By Ernie Whitehouse
The art of assessing risk management when selling a business entails a serious effort to uncover and recognize where the business risk resides for both the current and prospective owner.
We identify the key elements of risk management using a rigorous review process. This includes the business’s assets, liabilities, agreements, contracts, financial obligations, contingent liabilities and pending liabilities.
Addressing these elements is vitally important in eliminating unexpected surprises, especially after the transaction closes.
For example, when a seller has a loan covenant guaranteeing a corporate note with the rental income from their personal investment property, it is critical to have this loan covenant released if the note is being transferred to the buyer of the business. Even in cases where the buyer is providing first-level guarantees to satisfy the bank for note transfer, the seller must be released, or the financial risk increases for the seller.
Once the transaction is closed, the former owner’s rights, obligations and involvement in the business are strictly defined by the newly signed agreements between the buyer and seller. This includes indemnifications, employment agreements, non-compete agreements, notes, security agreements and others.
These documents clearly illuminate and define the level of business risk for both buyer and seller. Therefore, the signed documentation in the new transaction to sell and/or merge should cover every possible scenario relative to financial and contractual commitments.
Most owners do not think about what risk management entails when they sell a business. They are focused on the sale price, the cash down payment, how the balance will be financed and when their transaction will close.
The critical components of risk management for financial and contractual obligations are often ignored in the initial stages of negotiation. These risk management elements are often the major obstacles to success in closing the transaction. If they are recognized in the early stages of negotiation, there is a higher rate of transaction success.
When preparing to sell or buy a real estate business:
• Hire highly competent legal counsel, a certified public accountant and business advisor for representation.
• Make sure they are deeply experienced in the purchase and sale of businesses, financing and corporate law.
• Make sure they have industry-specific experience.
Industry-specific experience is a critical factor in your choice of representation and the success of a transaction.
It is critical to the success of the transaction to use a specialist. For example, if you need a knee replacement, would you prefer an orthopedic surgeon who specializes in knee replacement or a general orthopedic surgeon? The choice is simple. Apply the same logic to the sale of your business.
For more information, visit www.pcmsconsulting.com.