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Preparing Your Business For Transition

Written by Thomas P. Donnelly Thursday, 28 June 2018 19:25

There are many reasons why businesses sell.  Certainly, the lifecycle of a successful business is often longer than the founder or controlling shareholder’s desire to continue working.  In such circumstances, a business owner may wish to extract the reward for years of sweat equity by transitioning to a new ownership group.   In other situations, a strategic combination is necessary to fuel continued growth in scope of services or customer reach.  Sometimes, an entrepreneur must simply choose between a number of different projects such that divestiture of one opportunity becomes necessary. 

Whatever the reason, preparing the business for the sale process can both enhance the value of the transaction and make for a smooth transition.  A sophisticated buyer is loath to take on uncertainties, non-ordinary course liabilities or business practices which may give rise to same.  A potential seller is wise to get their “house” in order before going to market or even considering discussions with a potential buyer. 

Financial Reporting

Financial information is a primary focus of due diligence.  Many businesses do not commission audited financial statements on an annual basis.  For many more, the annual tax return stands alone as an indication of the value of the business.  However, tax returns prepared without an eye on sale often reflect information designed to reflect a reduced tax liability as opposed to demonstrating the value of a going concern.  A business owner is wise to consider the assistance of a qualified accounting firm to prepare corporate financial information in a light more suitable for transactional purposes.  The actual filing of all applicable returns is a must.

Human Relations & Employment Practices and Policies

Human relations matters are a potential land mine.  An employee handbook summarizing policies and procedures is essential.  If benefits plans are in place, compliance with all applicable laws will be required if a deal is to be consummated.  A current employee census and proof of citizenship or immigration status will be required.  Key employees should be subject to employment agreements with assignable restrictive covenants.  An acquiror will desire protection against an exodus of management.  

Customers and Business Partnerships

Customer relationships and key business agreements should be locked down.  An analysis of such agreements in advance with special attention to assignability or change in control provisions is necessary due diligence in any sale.  Disclosure to a client or customer may make for a difficult discussion, however, a buyer will want to ensure the continuation of the business relationships prior to commitment. Indemnification obligations and intellectual property rights are certain to be addressed to the extent integral to any customer relationships.

A well-constructed house sells more readily and for greater value than a leaky one on an unstable foundation.   Further, a buyer will often require representations and warranties as to the material issues summarized above such that, even after closing, a deficiency can be costly to a seller who thought the transaction was over and the profits safely secured. monetarily impactful. A seller is wise to identify and address deficiencies in advance of sale discussions both to maximize value and make for a smooth, efficient and cost effective transaction.       

 I recently had the opportunity to speak at the Central Bucks Chamber of Commerce’s health and wellness event, “Well Employees = Well Business: Best practices and Legal Considerations” along with Megan Duelks, CoE Employee Health Innovations at Johnson & Johnson.  Ms. Duelks’ discussion of wellness programs at Johnson & Johnson along with the excellent questions from the attendees highlighted that a workplace with good risk management is also a positive, professional and productive workplace.  Good risk management should include three important features, no matter the size of the employer:  professionalism, fairness, and a focus on employee performance. 

 Professionalism means that an employer has in place the important features that protect both employees and employers:  a handbook, policies that prohibit discrimination, harassment and retaliation, and a good complaint procedure.  Professionalism also requires that complaints are taken seriously, investigated properly and redressed in a meaningful way. 

Fairness requires that those policies are followed consistently for each employee, and that exceptions are made for good business reasons.

  A focus on employee performance helps to meet these goals.  At the seminar, employers were concerned about how to communicate with an employee in crisis.  The goal is to help the employee, but protect the employer from unnecessary liability.  Having clear policies in place will help to meet these goals. Where the crisis is impacting the employee’s performance, this is where the discussion must start.  A focus on performance, which includes anything from attendance to the quality of work, creates a platform for a professional conversation about how to address the issue.  An employer is always free to end such a discussion by identifying the resources the employer offers for employees facing personal, family, or health issues. 

  In my practice at Antheil Maslow & MacMinn, I have assisted many employers to put a program in place that improves culture, manages risk, and creates a framework to address employee crises. 

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