If your goal is to build something you can sell, not just in terms of your product but also in terms of your company, you need to approach your company in the same way that you approach your product. Would you be comfortable putting your product on the market before it is ready? Would you expect people to buy your product if it is not fully developed? When it comes to selling your company, these same questions need to be answered.
For entrepreneurs, setting up and running a company the right way is often seen as a hindrance to running with a great idea. Most entrepreneurs stay up late at night thinking about how they can tweak their idea to make it even better, not how they can strategically organize their corporation or limited liability company (LLC), and not how they can build a verifiable intellectual property (IP) portfolio that will add to their company’s valuation. But, when it comes to selling the company for maximum value, these types of issues matter just as much as – if not more so – than the final touches on the company’s product.
Just like building a viable product takes time, building a sellable business is not something that can be done overnight. Here is an outline of some of the key legal steps involved in preparing a start-up for sale:
7 Legal Steps to Selling Your Start-Up
1. Make Sure Your Company is a Stand-Alone Entity
In order to get potential buyers to take you seriously, you will need to have a clear company structure that separates your business from your personal life. While this may sound like a no-brainer, failing to properly form a legal entity and respect the separation between business and personal matters is one of the most common mistakes made by start-up founders. Consider these questions:
- Did you start working on your product before you formed your corporation or LLC?
- Are you using any of your personal assets (such as a phone or laptop) to work on the business?
- Are you fully segregating your business and personal finances?
- Are you paying yourself a regular salary or draw from the company?
If you have the “wrong” answer to any of these questions, there are corrective steps you will need to take before your company will be ready to sell.
2. Get on the Same Page with Your Co-Founders
If you started your business with friends or colleagues, you will need to be in agreement with respect to the timing and value of your company’s sale. You will also need to set clear expectations for the years to come in order to ensure that disagreements do not derail your planned acquisition. This starts with putting together an iron-clad founders’ agreement, and it requires that everyone have a clear – and consistent – understanding of the company’s trajectory.
3. Make Smart Decisions about Accepting Outside Investments
If your company, like most, will need outside funding in order to reach its full potential (or, at least, the potential required to become an attractive target for acquisition), you need to approach the investment process strategically. In most cases, this means not accepting the first offer that comes in, and it means making sure that outside investments – whether from family members, angels, or venture capital firms – are structured in such a way that they do not hinder your company’s attractiveness or your ability to sell.
In many ways, attracting outside investors is similar to selling the business (in fact, many investments involve selling a portion of the company’s shares). From getting introduced to potential investors to papering the deal, the more you understand and respect the process, the better the outcome will generally be.
4. Understand, Protect, and Cultivate Your Company’s IP Portfolio
While your company will almost certainly accumulate some physical property (assuming that you segregate your business and personal assets appropriately), when it comes time to sell, the real value of your company will be in the intangibles. Your proprietary product, your brand, your company image, your “recipe for success” – these are the things that will drive potential buyers to make offers that are several multiples of your company’s earnings before interest, tax, depreciation, and amortization (EBITDA).
So, how do you translate things like software code and logos into dollars? The answer is: You build, document, and protect a comprehensive intellectual property portfolio. This means:
- Ensuring that all founders have transferred the necessary IP rights to the company;
- Entering into the necessary contracts with independent contractors to ensure company ownership of IP;
- Selecting protectable trademarks (through thorough trademark clearance research), and registering your company’s trademarks – in the company’s name – with the US Patent and Trademark Office (USPTO);
- Registering your company’s patents with the USPTO, and registering its copyrights with the US Copyright Office;
- Obtaining any necessary foreign IP registrations;
- Diligently monitoring and enforcing your company’s IP rights; and,
- Keeping IP protection top-of-mind so that you can promptly register and protect new IP assets as they are developed over time.
5. Use Contracts to Mitigate Risk
While many members of the start-up and “gig” community are comfortable operating on a virtual handshake, potential buyers are going to be looking for written and executed contracts that contain the necessary terms to mitigate your company’s risk of liability. If the risk of buying your company is not worth the potential reward, your company will sit on the offer table while its liability exposure continues to accrue.
When entering into relationships with third parties – including suppliers, service providers, independent contractors, investors, and customers – it is critical to ensure that your company’s agreements include critical liability protections. This includes (but is not limited to):
- Obtaining appropriate representations and warranties from third parties;
- Limiting your company’s representations and warranties;
- Using indemnification clauses to protect against liability for third-party claims;
- Ensuring that suppliers have adequate insurance to cover potential liabilities; and,
- Including liability caps that are appropriate to the value of the transaction and that are at or below your company’s per-claim insurance policy limits.
6. Prepare an Accurate Sales Pitch
Unless your company becomes one of the darlings of the start-up scene, you will most likely need to take a proactive approach to finding potential buyers. This means that you will need a sales pitch in various formats – from an introductory email and “elevator pitch” to a full-scale presentation for follow-up in-person meetings.
While the natural tendency is to embellish, when preparing your pitch, accuracy is key. Not only could overstatements and misrepresentations blow up the deal (potential buyers will discover the truth during the due diligence process), but they could potentially lead to legal trouble as well.
7. Assemble Your Team
Let’s go back to what keeps you up at night. As a start-up founder, you are an expert in what you do. Every waking moment is spent thinking about your innovation. But, as passionate as you are about your product, there are people who are just as passionate about the legal, financial, and business aspects of preparing a company for sale.
When selling your company is a priority, going at it alone is a mistake. By assembling a skilled and trustworthy team early, you can ensure that you will be fully ready when it comes time to sell.
Schedule an Initial Consultation at Jiah Kim & Associates
For more information about what you need to do to prepare your start-up for sale, schedule an initial consultation at Jiah Kim & Associates. To speak with an experienced business attorney in confidence, call (646) 389-5065 or get in touch online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.