A sale of business transaction is a critical event for any company, representing the monetization of the value of the enterprise to date. This kind of transaction can arise as a result of any number of factors. However, today’s economic climate and projected slower internal growth patterns for many businesses mean that this corporate alternative is being carefully considered by many companies which would have not done so just five or six months ago.

While the input of board members, shareholders, employees and outside advisors such as attorneys and accountants are important in considering a business sale, a company entrepreneur/founder/leader should consider the following key planning points as a useful road map to ensure a successful transaction.

1. Firm-up Capitalization. Prior to discussing a possible sale of the company with anyone, make sure that all prior promises of equity and/or options for equity have been documented. Many sale transactions are significantly delayed or derailed because “handshake” agreements for stock emerge once people hear that a company is in the sales process. In order to avoid these difficult conversations, make sure that all these arrangements are documented ahead of time.

2. Firm-up IP Ownership. It is critical that a company can represent with assurance that it, in fact, owns its intellectual property. In particular, any independent contractor or employee who conceivably could be considered an inventor of any IP should have signed an assignment of invention agreement upon their engagement. Usually these kinds of provisions are included in standard forms of confidentiality agreements. However, if such an agreement was not obtained upon engagement, then it is prudent for some additional consideration to be granted in order to be able to enforce any subsequently signed agreement. On the eve of a sale of business transaction, an entrepreneur does not want to be discussing invention ownership with a prior consultant who happened to be a key participant in the creation of the company’s prime IP asset.

A related IP planning strategy prior to a company sale is to consider whether it is cost effective to file any patents. Even nonprovisional patents sometimes increase the valuation of a business in the sales process.

3. Touch Base With Your Board. Any non-employee board members need to be contacted early and informally about the sales process. Not only will directors probably have constructive suggestions, but early communications will avoid later difficult conversations if directors believe they are being asked to rubber-stamp approval of a deal which is “signed, sealed and delivered.”

4. Forecast Cash Flow. Work with your advisors and team toward a goal of achieving a closing of the sale of the business well before the company runs out of cash. Having a zero cash balance and ongoing burn rate is not the desired negotiating position when dealing with a prospective buyer.

5. Plan Employee Relations. The smaller the company team, the earlier in the process employees will need to be brought into the communications of the possible transaction. This will be necessary inasmuch as any prospective purchaser will want to discuss operations with appropriate employees and contractors. Before this happens, you should consider whether circumstances warrant additional incentives to employees based upon a successful sales transaction (i.e., possible retention agreements, additional equity options or cash bonus agreements based on either continued participation with the company and/or some percentage of the sales price).

6. Use NDAs. When a prospective buyer starts requesting copies of company documents and/or in-depth interviews with company employees as part of their due diligence, make sure that they have signed a form of confidentiality agreement. This is standard procedure which any reasonable buyer should expect as part of the sales process.

7. Engage Agents Carefully. A company may choose to engage a broker or investment banker to help sell the business. Typically, this will involve a request by the agent for an exclusive arrangement for some period of time. While requests for exclusive arrangements are relatively normal, they should be considered carefully since the company is betting that a particular agent will be able to successfully assist in locating the right buyer for the business. At a minimum, an entrepreneur should request references for any broker or investment banker which requests an exclusive arrangement and actually call such references for feedback on the broker’s performance.

8. Negotiate Letters of Intent. Oftentimes a buyer will provide the prospective seller with a letter of intent, saying that it is strictly a “form document,” that it should be signed expeditiously, and that the process needs to move quickly to drafting final documents. One of the biggest mistakes an entrepreneur can make is to rush through this phase of the process and not negotiate appropriate provisions at the LOI stage. Even though it is not legally binding on either party, the LOI represents the “spiritual commitment” of both of the parties and it is very difficult to either modify or add material provisions in final documents which have not been raised at the LOI stage. Entrepreneurs should utilize advisors and corporate counsel at this stage so that the LOI which is signed represents the best deal possible for the company. If this is done, the time and expense spent in documenting and negotiating final documents can be also kept to a minimum.

9. Balance Sheet Preparation. If the business has not historically prepared formal financial statements, be prepared to at least generate a closing balance sheet upon which the sale will be based. If needed, engage a part-time financial consultant to assist in this process. A part-time financial planner can also assist with some of the sales modeling which may result from negotiations with the buyer.

10. Carefully Weigh the Pros and Cons of Earn-Outs. On the one hand, an earn-out formula may be the only means of addressing the expectation gap of a buyer which only wants to sell for a certain minimum price with that of a seller which only wants to pay for future demonstrated performance. On the other hand, negotiating an earn-out provision will represent a significant component of time and brain power in a transaction. Earn-outs can also sometimes distort post-closing business decisions of operating the new purchased division within a large company enterprise. The message here is that there is nothing wrong with an earn-out, but it needs to be considered and drafted very carefully.

11. Post-Closing Employment Arrangements. As early as possible in the process, an entrepreneur should determine the buyer’s appetite for or insistence upon retaining company employees post-closing. The last thing an entrepreneur wants to do is spend the time and effort negotiating a transaction, only to find out that the buyer will not close the deal unless certain employment arrangements are reached with specified employees, who may not want to be employed by the large purchasing organization. A very important related issue is determining the extent of noncompetition agreements which the purchaser will request post-closing. The sooner these requests are made clear by the buyer, the sooner the company entrepreneur will be able to discuss and, if need be, negotiate these matters with the affected parties.

Written by Joseph P. Whitford, a Partner with the Davis Wright Tremaine LLP law firm.  Joe focuses on representing high growth emerging and early stage companies.   This does not represent legal advice.