Selling a company: 'Great Expectations' and reality :: Editor's Blog at WRAL Tech Wire

Updated Nov. 6, 2009 at 5:32 a.m.

Selling a company: 'Great Expectations' and reality

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By Deana A. Labriola, Ward and Smith, P.A.

Editor’s Note: Deana A. Labriola is a member of the Business and Technology Practice Groups at Ward and Smith, P.A.

The number of mergers and acquisitions (sometimes referred to as "M&A") declined in 2008 and thus far in 2009 because of the gloomy economy. However, there has been a small resurgence in the last few months. Perhaps this indicates a better economy is at hand or about to spring to life. The prospect that companies that could not be sold in the recent past may be marketable now is very welcome to potential sellers.

The "Sell" Side of M&A

There are many challenges a potential seller of a company must face. Aside from the obvious financial impact to the company and its owners, there are several other important considerations for many small businesses. Often, owners who have built their dream company with the expressed hope of one day selling it for a big price find that making that dream a reality can have personal and emotional consequences well beyond the financial upside.

Issues and Considerations before the Sale of a Company

When thinking about selling a company, a potential seller should consider the following:

• Financial Condition of the Company. If the company is financially unstable or in a position where it needs to be sold, buyers will know that and will offer a purchase price reflecting that fact. In such cases, the seller must understand this dynamic in order to prepare for the offers that will be received from prospective buyers. An experienced and knowledgeable business broker can assist both in finding the best potential buyers and in evaluating the offers made.

• Employee Consideration. For closely-held businesses and reasonably small businesses, employee treatment after the sale can be an important factor in determining whether to accept a potential buyer's proposal. Often, how employees will be treated post-sale becomes a critical part in the negotiation of a deal between a buyer and seller.

• Emotional Considerations. An often overlooked consideration in the sale of a closely-held business is the emotional impact that the sale will have on the seller. Finding a buyer that will continue the culture or legacy the seller has proudly set for the company will be particularly important to many sellers. While it may be next to impossible to determine the buyer's true intent during the initial stages of a deal, it will become clearer throughout the negotiation process. The seller must be prepared to "pull the plug" on a deal if the seller determines that the buyer does not value the same attributes of the company as the seller if those attributes are important to the seller.

• Personal Considerations. Additionally, a seller needs to realize that the seller is, or may be, losing the seller's job. Sometimes a seller negotiates to remain with the business in some capacity for a period of time in order to transition the business to the buyer, but, in reality, the seller no longer will be in control, and the seller's job and role with the company, as the seller has known them, will never be the same again.

Step One – Finding a Buyer

For first-time sellers, the sale process often is misunderstood. In the very early stages, the potential seller may employ a business broker to find potential buyers for the company. An experienced business broker, working with the seller's attorney and accountants, can be a very valuable resource, not only for finding potential buyers, but also in explaining the various phases of the purchase and sale process. Absent a business broker, the seller will have to wait for a potential buyer to approach the seller unsolicited, or to find a buyer some other way. However, in light of the matters discussed in Step Three below, this may not as be as simple as putting a "For Sale" sign on the premises or advertising in the paper, and many sellers end up opting for a business broker after all.

Step Two – The Potential Buyer's Need for Preliminary Information

No matter how a potential buyer is procured, a buyer, prior to making an offer or negotiating any terms, generally requires an opportunity to conduct preliminary due diligence of the company which will give the buyer non-public information about the company. During this preliminary due diligence phase, the buyer and seller will engage in a number of discussions about the company and its business. This likely will include a request that the seller give the buyer access to financial information about the company as well as key documents regarding the company's business.

Step Three – Confidentiality and Secrecy

Before engaging in any discussions or allowing any due diligence investigations with respect to the company, a wise seller will require the buyer to enter into a written and enforceable confidentiality agreement so that the buyer will not be able to get a "free look" at proprietary information or processes the buyer then can use for the buyer's benefit, and/or to the seller's detriment, especially if no sale occurs.

Closely related to the confidentiality issue is the need for the seller to ensure that the very fact that sale negotiations are taking place remains a closely-guarded secret, divulged only on a strict need-to-know basis. Few things can ruin a company's marketing position or employee morale faster and more completely than premature disclosure, or even rumors, that a company is for sale. As a result, sellers should demand an up-front, written agreement from the potential buyer that the buyer will not disclose the negotiations, come upon the company property during operational hours, or make independent inquiry about the company and its operations to the company's employees or third parties.

The Sale Process – It's Not as Simple as It Sounds

If, after obtaining and analyzing preliminary information regarding the company, the buyer decides to move forward with the purchase, the buyer usually presents a preliminary and non-binding letter of intent to the seller. The letter of intent will set out only the material terms of the sale such as the purchase price; the form of the payment of the purchase price (i.e., cash, promissory note(s), exchange of other property, any combination of the forgoing, or some other form of payment); and any other employment, indemnification, or financial provisions that the buyer and seller deem especially relevant and important. First and foremost, the letter of intent should disclose whether the buyer proposes to purchase the ownership interest in the company (i.e., the stock of a corporation or membership interests in a limited liability company) or just its assets (such as its building, leases, intellectual property, accounts receivable, customer lists, and processes). As will be discussed in Part 2, this can have significant tax implications for both the seller and the buyer,

Many times, the letter of intent also will include a period of time during which the buyer is given an "exclusive right to purchase" the company in order to give the buyer time to investigate the company without fear that the seller will "shop" the deal to another buyer.

A letter of intent is intended to cover the major points before the parties engage in the often time-consuming and expensive process of negotiating the necessary details of a complete purchase and sale agreement. If the parties cannot agree on such basic terms as what is to be purchased, the price, and the timing of closing, there will be no need to get into the details. Sellers and buyers should be aware, however, that agreement on the terms of a letter of intent does not ensure that a purchase and sale contract ultimately will be reached. As the old saying goes, "the devil is in the details," and a surprising number of deals founder on the hard rocks of the details.

Conclusion

Times appear to be getting better for the sale of operating companies. However, such a sale is not as simple as some sellers may think. Failure to consider carefully the non-financial consequences of the sale can lead to disappointment in the result. Failure to be careful in finding a buyer and conducting the preliminary negotiations can lead not only to a lost sale, but also to devastating consequences to an on-going business.

Part 2 will discuss the "nuts and bolts" of post-letter of intent negotiations.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Deana A. Labriola practices in the firm's Technology and Business Practice Groups where she focuses primarily on business matters related to technology-based companies. Comments or questions may be sent to dl@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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