3 Potential Deal Killers When Selling a Business

May 5, 2017

 

 

 

You’ve found the buyer, negotiated a mutually rewarding deal, and are ready to close. Then it suddenly all falls apart. What happened? These three common deal killers are often culprits, which can be less severe or preventable with good planning and solid positioning.

 

A Vital Employee Decides to Leave

Most successful businesses have a handful of vital employees—people who know how to run the company and consistently punch above their weight. The new owner needs these employees as much as you do. So when they leave—or attempt to leverage the deal by incentivizing their stay—it can destroy the deal. Consider asking vital staff to sign non-compete or non-solicitation contracts before pursuing the sale of your business. Doing this in conjunction with other incentives, such as promotions or bonuses, can encourage the employee to sign.

 

When a key employee attempts to leave without such an agreement in place, it can cause other employees to leave, too. This puts the business in flux, and may lower its value. Hand-holding, flexibility, and a willingness to offer a higher salary can keep the employee on board. You may need to split the cost of these incentives with the purchaser. This strategy is successful, but costly and stressful, so it’s better to prevent vital staff from leaving early on, rather than managing problems once they’ve already occurred.

 

A Contractor Owns Valuable Intellectual Property

Your intellectual property —code, custom logos, photography, web content, and much more—is a vital part of your brand. Even when you believe you own vital IP, a contractor may use the sale to claim it for their own—and seek more money, disrupting the sale and lowering the value. Especially true if specific IP attracted the seller in the first place.

 

Begin due diligence by taking careful inventory of all intellectual property, including patents, trademarks, copyrights, and work that was contracted out. You may find that your rights to some items have expired, or different than you originally thought. Paying fees to the owners at the outset ensures you offer a competitive IP package to a buyer. It also reduces the exposure to lawsuits and other public disputes.

 

It’s always better to prevent IP disputes rather than manage them. Clear contracts that give you full rights, not just the license, to your IP will help. It’s worth paying more for the full rights, since doing so can drive up the value of your company and prevent high-profile disputes at sale.

 

Your Business Owes Significant Taxes 

Taxation authorities are quite aggressive, particularly at the state level. Penalties and interest can be significant, which means companies often discover they owe outstanding taxes—including penalties that exceed the value of the original principal. You should pay particular attention to use and sales tax as you prepare for a sale.

 

As you proceed toward sale, taxing authorities may assert that you owe or that you should have been collecting tax on a service or product you provide. For example, a similar company might owe sales tax on a software service. Even if you don’t owe the taxes, the team counseling the buyer might view the situation otherwise. This uncertainty lowers value and creates needless costs.

 

Even if you don’t think you owe taxes, you might need to negotiate with state or federal authorities. It’s often better to pay the money than to fight the bill, since the cost of fighting might be losing the sale. By the time you’ve paid your accountant and lawyer, adjusted the price of the business to count for the taxes owed, and assured the buyer that you don’t owe anything else, you’ll be in a losing position.

 

It’s far better to prevent this at the outset by remaining on top of any and all tax burdens, even if doing so slows growth or other goals. Establish rigid controls that prevent you from owing back taxes, and communicate with tax authorities early and often if there is a disagreement about the taxes you owe.

 

 

 

 

 

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