Selling Your Business? Tackle These 6 Tasks for a Smooth, Profitable Sale

By Julian Izbiky

Entrepreneurs spend untold amounts of blood, sweat, and tears to build profitable businesses. Many, though, will eventually reach a point when they’re ready to cash out and move on. When that day comes, the last thing a business owner needs is to run into an issue that kills the deal and causes the potential buyer to walk away.

Over the course of my 40-year legal career, I’ve helped more than 1,000 buyers and sellers buy and sell small businesses mostly ranging in size from less than $1 million to $10 million. I know what can kill a deal and what buyers want to see.

Here are the top six tasks every business owner should tackle now to prevent a future sale from going off the rails.

Deal killers to avoid when you sell your business

1. Personnel issues

A key employee quitting before the close of a sale can decrease the value of the business, or worst-case scenario, kill the deal. Alternatively, what if a crucial team member says that they won’t work for the prospective buyer? Or, even worse, threatens that if the business is sold, they will quit and start a competing business? I’ve seen that exact scenario derail a $1,500,000 sale.

A great team is a critical value driver for any company, and it’s essential to have legal guardrails in place that keep the employees engaged and onboard.

Consider having leadership and essential team members sign non-compete and non-solicitation of customer agreements.

Keep in mind that in some states such as California, non-competes are generally unenforceable. Seek legal advice about the enforceability of non-compete and non-solicitation agreements in your industry and state. In situations in which they are enforceable, non-solicitation and non-compete agreements must be reasonable as to geographical area, scope and time period. Ideally, they should be provided when an employee is initially hired. However, if a company asks an existing employee to sign one later in their employment, then the agreement should be provided in conjunction with additional compensation or some other benefit.

Last, and perhaps most importantly in the case of a potential sale, the non-compete agreement should state that the company may assign it to a purchaser of the business.

Provide key employees with a financial incentive to remain through the closing date.

One common method is through the use of a phantom stock agreement. Phantom stock is not actually stock, but a contract that provides an employee with the promise of receiving payments in certain situations as if the employee actually owned shares of the company’s stock. Phantom stock agreements are typically structured so that the employee receives payment upon the occurrence of different events, most often the sale of the company.

2. Failure to protect intellectual property

A company’s intellectual property, such as patents, trademarks and service marks, copyrights, and trade secrets, are critically important assets that can be worth a lot of money to a seller of a business. If a business owner fails to protect them, that can either reduce the value of the deal or cause the deal to die altogether.

Determine what patent, copyright, or trademark rights need to be protected and file the appropriate applications.

Contrary to popular belief, hiring an attorney to help formulate copyright and trademark applications is not expensive. Most trademark and copyright applications can be submitted for a few thousand dollars or less in attorneys’ fees and costs, and the benefits can be enormous. Patents, although more expensive and arduous to obtain, can also provide significant value to business owners.

Ensure that any intellectual property rights have been assigned to the business—and are transferable to a future purchaser.

For example, the company should have contracts for everyone who has worked on or helped develop any element of its IP, including products, software code, website, logo, etc. If the business hired an individual or company to develop any of these assets on its behalf, it’s important to confirm that the intellectual property rights have been assigned to the business. Otherwise, the creator hired to develop the assets could be considered the owner, despite the business owner paying for the development of such intellectual property.

Confirm that the business has purchased all necessary software licenses.

Software can be an integral part of running a successful business. As such, companies should always ensure that any software agreements will allow the licenses to transfer to a new business owner.

Require all employees to sign confidentiality agreements.

These protect the business’s unique ideas, processes, and other proprietary and sensitive information. A potential buyer could face significant risks if employee confidentiality agreements are not in place.

3. Lease complications

If the company does not own the property where it does business, its lease can be a very important asset. However, many leases state that the assignee of a lease (such as a purchaser of the business) may not take advantage of any renewal options, and that if a business owner requests that the lease be assigned, then the landlord has the option to terminate the lease. These provisions can be deal killers.

To avoid lease complications, ensure that the lease provides the business with the right to exercise renewal options. When negotiating a lease or a lease extension, make sure that any future purchaser of the business will be able to exercise renewal options.

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4. Corporate records are not up-to-date

Inadequate or poorly maintained corporate records can not only affect a potential purchase price but negate a sale entirely. Business owners need to be certain that corporate records are thorough, clean, and up-to-date.

Proof of ownership, and executed ownership agreements, such as shareholder agreements and operating agreements, should all be in place so that there are no open issues or questions regarding who the owners, directors, and officers of the business are. Any options to acquire the stock or membership interests of the business, including phantom stock, should also be in writing.

5. Outstanding liens

Sometimes, business owners will find that although they have fully paid off a loan or other financing, the creditor has failed to release the applicable lien. Making that discovery in the middle of the sale process can create delays in the deal.

Do a search to determine whether there are any liens filed against the business’s assets.

If any liens are found, the business owner should contact the creditor to release this lien well before closing to avoid any problems. Be aware that if the business has outstanding loans or other financing secured by liens against the business’s assets, these will need to be paid off at closing or immediately following the closing out of closing proceeds.

Ensure that the business is current as to liabilities that could create an inchoate or statutory lien against its assets.

These could include state employee withholding, sales taxes, unemployment compensation, and workers’ compensation.

6. Contracts and agreements are not in writing

A lack of legally binding contracts and agreements can absolutely kill a sale. Oral agreements and handshake deals will not cut it with a potential buyer. Obtain fully executed written contracts and licensing agreements with all vendors, suppliers, customers and consultants. And ensure that the business can assign these relationships to a purchaser.

Prepare your business for a successful sale

By taking these steps, business owners will significantly improve their odds of avoiding surprise issues that can kill the deal and be well-prepared to profitably sell the company that they’ve worked so hard to build.

RELATED: Is Now the Right Time to Sell Your Business? 10 Questions to Ask Yourself