Many small business owners start their businesses with the hope of selling them to larger companies.  However, the success of a sale is greatly impacted by proper planning.  For instance, disputes among owners often arise during sales, and having an appropriate mechanism to settle the dispute can be the difference between the success or failure of the sale.  The key is to address issues before they crop up.  The basic areas to consider are (i) how to deal with disputes among owners, (ii) ensuring that the sale of your company does not impact your contracts, and (iii) ensuring you have the necessary intellectual property rights.  

Owner deadlocks can be the death knell to a sale.  Buyers often will walk away from a deal if the owners cannot resolve their disputes quickly.  All businesses should have a written agreement among the owners that sets forth how common issues will be resolved.  These issues are often dealt with in Shareholders Agreements or Operating Agreements.  Important issues that should be addressed in the agreement are (i) under what circumstances may an owner sell his/her interest in the business, (ii) is there a right of first refusal for the other owners to buy the ownership interest, (iii) what method will be used to value the business if the owners don’t agree on the value, (iv) may an owner transfer his/her interest and what happens in the case of a death or divorce, (v) does an owner have the right to force the sale of the other owner’s interest – i.e. drag-along clause, and (vi) does an owner have the right to participate in a sale by other owners – i.e. tag-along clause.

Another major issue is to make sure the sale of your company will not materially impact your contracts. When negotiating contracts, whether with a landlord, vendor, prime contractor or any other party, pay close attention to terms that would restrict your right to transfer ownership of the company.  Sometimes this may be a requirement to provide written notice of the change in ownership, other times a term may give the other party the right to terminate the contract or accelerate payment obligations.  If the new owner will not have the benefit of a contract, it may impact the value of your company and ultimately the sale. 

Another area of concern is intellectual property rights.  At minimum, make sure your trademarks and copyrights are in order.  Have you confirmed that your marks do not infringe?  Did you register your trademarks with the USPTO?  During negotiations for the sale of your company is the last place you want to find out that you need to change your company’s name because it infringes.  Lastly, did your consultants and independent contractors sign agreements assigning their work (e.g. software development) to your company?  If not, you may not own the work.  

Sales negotiations are not the time to discover problems. Your preparations today will affect the success of your sale tomorrow.