How to prepare your business for sale – Part 2

So, last month we looked at how you start the process of preparing to sell your business. You’ve reviewed the market, started the valuation process and put a long-term plan in place. What else should you consider?

Losing the liabilities

The first step to ensure your business is no longer carrying any liabilities is to do an audit of all potential risks. This should include not only existing contractual obligations, but any potential claims or lawsuits arising from environmental issues, employment agreements, product liability suits, taxes, and vicarious liability for actions taken by company personnel.

Step two is to reduce or eliminate some of these risks before the transaction is even contemplated perhaps by terminating contracts, eliminating a product line or changing business practices.

Step three may involve a swirl of side agreements; the key concepts are assumption, indemnification and insurance.

A buyer may agree to assume the seller’s obligations under a contract, likely for a reduction in purchase price. If the buyer fails to follow through, however, the seller will still be liable. This is why a seller must thoroughly vet the buyer’s financial ability to pay.

A buyer might also agree for a similar price reduction to indemnify a seller for legal liability that might arise in any number of contexts, such as employment or product liability suits.

A seller can also insure against risk or require that the buyer secure a promise to assume risks or indemnify against liability with an insurance policy.

Don’t forget the taxes

The tax consequences to the seller in an asset sale can be complicated, especially when several different kinds of assets are being sold. Carefully consider whether Capital Gains Tax or Goods and Services Tax will apply to your sale.

Some financial advisers suggest that sellers have several years of mock returns prepared in anticipation of a sale to fully grasp potential tax consequences.

And remember the employees

The usual practice in an asset sale is for the seller to terminate all the employees and for the buyer to then rehire some or all of them when the transaction is concluded. If the talents of certain key employees are essential to the deal, the buyer may want to make sure that these employees will agree to execute employment contracts before the transaction occurs.

Rolf Howard, Managing Partner, Owen Hodge Lawyers

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