As business owners, we all have different objectives for our enterprise. Some (like me) are doing this because we simply want career satisfaction paired with maximum flexibility to do things our way. Others are interested in building a small venture financed my close family and friends. And there are some that want to go all the way… they are shooting for the stars! They see IPOs in their future.
Regardless of your current objectives, there may come a time when you want to either move on to new opportunities (which means selling your business) or you may simply want to take your business to the next level. And to do that you may need to attract investors from outside your close circle of family and friends. Unlike your initial investors, these new people will not be investing in you or your ideas; they are seeking to find out whether or not your business will provide a good return on their investment. That is why – before they finalize any deal – they will probably conduct an intense review of everything pertaining to your business. How can you ensure that your business will pass this due diligence test?
Steven M. Sarwin provides a list of the things you will need to pay attention to right now:
1. Maintain comprehensive financial records: Having “complete and verifiable a business's financial statements… before the sale begins” will build confidence in the buyer. Among other things, Sarwin also recommend having a recognized accounting firm perform an audit of your financials before diligence begins.
2. Ensure that your business is not overly dependent on you for success: This is especially important if you are seeking to sell your business. This is because the buyer “needs to be confident that the company can maintain or exceed its current performance after the deal closes”
3. Ensure that all outstanding legal issues are resolved:
We are a legal site so obviously we are going to spend more time discussing this section.
The fewer outstanding or potential legal issues that may arise from regulatory compliance and patent protection, the more confident the buyer will feel before the sale. Pre-sale legal reviews should focus on the following areas:
• Follow the advice on this site to minimize exposure to lawsuits.
• As we discussed in our July 15th post and in our Intellectual Property Cheat Sheet, you must, “Ensure patents, copyrights, trademarks and other proprietary information are finalized for key products and/or systems in order to sustain the company's established competitive advantage after the sale.”
• If you are involved in any lawsuits either settle in an equitable manner or use arbitration to expedite resolution.
• Comply with all outstanding government regulations.
So what if you are already embroiled in a protracted lawsuit that would prove difficult to resolve? Well, during diligence the buyer investor will seek to find out how this will impact the company’s performance and profitability in the future. That is why I am here showing you how to take steps to prevent being sued in the first place.
Nobody knows what the future holds so why not keep your options open and follow Sarwin’s advice?
