This is Part 2 of my discussion of a third alternative for answering the question: When a closely-held business is a valuable marital asset, how can its value be turned into cash? Part 1 discussed the main pros and cons of selling the business to a third party buyer to generate cash proceeds for division between the spouses. Now we turn to a discussion of the challenges in attracting a buyer and closing the sale.
As a first step, the company should engage an investment banker or business broker to evaluate the business, identify potential buyers and begin making discreet approaches. These advisors tend to specialize in specific types of companies and industries, and their expertise is critical in finding a buyer and understanding the likely price range a seller should expect.
It is also important to take a cold, hard look at any financial, operational or administrative issues which can be addressed to make the company more attractive to buyers. For example, do you have clear annual and quarterly financial statements ready for disclosure to a buyer? Are the important contracts with customers, suppliers and third party service providers current? Do you have suitable agreements with employees and consultants to protect the Company’s ownership of its intellectual property? Are there pending or threatened lawsuits which could be resolved? Your early internal review of these matters will help you to resolve potential issues and present a well-managed business to prospective buyers.
Once your investment banker or broker has generated initial interest, you will have to present some basic financial and operational information allowing a buyer to decide whether it wishes to proceed to a proposal of price and terms. If all goes well, this leads to negotiating a letter of intent or term sheet with the buyer. This is not a binding agreement but it does force the parties to: (1) articulate in writing the material terms of a deal that would satisfy them both, (2) agree on the period for the buyer’s due diligence review and exclusive negotiating rights, and (3) identify the conditions to each party’s obligations to close a sale. This step is critical in helping the buyer and seller discover whether they agree on the basic framework for a deal.
Immediately after a letter of intent or term sheet has been signed, the intensive part of the transaction process begins. Any sophisticated buyer will require sufficient time and access to undertake an extensive due diligence review of the company’s financial and tax information, assets, contracts, liabilities, key business relationships, litigation or disputes, employee benefit plans and the like. The buyer’s business team, attorneys, and other advisors will have a significant volume of questions and requests. For a seller who has not been through this before, the resulting time, effort and intrusiveness may seem overwhelming. As discussed above, an early internal review can prepare the seller and avoid unwelcome surprises that may unnerve a buyer or arm it with issues to use in renegotiating a lower price.
As the diligence review proceeds, the attorneys for buyer and seller will prepare and negotiate a Sale and Purchase Agreement, with detailed provisions on the price and payment terms, seller’s representations about the company and indemnifications protecting the buyer, the conditions to closing, the transfer of contracts and other legal rights, and a variety of other critical elements of the transaction. Other transactional documents will be needed for the intricate process of transferring ownership of a business. The parties will need experienced deal attorneys to navigate this complicated path to a successful closing.
In conclusion, when a closely-held business is sold in a division of marital assets, the transactional process involves finding a buyer, satisfying its diligence review, negotiating the detailed contracts, and closing the sale. These require significant work, skill, patience and judgment to reach the goal of a successful sale. Both spouses should have deal advisors with the expertise needed to achieve a fair realization on the value of this key marital asset.
