A successful business sale requires strategy, preparation and hard work. Failure to complete a deal can be devastating and create unfortunate consequences such as disgruntled employees, a damaged reputation in the marketplace and, possibly, a lawsuit with the buyer. One truly effective method to improve the likelihood of a successful transaction is to conduct an internal legal due diligence process prior to a sale. This action can pave the way for a smooth due diligence phase that the buyer will undertake after a letter of intent is signed.

It is not uncommon for a buyer doing its due diligence to submit a request to the selling company for an extensive list of documents and information to assess the selling company’s business. During this phase, if the buyer turns up something previously undisclosed and unexpected (e.g., the discovery of a hazardous waste spill on company property years ago), it can lead to different scenarios. The best case is that the seller is able to explain why there is no current problem and the buyer elects to move on to the next inquiry. The worst case, if it is a complicated and unresolved problem, is that it might cause the buyer to lose interest in the purchase and walk. The “in-between” case is that it is fixable within a reasonable period of time, but has the effect of creating leverage for the buyer to renegotiate the price (in a “what else have you not told me that I need to be looking out for” moment).

Selling companies can mitigate this risk by getting in front of the process and identifying potential problems well before a letter of intent is signed. Troublesome items can be spotted and fixed while the company has time and before top executives become distracted with the closing sale process. While the best thing to do, ideally, is to take care of problem items when they surface, comprehensive pre-sale legal due diligence and follow-up remedial action can add substantial dollars to the bottom line of a sale.

Actions that should be taken include the following:

• Verifying compliance with environmental laws in all leased and owned facilities;

• Performing a UCC lien search and real estate (if part of the sale) title search and obtaining the release of any prior and now irrelevant UCC financing statements, mortgages or assignments of leases;

• Determining that all business licenses are current;

• Reviewing key company contracts for assignability;

• Confirming ownership of all intellectual property rights, including the works of current and former employees and consultants; and

• Ensuring the corporate minute books and stock ledgers are up to date and that all Secretary of the State annual reports have been filed.

One important thing for company executives to keep in mind is to be candid with your advisors about any “skeletons in the closet.” It is important to admit weaknesses now and correct them in order to avoid re-trading down the line. For more information, please contact Thomas J. Walsh, Jr. (twalsh@brodywilk.com).