Legal Factors

While legal issues generally aren’t an opportunity to create value, they do present an opportunity to reduce perceived risk for the buyer. When maximizing your business’s value, ask your attorney to identify any legal issues that need to be cleared up before you begin the sales process. In most cases, legal issues take time to resolve, so start this as early as possible. The following section outlines an overview of the most common legal issues.

UCC Search

Perform a Uniform Commercial Code (UCC) search to make sure there are no existing liens on your business before you go to market. Existing liens can lead to delayed closings, which can lead to a host of other problems. When selling your business, speed is key to ensure you maximize price. If you do have existing liens, clear them prior to putting your business on the market to ensure a smooth and uneventful closing.

Entity

Ensure your entity is up to date. Not doing so can delay the closing. I’ve been involved in transactions in which the seller’s entity was not up to date, and the closing was delayed by several weeks or more. Again, if the closing is delayed, this is an opportunity for the buyer to dig up additional problems or even change their mind about the transaction. This may also cause the buyer to doubt the accuracy of your recordkeeping, and they may dig deeper into issues they previously weren’t concerned with.

Intellectual Property

Document any intellectual property included in the sale and gather the necessary paperwork to assist with the transfer. This can consist of trade secrets, proprietary products or services, trademarks, patents, and any other registered and unregistered intellectual property. If your employees or other contractors assisted in creating the intellectual property, make sure you have signed invention assignment creation agreements on hand. Many issues regarding intellectual property can take a significant amount of time to clear up, so it’s best to resolve these issues as soon as possible before you begin the sales process.

Litigation

Resolve any pending litigation, other legal matters, or even threats of litigation before you put your business on the market. Even though you might offer to take full legal and financial responsibility for any negative consequences, many potential buyers will pull back, fearing the unknown – including how lawsuits and other disputes may affect the public image of your business. In short, if you can’t reach a settlement before you go to market, the salability of even a well-run, profitable business will be stalled, if not impossible to conclude. Alternatively, if the litigation is frivolous or for a small amount, obtain a letter of opinion from your attorney to present to potential buyers, and be prepared to hold back a portion of the purchase price in escrow.

Action Steps

• UCC Search: Perform a UCC search to identify any outstanding liens on your business. If any exist, clear them up prior to putting your business on the market.
• Entity: Ensure your entity is up to date.
• Intellectual Property: Document any intellectual property included in the sale and gather the necessary paperwork to assist with the transfer. Ensure you have invention assignment creation agreements with your employees.
• Litigation: Resolve any pending litigation or other legal matters – or even threats of litigation – as soon as possible before you put your business on the market.