Twelve Tips When Preparing to Sell a Family-Owned Business

Whether you started the business yourself or are “next generation,” selling a family-owned business is usually an experience that can bring both excitement and anxiety. Here are 12 tips to help you focus on the exciting parts:

Twelve Tips in Preparation

1. Before you go to market, do a preliminary valuation analysis. While there is a certain “eye of the beholder” element to all business valuations, knowing what you are up against can help you negotiate favorable terms. Having the right advisor to help you value your family-owned business, and negotiate it with a potential acquiror, can make a world of difference.
2. You’ve heard this one before – get your books in order. If you can obtain audited financials, or at least financials reconciled to GAAP, this improves your ability to speak with the potential acquirors in their financial language, which helps with negotiations. Disconnects over cash treatment often materialize as a basis for adjustment of the purchase price between the LOI and purchase agreement stages. If you are far out enough in advance, establishing internal controls and making sure payment flows are clear (and not to or from friends and family at discounted rates) help here too.
3. Secure your intellectual property in applicable jurisdictions. Whether your family-owned business relies upon your brands, patentable technology, or copyrightable materials or they are incidental to it, securing IP helps capture the value and reduces potential risk for post-closing liabilities. It takes time to secure the registration (it does not happen upon application), so be sure to take this step well in advance.
4. Secure similar domain names. In addition to your own domain name, confusingly similar domain names can be a problem. Securing similar domain names doesn’t improve value so much as it creates protection against someone messing with you at an inopportune time.
5. Double-check governance documents. An operating agreement, partnership agreement, or shareholder agreement will have terms that can impact your ability to do a deal if there are minority investors, and the absence of such an agreement may affect the structure as well. Making sure there is no barrier to getting the deal done, and that the owners have a clear approval process and distribution of proceeds process, can reduce last-minute concerns. It is sometimes advisable to get stakeholders to agree in advance to do the deal.
6. Lock in valuable long-term contracts. If a portion of your value comes from your contractual relationships, locking in favorable terms for the future can help improve your valuation. On the flip side, if you have “bad contracts,” either getting out of them or making sure they are terminable on short notice can help.
7. Lock in valuable employee/independent contractor relationships.  Similarly, locking in employees, by making sure they have strong contracts and solid incentives to work towards and beyond the sale, helps acquiror confidence, increasing the likelihood of getting a deal done.  A word of caution here, though – sometimes the acquiror will want to lock in key personnel their own way or may not value those personnel as you do.
8. Update your employee handbook and policies. This is only sometimes helpful but should be considered if your handbook is out-of-date and fails to address key legal considerations (data privacy, work-from-home/COVID policies, sexual harassment, etc.), and those issues come up. More to the point – having a good handbook and internal systems in this area speak to maturity as a company, which can help you in due diligence.
9. Review contracts for anti-assignment clauses. Anti-assignment clauses can slow down a deal and sometimes give leverage to the other parties in renegotiating with you for their consent or an amendment. In doing contract renewals or renegotiations, pay attention to these clauses to avoid barriers to getting a deal done.
10. Settling/resolving litigation (or potential litigation) matters.  If you have disputes that make your company look bad, it can help to resolve them in some fashion prior to the sale process.  Securing confidentiality obligations from the other parties is helpful (but make sure you can disclose relevant terms to the potential purchasers).
11. Review operational compliance with laws issues. If you have issues that touch upon the law and might result in a legal violation (i.e., treatment of independent contractors, foreign qualification, collection of sales taxes, satisfying import requirements, treatment of data privacy, equal pay, factory worker safety requirements), now is the time to review them with an attorney. These issues can be deal-killers, even if some can be readily resolved through changes in practice.
12. Gather and maintain relevant documentation in a secure place. You will ultimately need to provide a whole host of documents in diligence: corporate documents, contracts, employment agreements, licenses, registrations, financial records, leases, and more. Start organizing them and gathering them now, to help reduce costs and inefficiency in the process down the road.

Selling a Family-Owned Business

Putting together your deal team early, including your in-the-know executives, attorneys, and accountants, can help you avoid common pitfalls in selling your family-owned business. If you have questions about this post or other business law matters, please reach out to me at (917) 369-8829 or jcassin@norris-law.com.