Wednesday, November 29, 2023

Keeping Good Records – An Often Overlooked Element of the Business Exit Plan

With all of the long nights and frantic days that can come with starting and running a business, the practice of keeping paperwork neatly organized can easily fall to the bottom of a to-do list. It is certainly understandable that you might consider time spent networking with potential customers and funding sources to be far more important than making sure your company’s contracts are organized in a logical order; however, having a good handle on your paperwork can be more important than you may think.

If you suddenly find yourself awash with customer demand, you may also soon find yourself across the table from a sophisticated investor that is offering either to invest a large sum of money or, hopefully, to acquire your business for an even more tidy sum. That investor is going to want to conduct its due diligence on your business to ensure it is worth the money. The diligence process can be lengthy and expensive for both the investor and you.

While the saying “it takes money to make money” may be true in many instances, the diligence process is not an area where you want to have to spend a lot of money that could otherwise go to you as the owner in a sale. By having items such as your organizational documents, meeting minutes, capitalization table, customer and vendor contracts, and shareholder or member agreements in order, up-to-date, and ready for review by the investor and its counsel, you can not only potentially save yourself tens of thousands of dollars, but you will also likely put yourself in a better negotiating position when it comes time to decide the terms of the investment or sale.

While it is fairly common for business owners to engage the services of an investment banker to aid them in presenting the financial aspects of their business in the best possible light when they start to think seriously about a potential sale, the legal and contract-related aspects of a business typically do not get the same level of attention until much later in the sale process. If you are considering a sale of part or all of your business (and who isn’t, at least at an eventual exit?), it would likely be worth your time and money to engage legal experts (present company included) early to help you prepare your business for the acquisition diligence process and to strategize about the most effective ways to negotiate sale terms with the constraints of your company’s current legal agreements and governance structure in mind.

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