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Ten Key Steps to Take Before You Sell Your Business

Ten Key Steps to Take Before You Sell Your Business

Whether you are nearing retirement or believe an exit from the business is an important part of the company’s life cycle, it is never too early to plan for a successful sale of the company. Business owners and management should consult with their advisors and understand the process and timing in selling the business. Recent changes in the tax and other laws make planning extremely important. For many entrepreneurs, the sale of their “baby” is a challenging and overwhelming process.

While serial executives may have sold many companies, the following provides a checklist of the key action items that should be considered or reviewed in the process. Even if a sale is not in the near future, these actions can assist the company and its management in better positioning the company for continued success and growth.

1. Value Proposition. What is the company’s value proposition? How is the business valued in the marketplace? Is it based on earnings, cash flow or some other metrics? Understanding how the company is currently valued can assist management and the board in making key decisions about future growth and increasing the net worth of the business. This exercise can greatly assist the company in determining the optimal time to sell the business. In fact, many investment bankers or other professionals can assist in this process generally at no charge to the company. The net result is that the company should have a plan to increase revenues, control costs and ultimately increase the potential exit for the business. Even if a sale is not imminent, the exercise can do wonders for the company and increase its bottom line.

2. Books and Records. Are the company’s books and records in order? Are the financial statements and internal controls adequate for the business? A company should make sure its books and records are accurate and up to date. Most importantly, a company should consider having its financial statements audited, or at least reviewed, by an independent certified public accountant. Most buyers, especially public company acquirers, will require audited financial statements. A good CPA or financial advisor can assist the company in ways to increase the value of the business.

3. Contracts. When was the last time the company reviewed all of its existing agreements? A complete review of its contracts is important for all businesses, not just companies looking to exit. This review should confirm that all agreements have been properly executed by all parties. The key provisions need to be reviewed to insure compliance and confirmation that the contract has not expired. Another important item to confirm is whether the contract can be assigned and which agreements a buyer may be interested in obtaining or receiving an assignment from the seller. This may be crucial in dealing with landlords or key lessors. To the extent the company does not have a contract or merely is working from purchase orders, thought should be given as to whether a formal agreement is advisable or required. Ensuring that the company has an electronic version of all their agreements can greatly assist in the due diligence process of a sale.

4. Ownership. Have all ownership documents been prepared and reviewed? A review and/or confirmation that all owners have properly been documented and that no further actions are required to verify ownership in the company is essential for all companies. For example, have all shareholders received their stock certificates and has a stock ledger been prepared and updated? Stock options is another area that should be reviewed carefully to make sure that all employees who have been promises stock options and/or ownership in the company have received the necessary documentation to confirm their ownership and understandings with the company. Are there any side deals or other promised that need to be reduced to writing? Are there agreements with former owners that still need to be documented or complied with? Documenting these deals can avoid headaches in the sale process.

5. Intellectual Property. Has the company undertaken a recent intellectual property audit to confirm whether all patents, trademarks and other important assets are protected? Intellectual property can be some of the most important assets of the business. Even if there are no formal filings, renewals or maintenance fees required, the company should make sure it is protecting its trade secrets. Many buyers will not consider making an offer to buy the business if they feel the intellectual property protection is not sufficient to protect the business. If not already in place, consider having all employees and consultants execute proprietary information agreements that safeguard company assets.

6. Customers. Do your customers rave about your products and services? To the extent possible, companies should meet with their customers at their locations to better foster their relationships. During due diligence, many buyers will want to meet and/or discuss with the key customers of the business and laying the foundation work for these important meetings can be crucial to a successful exit. Even if you do not sell the company, meeting with customers can potentially lead to new business and equally important discover what is important to your customers and avoid any surprises. Market intelligent can be gleamed from customers that can assist in new products and other developments.

7. Employees. What is the current morale of the company’s workforce? Management should make sure that they understand any issues facing the employees, especially items that have not been resolved. Buyers may view the company’s employees as an important element of any transaction and they may want to meet with key personnel during their due diligence process. Companies should make sure that the employee handbook, policies and procedures and other labor issues are current and in compliance with the law. To the extent not in place, succession planning should be an important part of any company’s strategic planning.

8. Disputes. Are there any current disputes or litigation pending? If so, is there a way to resolve the disputes and/or settle the litigation? Most buyers prefer to purchase a company that does not have any ongoing litigation or disputes with key customers or vendors. With that said, taking proactive steps to avoid disputes can greatly assist the operation of the business, even if an exit is not imminent.

9. Licenses and Permits. Is the company in a regulated industry with lots of government compliance and regulations? If so, the company should make sure that all licenses and permits have been obtained and are current and in compliance with all applicable regulations. Even if the business is not highly regulated, it is prudent to confirm that any licenses or permits required or advisable for the company have been obtained or at least considered. Potential buyers and their counsel will want to confirm that there are no regulatory issues facing the seller’s business.

10. Operation of Business. Can you undertake a successful exit without keeping your eye on the ball of running the business? The answer needs to be a resounding NO. The sale of any business is complicated, takes the company’s management away from its core business and can be a significant distraction from the operation of the business. Management must keep focused on the key elements to continue the success of the company.

Dennis J. Doucette is a Partner at Procopio and co-leader of its Capital Markets and Securities Practice Group. He has participated in more than 350 corporate finance transactions, including corporate, securities, mergers and acquisitions, and venture financing.

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