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Clear up any legal issues

By Geoff Ling, MBA.

It is not unusual for large companies to have at least one active or threatened legal dispute at any given time, so it is generally not feasible to wait for a window when there are no legal issues to launch a sale process. A deal can still get done, provided the financial exposure is not material relative to the value of the company and/or the seller agrees to pick up the tab.

For smaller companies, however, buyers get nervous if there is any outstanding litigation. Even if the amounts involved are relatively modest, buyers will assume the worst-case scenario for valuation and indemnification purposes. We strongly recommend settling any legal issues before launching a sale process.

We also recommend consulting legal counsel to proactively identify other legal issues that can derail or delay a transaction, such as:

· Missing corporate records

· Significant contracts (particularly customer contracts and facility leases) that require the counterparty’s consent to assignment in the event of a change in control

· Missing contracts with employees, such as patent assignment agreements

· Handshake agreements with shareholders and employees contemplating a successful sale of the business

· Onerous early termination penalties for financing or facility leases

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