Any real estate professional will tell someone trying to sell a house that it needs to be tidy and de-cluttered before any open house. And common sense tells us that it is much easier to make a house presentable when it’s been kept up over the years. A business is no different, but unlike a house, it is hard to hide the dust bunnies under the bed.
Any business that goes through the sale process will undergo some form of a due diligence process. This may be performed by a prospective purchaser, investment banker, accountant, attorney, or a combination of any of the foregoing. One of the key components is a review of the business’s contracts to understand (a) how the business purchases the services and goods it needs to operate, and (b) how it sells its end product. More often than not, these contracts have been carefully reviewed and drafted, but when small businesses begin, it is easy to gloss over details. Who has the time to read the fine print on the back of a purchase order, anyways? After all, it’s the sale that really matters, right? Maybe, but the devil is almost always in the detail.
Do you think that the business that has overlooked to get a customer’s countersignature on every contract appears to have its house in order? What about the business that relies on long term customer relationships, but does not realize that every contract has a termination right with 30 days notice? Don’t assume that because something is in fine print, that it is “boilerplate” or inconsequential.
One of the best ways to avoid too many surprises in the due diligence process is to be confident in your contracts and/or the terms and conditions of purchase or sale that your business utilizes; however, even if your succession plan will not involve a sale, it is good business practice to keep a close eye on these documents and not let them become an afterthought. Have them drafted and/or reviewed by attorneys and reviewed and updated periodically to meet the business’s needs and expectations. For instance, if your business succession plan involves a sale down the road, then your standard terms should not require consent to assign a contract if you are selling substantially all of your business. Negotiations may (and probably will) be necessary, but remember that a contract (and the terms and conditions thereof) is a meeting of the minds. You probably won’t get a “perfect” agreement, but most business people understand that business (and each contract) is a calculated risk.
If you would like more information on business succession planning, terms and conditions or would like to discuss any of these issues with Burr & Forman’s Business Planning and Succession team members, feel free to give us a call.