A blog published by Red Mountain Law Group providing
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Many reasons exist that may prompt an owner or owners to begin to at least consider that the time has come to sell a company. Something may be happening with the industry generally; something may be happening with the owner personally. But for whatever reason, “it is time to get ready to sell.” From a financial perspective, being sure you have several good quarters of financial gain is always key, and inevitably, you will want the business running on all four cylinders before you go through a sale. However, what do you need to do from a legal perspective to get your company ready to sell, or as it’s colloquially called, get your proverbial stuff together?

Simply put, you want to have written agreements with all of the various parties that make your company run, or if having an agreement in place is not necessary due to the nature of the business, you want to be sure that the liabilities are limited (in particular, claims against your stock). A business should be engaged in and practicing best practices. If you go back through the articles included in this series, you can begin to construct a checklist. You want your trademarks done, you want your supplier contracts signed, your lease agreement in place, etc. If you boot strapped your way from a start-up to a good size business, you may not have had the time or resources to have everything perfect. Now is the time to go back and clean up those issues.

If you want a more comprehensive business checklist, get a stock or asset purchase agreement. If you do not have a thorough one1, then you can go to the SEC website and pull a stock or asset purchase agreement from a recent industry transaction. Look at the representations and warranties of the seller in this agreement. Often the bulk of the agreement is the representations and warranties. A seller’s representations and warranties are the statements that the seller makes to the purchaser concerning the company. Statements such as “seller has good title,” “no litigation exists,” and “seller has disclosed all liabilities” are standard representations made by the party selling the company to the party purchasing the company2. A list of these standard representations is attached at the end of this article. These representations and warranties, which may vary from industry to industry, are a good starting point to build a corporate checklist.

Because a business is a mesh of tangible and intangible property, a purchaser will want to know that they are getting what they purchased. A company is not like a car; you cannot go and take a company out for a spin. Additionally, if you do not like the business, you cannot return it to the dealer to get a new one. Once purchased, a company is sold. Thus, the purchasers will want the seller to make statements about various aspects of the company. In these representations, you will see what concerns a purchaser, and thus the representations in a purchase agreement are a good place to start for assembling a legal checklist of what needs to be done prior to selling a company.

As you look through this checklist, you will notice that some things will not be able to happen instantaneously. If you delayed filing for a trademark, for example, you cannot get your trademark registered overnight. You can file for registration, but you will not get it registered for at least six months. Some corporate hygiene issues can be handled easily, but not necessarily quickly. That said, not every item can or should be completely resolved. The important part as you “clean up” a company is that you have a plan for handling all of the issues. For example, you may have litigation outstanding. Outstanding litigation does not necessarily preclude a sale of business; if the risk is quantified, reserved for, and being handled, a purchaser may get comfortable, particularly if the litigation is not material to the fundamentals of the business.

Shareholder issues are one of, if not the, thornier issues that you come across at this stage. Ideally, you will have in your formation documents, and if applicable, later investment documents, all of the equity fully accounted for and properly documented. However, my experience has taught me that such is not always the case. Promises are made to employees. Investors may believe that have more or less rights than they actually do. Without a definitive idea of who owns the company and precisely what percentage is owned, enormous problems can creep into a transaction. If you have an offer to sell for a million dollars, the shift of one percentage point puts $10,000 in one pocket and takes it away from another pocket. Sorting these issues out in the hypothetical realm is much easier than sorting these issues out when you are close to closing.

Those things that the business owner has conveniently neglected, piles of paper in the corner of the desk, and outstanding items that are unresolved must be worked out on the front end. As you begin to shift into a sales mood, getting resolution is a must.

Mike Goodrich
Goodrich Law Firm, LLC

Representations and Warranties of Seller and Shareholders 3
1. Organization and Good Standing
2. Enforceability; Authority; No Conflict
3. Capitalization
4. Financial Statements
5. Books and Records
6. Sufficiency of Assets
7. Description of Owned Real Property
8. Description of Leased Real Property
9. Title to Assets; Encumbrances
10. Condition of Facilities
11. Accounts Receivable
12. Inventories
13. No Undisclosed Liabilities
14. Taxes
15. No Material Adverse Change
16. Employee Benefits
17. Compliance with Legal Requirements; Governmental Authorizations
18. Legal Proceedings; Orders
19. Absence of Certain Changes and Events
20. Contracts; No defaults
21. Insurance
22. Environmental Matters
23. Employees
24. Labor Disputes; Compliance
25. Intellectual Property Assets
26. No Date Limited Software, Etc.
27. Compliance with the Foreign Corrupt Practices Act and Export Control and Anti-Boycott Laws
28. Euro-Affected Products and Services
29. Relationships with Related Persons
30. Brokers and Finders
31. Security Law Matters
32. Solvency
33. Disclosure

1 — At this point, you want the longest one you can find. You may want to start from a less comprehensive form when the transaction is being negotiated, but for the purpose of getting in your mind what is required, the longer and scarier the form, the better.

2 — Of course, the lawyer’s job in this process is to turn the simple phrase, “you are good, and you are getting what you paid for,” into a fifty-word document.

3 — List developed from ABA Model Asset Purchase Agreement.