Legal Article – A Checklist for the Sale of Small and Mid-Sized, Privately-Held Corporations

By March 15th, 2015

Blog No. 57

March 14, 2015

NOTE: The following business and transactional law article was originally published in The San Francisco Daily Journal and The Los Angeles Daily Journal on March 12, 2015

A Checklist for the Sale of Small- and Mid-Sized, Privately-Held Corporations


Mack W. Borgen

Santa Barbara, California

University of California at Berkeley (Honors, Economics); Harvard Law School; Author, The Relevance of Reason – Business and Politics (Vol 1) and –Society and Culture (Vol 2)  – As Advertised in The New York Review of Books and Recipient of Four National Book Awards

           There are 76.4MM Baby Boomers in the United States. They constitute nearly 24% of the U.S. populaion. Born between the years 1946 and 1964, the current age range of all Baby Boomers is from 51 to 69 years of age. The median age Baby Boomer is now 60.

In post-World War Modern America, economic opportunities were greatly expanded. The reasons for this are numerous — the GI Bill availability of a college education, the lessening of racial and gender barriers, the wider availability of business capital, the diversification and (later) the globalization of markets, the steady introduction of new technologies, and the extraordinary acceleration of both travel and  communications. It is not surprising that the men and women of this generation marched to a hundred different drummers. They pursued a wide range of careers. They built thousands of new businesses.

As of 2012 there were nearly 6,000.000 small businesses (businesses with less than 100 employees) in the U.S. In addition, there are over 197,000 medium-sized firms with annual revenues from $10.0MM to $1.0BB. These businesses represent one-third of the U.S. GDP, and they have an average age of 31 years. Borgen, M., The Relevance of Reason – Business and Economics (2013)citing The Economist, October 20, 2012, p. 59 and November 3-9, 2012, p. 76.

Due purely to the math of aging and unless there exists a groomed and competent successor, the owners of these businesses will soon be analyzing their exit strategies. They will face a choice – close the business and shutter the doors or find a buyer and sell the business. While there are many business and personal factors to be considered and respected, many owners will conclude, very bluntly, that dying at one’s desk is not the desired or prudent exit strategy of their choice.

Instead, these owners will seek a disposition of the corporate shares or assets. For this reason alone, over the next decade there will be an increasing number of sales of privately-held businesses.

Admittedly, every disposition is different. The specific purpose(s) and time requirements will vary. The sellers will normally be highly knowledgeable about their own products, operations, and markets, but their sophistication regarding business dispositions will vary. Furthermore, the composition of each disposition will be different in many ways – the nature of the assets; the annual revenues and profitability; the size of industry; the presence of workforce issues and strategic buyers; the existence of subsidiaries, affiliates, and minority shareholders; and the extent of existing or contingent liabilities.

Nevertheless and the differences aside, the orderly sale of most privately-held businesses normally requires a standardization of planning. There are certain processes to be followed and checklist steps to be completed. It is oftentimes one of the responsibilities of business counsel to guide clients through these component steps.

In this article no distinction is made between the sale of corporate shares and the sale of corporate assets. There are numerous reasons why a buyer may want to purchase only the assets (or specific assets) of a corporation. Although less common, there may be instances where a seller may prefer an asset sale. Regardless, this article assumes that so long as material post-tax equivalency is achieved, the seller will be open to either the sale of controlling interests in the ownership entity or the sale the entity’s component assets.

The following is a summary checklist of ten basic steps which normally need to be completed in order to achieve an orderly and successful sale of a small- and mid-sized corporate entity. In numerous instances, some aspects of these stages will overlap.

Step 1.             Timeline Schedule for Completion of Stages of Disposition Process and Target Sales Closing Date. Review and approve a rough timeline schedule. Any such timeline is obviously subject to many variables including intervening events, developments, or discoveries, and ultimately, of course, the identification of the buyer(s) itself. Nevertheless, the preparation of even a rough timeline and the establishment of a target sales closing date will help the client better understand (and accept) the necessary steps.

Step 2.             Document and Information Organization, Assemblage and Review.

          Step 2-A.         Assemblage and Review of Financial Data (including Balance Sheet, Income Statement, Sales and Profits Statements, Federal and State Tax Returns) and Corporate Records.

          Step 2-B.         Organization of Comprehensive Presentation of Company including a summary description of current sales revenues and profitability, sales stability, projections, business expansion ideas, staffing and organization, and a schedule of major suppliers, vendors, and customers.

          Step 2-C.         Schedule of Real Property, Permits and Licenses. In addition, evaluate all real property title matters and all permits and licenses (including transferability matters). If applicable, evaluate the nature and likelihood of post-closing environmental compliance obligations and liabilities.

          Step 2-D.        Schedule of Business Assets – Tangible and Intangible Personal Property including, cash and cash equivalencies, inventory, fixed assets, machinery, furniture, vehicles, equipment, contracts, and intellectual property assets.

          Step 2-E.         Schedule and Review of Employment and Fixed-Term Independent Contractor Agreements including compliance with immigration laws, the existence of collective bargaining agreements or any employment-related disputes.

Step 3.             Valuation and Business Pricing and Tax Model and Analysis.

          Step 3-A.         Independent Business Valuation. In order to help your clients have a realistic understanding of the valuation range of their company, obtain an independent business valuation. Such valuation may be useful later in order to support the offering price or to establish a de facto floor price.

          Step 3-B.         Preparation of Summary Corporate and Business Descriptions including business history, ownership, current operations, sale objectives, and business expansion opportunities for the prospective buyers’ consideration.

          Step 3-C.         Development of a Post-Tax Financial Analysis and Computer Model. Identify major tax planning considerations such as tax basis issues, ordinary vs. capital gain, two-tier taxation issues, and the possible use of tax-straddling and other tax minimization alternatives with respect to the distribution of proceeds. To the extent permissible, consider the use of post-closing noncompetition, consulting or transition agreements in order to minimize corporate-level taxation.

         Step 3-D.        Finalization of Client’s Initial Offering Price. After consideration of the independent business valuation and all other factors, the client should establish an initial offering price.

Step 4.             Investment Banker. Depending upon the size of the company (usually a minimum of $5.0MM-$10.0MM in annual sales is required), the use of an investment banker may be both feasible and advisable. If such use is planned, assist client in the interview, selection, and retention of such investment banker.

Step 5.             Organization of Marketing Package and Materials. Finalize the electronic or hard-copy presentation of the requisite confidentiality agreement, business description, core sales terms, and due diligence documents.

Step 6.             Facilities Repair, Maintenance, and Cleaning. Depending upon the size and nature of the corporate facilities, identify any repairs, maintenance and cleaning of the facilities to be completed prior to making the facilities available to third-party buyer inspections.

Step 7.            Post-Closing Employee Distributions or Payments, If Any. Design, if contemplated, tentative plans for current employees including, for example, post-closing distributions or other payments. ‘

Step 8.             Identification of Possible Strategic Buyers and Commencement of Public or Strategic-Buyer Marketing of Business. This can be done independently or through the services of an investment banker.

Step 9.            Letter(s) of Intent, Purchase and Sale Agreement, and Ancillary Documentation. In coordination with Buyer and Buyer’s counsel, assist in the drafting, negotiating, finalizing and execution thereof.

Step 10.           Buyer Due Diligence and Investigations, PSA Adjustments, Escrow and Payment Terms and Arrangements, Transaction Announcements and Notices, and Closing.

– – – – –

Due to the many disposition variants noted above (including especially the level of disposition experience of one’s client(s) and the unique requirements of any particular client or industry sector), the checklist will need to be tailored, indeed refined and expanded, for every client. Nevertheless, this checklist is offered as a place to begin in representing a client in the sale of the shares or assets of a small- or mid-sized, privately-held corporation.

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