Auto seatbelts have been around for over a seventy-five years. Remember those two-point lap belts in the fifties? Seatbelt installation wasn’t required in US cars until 1966. By 1981, only 11 percent of US drivers used them. It wasn’t until 1989 that most states required that seatbelts actually be used; so that by 1997, 68 percent of drivers used seatbelts. It took another twenty years before seatbelt use reached 90 percent.
The excuses heard in the early days were that seatbelts would trap people in an accident or under water. For most people, they were just too inconvenient to use. Now we clearly know that they save lives and money. According to the CDC, “non-fatal crash injuries to drivers and passengers resulted in more than $48 billion in lifetime medical and work loss costs in 2010.”
Even knowing the benefits and risks associated with using (or not using) seatbelts, it took 60 years to achieve 90% utilization.
Click It or Ticket
What produced the tipping point in seatbelt usage was a campaign called “Click It or Ticket.” It created a clear, compelling reason to take the simple action of buckling your seatbelt. It seems that aversion to a traffic ticket was more compelling than fear of a potential accident.
That’s a long way of introducing a similar crucial act for business owners–“buckling up” to protect your interests when you begin to explore selling our company.
- What is the simplest action you could take now to avoid the hassle analogous to a ticket e.g. an aborted selling opportunity that wastes your time and money?
- How serious an accident would it take to motivate you to put legal protections in place as you start the sales journey e.g. the loss of intellectual property or customer data impacting the sustainability of your company and your retirement security?
Buckle Up Your Business
We know we need to protect our interests as we think about selling our companies. Yet horror stories, like car accidents, abound. Protection is inconvenient and time-consuming. It costs money. Our belief and trust in people fights against putting restraints in place; or we believe we’re good, defensive drivers/owners.
Company Seatbelts: Three Document Sets
There are three sets of legal documents that prevent injury to you and your company, and they facilitate the selling process when you start the selling journey. Think of them as your three-point safety-belt. Here’s an overview. For more details you might look at chapter 7 in my book, Exit Signs: The Expressway to Selling Your Company with Pride and Profit or, contact your professional advisers.
Informational Documents: What is for sale?
- Simplified Selling Memo (aka your Company Story) creates a link between your hopes for a profitable exit and a buyer’s hopes for a profitable ongoing concern. It needs to tell an honest and optimistic story that gives a snapshot that appeals to a buyer’s needs and objectives and encourages further interest. The story can be a high-level management presentation or something resembling a brochure.
- Confidential Information Memorandum is a more formal and complete disclosure of the company picture. It is given to a qualified prospective buyer upon their signing a confidentiality agreement. There are three caveats to observe in your memorandum: a) brevity wins the day, b) do not include proprietary trade secrets, competitive pricing details or customer proprietary information and c) an internal buyer should be as informed as an external buyer.
- The Terms and Conditions Sheet defines the explicit requirements and stipulations of your sale. It is a starting position statement, subject to negotiation, ranging from what is to be sold and at what price to with what restraints post-close. It is the basis for your sales agreement once there is consensus.
Sales Process Agreements: What are the rules of the road?
These agreements protect you, your sanity, and your company value during the sales process. There are three main agreements plus closing documents.
- A Confidentiality Agreement signed by a prospective buyer states that in examining your business they will not use the information they receive or uncover for any purpose other than making the decision to buy it. It defines the purpose for the non-disclosure, the duration of the agreement; what is considered confidential, e.g., information and material shared or uncovered that has or could have commercial value to the owner including proprietary processes a buyer may observe; who may access the information, and other stipulations.
- A Letter of Intent signifies the mutual interest that you and a prospective buyer have in completing a purchase transaction. It’s not a binding agreement. It’s an indication of good faith and trust that you intend to come to agreement once the due diligence and negotiations are finished. It spells out such items as: what is to be purchased or transferred; the proposed price and terms of the purchase; the conditions for the sale of the business, and the term of the agreement.
- Purchase or Sales Agreement finalizes the purchase of your business. It reflects the negotiated terms and conditions of the sale. The U.S. Small Business Administration provides a checklist to be addressed in a small business sales agreement.
Legal Entity Agreements: What’s allowed?
You decided your legal entity business structure when you started your company. However, as you consider an ownership transfer, the rules of your legal entity designation may demand certain actions or restraints you had not anticipated back then, such as who are eligible buyers and the tax consequences of a sale. The sooner you know the implications, the more freedom you have to modify the structure if needed.
Gearing up for a sale means buckling up — to protect your interests and your company assets. But you know that.
Have you Buckled Up for Safety in Your Ownership Transfer?