your business so many decades ago, right? Now, you are coming full circle.
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| Playing Now at a Theatre Near You! |
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If you find yourself with a little free time this month, be sure to see The Imitation Game, featuring Benedict Cumberbatch as British code-breaker Alan Turing.
Not only is the history of Bletchley Park's role in British intelligence during World War II and its band of super-smart patriots fascinating, Cumberbatch deserves professional plaudits for his portrayal of a mathematical genius with a tortured personal life… a bit sad, but inspiring. See it on the big screen!
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| About Us |
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Widett and McCarthy specializes in advising small
business owners in the area of contracts.
Whether
reviewing a contract for services with your customer,
negotiating a lease with your landlord or finalizing
financing documents with your lender, we make sure
your best interests are protected.
In addition, and for
those clients whose successful growth requires a
more comprehensive relationship, we act as "general
counsel:" On-call when you need us as a sounding
board, legal advisor and strong right hand.
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Widett and McCarthy, P.C.
1075 Washington Street
West Newton, MA 02465
Telephone: 617.964.5559
Facsimile: 617.964.5529
Email
Us | Visit Our Website
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WHO WE ARE 
