Considering Selling Your Company? Avoid These Common Mistakes

Article written by?Croke Fairchild Duarte & Beres?Partner?Andrew Gilbert?and Associate?Taryn Strohmeyer

Selling a business is a major milestone for any founder and their key employees. But the sale process can be complicated and risky, and mistakes can have significant and costly consequences for the owners and the business going forward. This is especially true given the substantial disruption a sale process can cause to ongoing operations of the business. In this article, we will explore some of the most common mistakes made by business owners when selling their company, and how a lawyer can help you navigate and mitigate these risks.

Rushing through preparation for sale

The success of a sale process often depends on the seller’s ability to identify and mitigate legal and financial risks before engaging with a buyer. Some of the most common risks include intellectual property, employment, or contractual disputes; environmental liabilities; regulatory compliance issues; and tax liabilities. Unfortunately, when sellers rush through this process the sale can later be derailed by an unwelcome surprise. An experienced M&A attorney can help you take a comprehensive approach to assessing your risks and addressing them to put you in the strongest possible position.

Inaccurately valuing and pricing the business

Given the many internal and external factors that determine the value of a business at a given time, valuing a business and determining price is a difficult task, and sellers shouldn’t go it alone. A valuation firm and your accountants and lawyers can work together to evaluate factors such as financial statements, industry trends and market conditions, intellectual property assets, customer contracts and relationships, and your competitive position.

Negotiating without experienced representation

The terms of the sale agreement can have significant consequences for the seller (and key employees), and the negotiation process is often complex and unpredictable. A skilled attorney can help negotiate favorable terms that protect the seller’s interests. They can also advise on the deal terms, including earn-outs and non-compete agreements that may depend on market conditions. For example, recent market developments have transformed the formerly hot sellers’ market into a buyer-favorable market, resulting in falling valuations for sellers. In response to these conditions, we have seen a significant increase in the use of earn-outs to help sellers bridge the gap between the price they were hoping to get for their companies and the reality of the price buyers are willing to pay. While these terms offer a good solution for sellers, they can impact a seller’s financial return and ability to compete in the market after the sale, so they should be negotiated with care by an experienced advisor.

Mishandling disclosures and confidentiality

Maintaining confidentiality while disclosing key information to a potential buyer is critical to protecting the business and ensuring a successful sale. An experienced lawyer can help develop a strategy for maintaining confidentiality and avoiding potential deal-breakers like leaks of sensitive information or disputes with potential buyers. There are significant additional risks when the buyer and seller compete in the same industry. Lawyers can help you navigate the use of a “clean team” or limited review team to carefully control who has access to certain kinds of information. Additionally, they can help identify potential deal-breakers early in the process, allowing you to take steps to proactively mitigate those risks.

Underestimating the complexities of the sale process

Selling a company involves many moving parts, and it can be difficult for business owners to navigate and coordinate the process on their own. This is where skilled M&A attorneys can be invaluable. By engaging a lawyer early in the process, business owners have the benefit of experienced guidance through all stages of the process and on all aspects of the sale, from preparing the company for sale to negotiating the terms of the deal to navigating the closing process.

Legal counsel can also provide unbiased advice and ensure you make informed decisions that are in the best interests of the company and its stakeholders. For example, there are significant tax and accounting differences among various M&A structures, which benefit or hurt the buyer and seller in different ways. With the expertise and experience of trusted legal counsel, business owners can avoid common mistakes and pitfalls and ensure that the sale process is structured in the most advantageous way and goes as smoothly as possible.

Breathing a sigh of relief too soon

The deal is not fully done after you sign on the dotted line. It’s crucial to understand and address the many significant post-closing matters that often follow the consummation. Experienced M&A counsel can help you understand what will happen after the closing date, whether that may be indemnification obligations, purchase price adjustments, earn-outs, or post-closing restrictive covenants such as non-competes and non-solicits.

Selling a company is a significant undertaking, and it’s essential for business owners to take steps to protect their interests throughout the process. By engaging an experienced advisor early in the sale process, business owners can receive the guidance and support they need to navigate the complexities of the sale and avoid common mistakes and pitfalls.

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Croke Fairchild Duarte & Beres brings decades of experience leading complex, sophisticated, and cutting-edge M&A transactions that drive value for our clients. Our attorneys work with founders, family offices, family businesses, fund sponsors, and public companies across a range of industries on their most pivotal transactions, offering the full complement of services across tax, real estate, intellectual property, securities expertise, and all other services sellers need.

Planning for a sale? Let’s talk.

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