Selling a business starts with first day of ownership

A client once told me, "If I ever wanted to take a competitor down, I would simply offer to buy his company."

That client was in the throes of a transaction, buried by due diligence requests and juggling the time-consuming job of selling his company while simultaneously trying to run his company so that it retained its value proposition until the closing.

Many business owners think about their exit strategy and the time frame for the exit, but often do little to prepare until the letter of the intent is presented by a potential buyer.

Thinking about and planning for the sale of your business one, two or even several years before you actually sell can make the sale process go more smoothly once an exit opportunity presents itself.

Business owners who are excellent managers of their product lines, expenses and operations, which ultimately build valuable companies, often can still use improvement when it comes to internal processes or legal details affecting the sale of their businesses.

In connection with your exit strategy, consider the following tips:

Estate Planning Seeking the advice of an estate planning attorney in the early years of your company before its growth and success can help minimize your estate's exposure to federal and state estate taxes. For example, certain estate planning techniques may allow you to freeze the value of your business for estate tax purposes, allowing you to shelter any appreciation in value from the date of the freeze to the date of the owner's death. This can aid transfers of business interests to family members as well as to third parties.

Governance Review your minute books and corporate records. Are they up to date?

•  Have the board of directors, shareholders or members approved all major transactions?
• Do equity records accurately reflect all current owners, stock transfers and stock cancellations?
• Has the company promised any equity rights to any third parties or employees?

Housekeeping In connection with any sale of a business, a buyer will want to conduct due diligence on the seller. This process helps a buyer confirm that it wants to purchase the seller's business, and helps the seller to identify and manage any potential issues prior to the sale.

I often advise my clients to open up their file cabinets, copy and send me everything - yes, everything. However, after the first production of due diligence materials, it is not uncommon for business owners to discover additional agreements that were buried on someone's desk or in someone's file cabinet.

Some buyers may view this negatively and believe that this delayed production of diligence materials was held back purposefully or to limit discovery by the buyer.

In anticipation of conducting an extensive due diligence process, consider the following questions:

• Where are your corporate records, benefit plans, licenses and contracts located within your company?
• Is there a central file location?
• Is there an inventory or index of your legal files and agreements?
• Who is permitted to sign agreements on behalf of your company? This should be limited to two to three people so that you can assure that all contracts are approved and reviewed before your company becomes obligated.
• Do those authorized signatories regularly file all contracts in a central location?
• Do you regularly accept the terms and conditions of your customers by not expressly rejecting their terms?
• Are those purchase orders in your purchasing department, sales or customer service department?

Choice of entity and other tax matters Buyers will often pay a premium to purchase assets rather than a company's equity interests. However, if your company is a "C" corporation, the company will be subject to double taxation in connection with the sale of assets. But if a likely exit strategy is an initial public offering, converting your limited liability company or "S" corporation to a "C" corporation sooner rather than closer to the IPO may be beneficial.

Work with your tax and accounting advisers to determine if your choice of entity best suits your potential exit strategy.

• Has your company used aggressive accounting methods or aggressive tax strategies that could scare off a potential buyer?
• Are you properly reserving for known contingencies?

Employees and management Do you have the appropriate incentives to keep your management team in place preceding, during and after a change of control?

• Have you implemented severance agreements or retention bonus agreements?
• Do you have an employee equity program, deferred compensation plan or incentive compensation plan?
• What do these plans say about a change of control?
• Would you want to reward employees on a change of control?

Trying to protect your employees once a buyer is at your door is much more difficult if you did not implement policies and plans on their behalf while you were running the business.

Litigation Do you have any outstanding litigation? If so, can it be settled efficiently? Ongoing litigation is a deterrent to a potential buyer.

• Are you aware of any potential claims or have you received any demand notices?
• Are there reporting and other policies in place so that management would be aware of any possible claims or demands that may be made against the company?

Selling your business can be a time-consuming and frustrating process even when you know that a successful sale will provide a substantial economic return. However, by considering the questions above and implementing procedures now, you can ensure a much smoother sale process when your exit opportunity arises.

Rochelle Klaskin is a shareholder at Godfrey & Kahn, S.C., specializing in mergers and acquisitions and private equity transactions.