Selling Your Business

Family owned and other closely-held companies often bring an unique set of considerations to a sale of their businesses beyond the financial consideration. Most every business owner seeks to maximize the financial return on their financial, sweat equity, and emotional investment in their business. An increasing number of sellers, however, are also considering the impact of the sale on their business legacy. These sellers are carefully reviewing the potential purchasers of their businesses, as well as what the business will “look like” after the sale.

There are a variety of reasons why the seller of a business will seek to ensure the continuity of the business post-closing. One reason is a concern for the community in which the business is located, and often where the business owner lives. A seller may seek to ensure the continuity of business operations post-sale for the benefit of the community in which it is located. Various related considerations include maintaining jobs for local employees, both to ensure the continued success and growth of the business and so that such employees remain as consumers in the community. Maintaining the business in its existing location thereby benefits the community by providing a steady economic and tax base.

Continuity in internal business operations following a sale is also a key issue for many sellers. Following are some of the concerns of sellers of family owned businesses and closely-held companies in assessing a potential transaction.

Will the company structure following the sale:

  · Provide for broad protection of employee base;
  · Allow for continuity in management structure;
  · Maintain (or improve) employee benefits;
  · Sustain the company culture;
  · Maintain local third party business arrangements;
  · Maintain social commitment programs.

Ultimately, attaining some or all of these goals not only serves to benefit the employees and the community in which the business is located, but also contributes to ongoing success and growth of the business. There are a variety of transaction types all of which, with careful transaction planning, can be used to meet these goals.

Internal succession methods such as Employee Stock Ownership Plan (ESOP’s) and Management buy-outs are well suited to meet the goals of business continuity. These transaction types meet these goals in that they often involve very little transition in business operations. Employees and current management know the company and have great incentive to continue the success of the business. Moreover, employees and management have an existing commitment to the community.

Family business succession planning (the transition of the business from one generation to the next) is another viable option to provide for business continuity. The use of estate planning methods for the transfer of a business, of course, has its own complex set of issues. Additionally, to be successful, those family members to whom the business is being transferred must be committed to the business and share the post-closing goals of the current owner(s).

Often, however, the sale of a business to a third party is a more desirable transaction alternative. A third party sale typically allows the seller to maximize sale price through competitive shopping of the business to a variety of potential third party purchasers. A third party sale also provides for flexibility in transaction structuring and managing the tax impact of the transaction. A third party purchaser may also provide the business with greater opportunities in the future through a strategic sale to a purchaser that can provide greater resources for product research and development, complimenting product lines, better marketing/sales channels and new markets.

Third party sales, however, can present greater challenges in protecting the seller’s interests in the post-closing operations of the business. The first step for a selling business owner in approaching a third party sale is proper planning and prioritizing of business succession goals. This planning should include identifying appropriate advisors, such as a business broker/investment banker, legal counselor, and accountant, and discussing the seller’s goals and objectives for the transaction.

Additionally, the seller should prepare a “wish list” to identify the qualities and types of potential purchasers that would be a good fit with the seller’s goals. This wish list will serve as the basis for the seller’s due diligence on the potential purchasers. In a sale transaction it is more common to hear of purchasers conducting due diligence on sellers. It is critical, however, for a seller seeking to find an appropriate fit to meet the types of objectives discussed above to conduct careful and well thought-out due diligence on a prospective purchaser. The seller’s advisors can help design an appropriate due diligence process.

Conducting due diligence on prospective purchasers and selecting the appropriate purchaser is perhaps the most critical aspect in a third party sale; it is certainly the aspect of the transaction over which the seller has the greatest control. Once a purchaser is determined, however, the acquisition document must be prepared and negotiated to provide for certain obligations and restrictions on the purchaser regarding business operations post-closing. These provisions will, quite often, be the most difficult to negotiate as even a well-intentioned purchaser has limitations on what it can and will commit to post-closing. Moreover, the post-transaction structure of business sold and the purchaser will greatly impact how the business will be run post-closing (for example business sold may be a fully integrated part of purchaser, it may operate as an individual business unit, or it may remain a stand-alone company as subsidiary or affiliate of the purchaser).

Specific provisions in an acquisition agreement can help shape how the business will continue to operate post-closing. Such provisions operate as post-closing covenants of the purchaser with respect to the business sold. For example:

  · Various requirements can address employee retention: such as requiring employment agreements for key personnel, as well as instituting company-wide employee retention plans and employee severance programs;
  ·  Benefits protection: the purchaser may be obligated to maintain specific employee benefits programs post-closing (typically for a specified period of time);
  ·  Commitment to Third Parties: purchaser may commit to assume specific contractual obligations such as vendor and customer contracts

Enforcing such provisions can prove to be difficult on a practical basis; there are, however, various remedies that can be incorporated to enforce such obligations. The purchaser may resist certain remedies, and seek to allow some flexibility in the event the general business or specific company environment changes. Ultimately, however, much of the value in raising and negotiating such provisions will be in identifying the purchaser’s desire to work to meet the goals and to serve as an ideal for the company moving forward after the acquisition.

The bottom line for the seller of a business to address the various issues discussed in this article is to have a well thought-out plan before engaging in a transaction. The plan should strive to:

  · Identify priorities in structuring a transaction and determining potential successors/purchasers;
  ·  Based on those priorities determine an “ideal” purchaser and transaction structure;
  ·  Build an acquisition team and educate them on goals and priorities;
  ·  Identify potential purchasers that meet some of the requirements (unlikely any one will meet all);
  ·  Conduct due diligence on the prospective purchaser(s); and
  ·  Negotiate the acquisition agreement including the desired post-closing purchaser covenants.

Contact Erik T. Barstow (603-629-4543) or any member of the Wiggin & Nourie Business Group if you have questions about this and other business questions.

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