Key Considerations When Selling Your Business

Published on: February 2023 | What's Trending

Sand running through the bulbs of an hourglass measuring the passing time in a countdown to a deadline, on a dark background with copy space.

If you are planning on selling your business there are several key items you will want to consider to maximize your financial gain and preserve your negotiating position.

Additionally, getting your business ready for a sale generally requires a substantial investment of time to prepare it for transition to the buyer and to satisfy the buyer’s due diligence requests. The following is not an exhaustive list, but highlights the key items you will want to consider as you prepare for a sale.

  1. Ensure the corporate records are in order. One of the first things a buyer will do is request the corporation’s minute book to verify the shareholdings and complete other due diligence. You will want your lawyer to review and update the records, if required. This will facilitate a smooth closing and allow you to focus on other aspects of the transaction as it gets underway.
  2. Consider debts to be paid off and security to be discharged. As most sales of shares are completed on a cash-free and debt-free basis, you will likely need to arrange for debts to be paid off and security registered against the business to be discharged prior to or on closing, as the buyer will generally not assume these obligations. You will also want to consider any liabilities facing the business, such as ongoing lawsuits.
  3. Prepare for the buyer’s due diligence requests. The buyer will want to review copies of material agreements such as key customer and supplier agreements, shareholder agreements, and employment agreements.
  4. Engage Advisors. Engaging experienced advisors is crucial. Below we have briefly touched on just some of the aspects of the transaction that these advisors can assist with.
  • M&A Advisors: Assist with marketing the business and identifying suitable buyers, and negotiating the business terms of the sale.
  • Accountants and Tax Advisors: Perform a valuation of the business, recommend pre-closing reorganizations designed to minimize tax to the seller, assist with outlining the structure of the transaction, and complete calculations necessary for purchase price adjustments.
  • Corporate Lawyers: In addition to reviewing and drafting the sale agreement and ancillary documents required to give effect to the transaction, you will want to engage a corporate lawyer early in the process to review the Letter of Intent (LOI). One of the biggest mistakes a seller can make is entering an LOI on terms that are not favourable as it can be difficult to re-negotiate these terms at a later time even though the LOI may be non-binding. Among other things, your lawyer will also negotiate the representations and warranties in the sale agreement, consider post-closing adjustments to the purchase price and your obligations to the buyer and business post-closing.

Your advisors can also assist you with determining whether it is more beneficial to complete the transaction as an asset or share sale.

  1. Identify consents to be obtained. It is common for licenses, agreements with lenders, leases for real property and agreements with customers and/or suppliers to include a requirement for consent to be obtained for the assignment of the agreement or to a change of control of the business. Closing can be held up, or representations breached, if you do not comply with these provisions.
  2. Transition employees. You will want to consider whether the buyer will assume all of the business’s obligations to its employees. If not, a key aspect of the transaction may be responsibility for severance and the provision of adequate notice. If the obligations for employees will be assumed, you will need to consider the timing of notification of the sale.
  3. Maintain confidentiality. Further to the point above, sellers typically keep the pending transaction confidential until closing is certain. You will want to consider how confidentiality can be maintained as you access due diligence materials and complete other steps in preparation for closing.
  4. Preserve your wealth. Your tax advisors may recommend a pre-closing reorganization of the business to minimize the tax consequences of the sale. Implementing such reorganizations can result in substantial savings, but typically requires careful planning and the drafting of a significant number of documents.
  5. Consider your role and compensation post-closing. Many transactions are structured to keep the seller involved post-closing to facilitate the transition of the business. The seller may be retained via a consulting or employment agreement, and consideration may include an “earnout” that provides for additional compensation to the seller if certain financial targets are achieved by the business.

As you can see from the list above, selling your business is no small task and there are a number of items to be considered. Depending on the size of the transaction, you may also want assistance identifying advisors with the right experience, and want to engage a legal team that can coordinate the transaction. If you are looking for guidance on the sale of your business, contact a member of the Business Law group at Pallett Valo.