As the M&A market stays active, more and more family-owned businesses are selling to third parties. Many of these transactions involve sophisticated buyers, who spend a lot of time, money and effort on due diligence of a seller. While there are many elements that go into a successful sale of a business, sellers can take a few steps prior to starting on the sale process to help ensure smoother negotiations (and hopefully a smooth transaction).
Know Your “Governing Documents”
Whether you have an operating agreement (for limited liability companies) or bylaws and/or a shareholders’ agreement (for corporations), there are usually one or more documents that include some language about how major transactions (like selling the business) are approved. Anyone considering selling a business with more than one owner should make sure to review any and all agreements relevant to the management of the business. This will ensure that all legal and fiduciary duties are satisfied. In addition, it can cause concern on the buyers’ part when that buyer (through its diligence) discovers an approval requirement that the seller doesn’t appear to be aware of.
Review Third Party Agreements
Before embarking on a sale process, take some time to review key agreements with customers, suppliers, employees, etc. These documents may contain restrictions on the type of transaction that is being considered. In some cases, these restrictions don’t impair the operating business in any way, but would come into play only in the event of the sale of the company. It is also important to be familiar with any loan documents, as these agreements often have restrictions on a sale of the company, including approval by the lender. In particular, it is always good to do a preliminary search for UCC financing statements to determine if there are any on record that should have been discharged. As part of this process, sellers often find incomplete documents, missing signature pages, and the like, and it is always good to get these cleaned up before providing them to a potential buyer in diligence.
Get the Family Perspective
There are many business where family members are not only shareholders, but are also employees. A sale of the business may mean a significant disruption in their way of life. It is always favorable to get the key stakeholders (either owners or employees) on board ahead of time to present a united front to a buyer.
"Identify which family members will be responsible for “running” the transaction, as the buyer will want to know that they have a primary point of contact who can act for everyone.
This is also a good opportunity to dispose of assets or real estate that are not going to be part of the core business being sold, to make the ultimate transaction as clean as possible.
Selling the family business is almost always a significant undertaking. Taking a few steps ahead of formally starting the process can make negotiations, and hopefully the entire transaction, go smoothly.