For today’s blog I’ve asked Ara Babaian, Esq., a partner at Ervin, Cohen, and Jessup's business and corporate law department, to tell us how to prepare a business for a major transaction.
Listen to the man. He knows his stuff!
By the way, Ara had a much longer list originally, but for the purpose of brevity, I asked him to condense the list. Feel free to add what other factors you think should be involved in preparation for major business transactions.
Are you considering a major transaction for your business, such as a sale, merger, private placement or debt financing? These types of deals are very important to the stakeholders in your company and to the future success of the business, and they are often time-consuming and costly. Below are seven key issues that often arise in these deals, and any one of them can become a major obstacle to closing your deal. In addition, in a major transaction, the business owners will be asked to make certain representations and warranties about the business that can make them personally liable for any breaches. Addressing these issues in advance can prevent them from becoming pitfalls.
Maintain reliable financial information. It is critical to work with your in-house financial staff or your CPA to prepare financial information that you and other decision-makers can rely upon. Developing effective audit and internal control procedures is an integral part of this effort. Doing this will allow you to gauge how your business is performing and demonstrate its value to other participants in the deal. Further, it will show that your business is organized and well-managed.
Keep your employees through the transaction. Often a company’s value is closely tied with the individuals whom the company employs. Because a certain amount of confusion and uncertainty is involved with a major corporate transaction, it is critical to retain these employees. One way to do that is by incentivizing them with equity incentive plans such as stock option or other equity plans, so that the employees are motivated to remain employed by the company to the end of the deal and beyond.
Document your relationships. Depending on the industry your are in, some or all of your business relationships may not be documented—whether those relationships are with your suppliers, customers, contractors or others. However, to the extent practical, it is important to document those relationships. Doing so will help preserve the value in your company and support the due diligence review of your business that any investor likely will undertake.
Manage your partners. If your business has more than one owner, it is important to make sure that your partners are all on board with respect to any decisions regarding the deal. A buy-sell agreement, shareholders’ agreement or operating agreement (if your company is a limited liability company) can help you do this by imposing restrictions on the transferability of the shares and providing for other management and decision-making mechanisms.
Maintain your corporate records. Maintaining and updating the corporate records of your business on a regular basis saves a lot of time and prevents confusion during a major transaction. Worrying about these details in the midst of a complex deal will take away resources from the business and the deal itself.
Protect your intellectual property (IP). It is critical to protect your company’s IP (patents, copyrights, trademarks and trade secrets). The actions that need to be taken depend on the type of IP that is important to your business. For example, you may need to file for a patent, or register a trademark or copyright. To protect trade secrets, you want to make sure that your trade secrets are shared only with people who have a “need to know” and who sign a non-disclosure agreement. Your employees and contractors also should sign an inventions or “work for hire” agreement to make sure that the sole owner of the IP is your company and that employees or contractors do not acquire rights in the IP.
Review your lease and environmental matters. If you are considering a major deal, it is important to ensure that the lease for your business (1) is appropriate for the future needs of the business, (2) is assignable in the context of your deal and (3) has acceptable terms such as rent amount and term. In addition, a myriad of environmental and zoning laws may apply to your business, and it is necessary from time to time to evaluate these laws to determine their impact on the deal.
Complex corporate transactions present many challenges and use up a lot of resources. Addressing the issues presented above, along with any particular issues that face your business, will be a good start to smoothing the path for a successful business venture.