There are many roadblocks that can slow a transaction – just when you are in a hurry to get it done. Among those that you can do something about now are delinquent tax returns or other regulatory filings, promises of equity participation that may have been made to key employees or others, other unresolved legal issues, and environmental concerns. The buyer will conduct a “due diligence” investigation of your business prior to completing an acquisition. In addition, you will be asked to make “representations and warranties” about the status of your business in connection with the acquisition agreement. It should be your goal that the buyers do not find any surprises during due diligence. If they do, it will likely result in a delay and, possibly, a lower selling price.
If you have unresolved tax issues, contact your tax advisor at once to discuss how best to remedy the situation. The matter will need to be resolved in order for a transaction to move forward, and the best way to put a positive face on a difficult situation is to confront it and know what has to happen. For example, if there are unpaid taxes, it may be possible to pay them at closing and still be able to deliver the business to a buyer free and clear. In most cases, the buyers will expect the seller to take care of any problems of this nature. Dealing with them in a forthright, businesslike manner will help build the confidence of the buyer and make the deal more likely to close.
Employee-related issues are also often a roadblock. Among them are concerns about competition and any promises that have been made to employees. Buyers will usually be interested in retaining key employees to run the business, and any impediments to that will be a problem. Do you have appropriate employee files on all employees, containing such documents as employment applications, W-4s, I-9’s, evaluation forms, records of any pre-employment or post-employment screening and, where legal and appropriate, noncompetition, nondisclosure and/or nonsolicitation agreements? Buyers will want the best possible protection from competition from your employees.
Another area that will usually receive special attention will be environmental issues, especially if the business involves the use of hazardous materials. Buyers will be interested in records of compliance with environmental regulations and will often want to have an environmental engineering firm complete a “Phase One Environmental Assessment.” This may also be required by a lending institution if the buyer will be acquiring real estate in connection with the acquisition of the business.
Any outstanding litigation needs to be reviewed and, if practical, resolved prior to the acquisition process. The existence of such matters will cloud the water in connection with an acquisition and likely reduce the marketability of the business.
A word about a difficult topic – it is well-documented that many small businesses do not report all of their income for tax purposes, especially cash receipts. This has been highlighted in recent IRS publications, and the whole area has been targeted for enhanced enforcement. It is amazing that many prospective business sellers will suddenly talk about their unreported cash receipts when trying to get the best value for their businesses.
This presents lots of problems – for everyone. First, business owners that make such claims are putting themselves at great risk. In essence, they are confessing to tax fraud and asking people that they barely know to give them credit for it. They are also putting the people they are doing business with at risk by disclosing this information to them and asking them to consider it in determining value, then asking them to keep it private. Most credible buyers will totally disregard such information and, if the amounts involved are material, may choose not to pursue the potential acquisition. Our advice – proceed with great caution – it is not work the risk.
One other comment needs to be made here. Clean it up! Cleaning up the physical facility, the office and records will usually result in more interest in the potential sale of the business and make the process smoother. You wouldn’t even think of trying to sell your home without making sure it is as presentable as possible. You shouldn’t try to sell your business without doing the same thing.