What to Consider in Anticipation of a Major Transaction

GreenGoPost.com has spent much time talking about the "what-if" scenarios in the world of renewable energy and green technology.

But there are companies out there that have found much success.  For those of you considering a major transaction for your business, whether it is a sale, merger, private equity financing, or debt financing, I invited Ara Babaian, a partner at the Beverly Hills firm of Ervin Cohen & Jessup LLP, to write about the issues involved in undertaking a large transaction.

Six Key Legal Recommendations to Consider in Anticipation of a Major Transaction, by Ara Babaian, Esq.

Thinking about a major transaction for your business?  Are you going to sell your business, merge with another company, or attain financing through a private placement or borrowing funds?  You are about to embark on a process involving your stakeholders--and it is often costly and time-consuming.  Various issues will arise, and it is critical that you proactively confront them in advance to avoid any pitfalls, while making the process seamless for everyone involved.   Here are some of my recommendations:

 

• Maintain reliable financials.  Work with your internal financial staff or CPA to prepare financial information upon which you and other stakeholders can rely.  Creating rigorous audit and internal control procedures is crucial because it allows you to gauge how your firm is performing, whether it is meeting debt service obligations or your accounts payable.  Doing so will display the value of your business to other participants in your transaction.  Generally, the rule of thumb is to maintain three years of financial statements, preferably reviewed (though optimally audited) by an independent accounting firm.

 

• Proactively assess any issues that can arise during a due diligence review.  Ask your attorney for a due-diligence checklist, review it, and compare how your firm performs against the checklist.  Do you have a clear, lucid organizational chart?  Have you vetted your permits, leases, and other contracts in the event you need any third-party consents to proceed with this transaction?  Finally, to protect your firm’s confidential information, be sure you have third parties sign non-disclosure agreements (NDAs) before entering any negotiations with them.

 

• Prepare to disclose any liabilities and offer solutions.  Have you got any employee disputes?  Product defects?  Expiring patents?  A huge concentration of customers in your client base?  Acknowledging these issues is important, but so is offering solutions—after all, being proactive here could diminish the liability in the eyes of the buyer.  Integrity is important for long-term success:  the more transparent disclosure, the better.

 

• Obtain a third-party valuation.  You, the business owner, are too close to your business to offer a fair assessment of your company's worth.  You need a credible third party to determine the value of your firm's tangible and intangible assets, as well as the factors driving (or suppressing) your firm's worth.

 

• Maintain your firm's records.  Depending on the structure and size of your firm, this would include director and shareholder minutes, operating or partnership agreements, tax filings, and other important records.  Having all of your documents ready imparts that your firm is ready and willing to embark on a large transaction.  And if anything should go awry, such as a legal action by which the plaintiff attempts to "pierce the corporate veil" by going after your personal assets, your meticulous upkeep of corporate records can help defend you against any such threats.

 

• Work hard to keep your employees.  Any large transaction can be disruptive and create angst for your employees.  Their talent contributes to your firm's value.  You may want to avoid that uncertainty and confusion by entering into retention agreements with your employees.  Stock option or other equity or bonus plans can give your valued employees an incentive to stay with you during (and after) this hectic time.

 

Complex business transactions create many challenges that a firm's ownership should not conduct alone.  For issues ranging from tax and accounting, legal, and valuation, you will need advice from professionals in these fields of expertise.  Being proactive and getting the proverbial "ducks in a row" will pave the road for you and your employees to a more seamless and successful business venture at a time when transactions are conducted at breakneck speed and timing is everything.

 

For Mr. Babaian's biography and contact information, please click here.