Utah has become a hotbed of private business acquisitions, and you may be considering whether it is right for you to search for a buyer of your business as part of your exit strategy. There are many things you should consider when debating whether to sell your business, but once you’ve decided to start looking for potential offers, there are important steps you should take today to prepare for a future sale.
Business buyers ask for extensive records going back many years, and gathering those records can take a significant amount of time and effort, which is crucial for a favorable business sale. Because of the significant legal cost of responding to employment-related legal issues, many of these questions are focused on your employment practices. The pre-sale due diligence process is draining and distracting for you and your administrative staff. Even worse, new ‘surprises’ located during due diligence can disrupt the sale process by bringing new potential legal liabilities to light that require careful negotiation to resolve. While many of those liabilities can be managed in the purchase contract, each one increases the cost to negotiate the transaction, may affect the sales price you can obtain, and may require the seller to indemnify the buyer for those ‘surprises’ as a condition to proceeding with the sale.
In addition, each complication introduced by poor recordkeeping or informal practices can reflect poorly on your management of the business and reduce the buyer’s confidence, so it is helpful to get ahead of those surprises early.
To try and minimize the distractions caused by pre-purchase due diligence, mitigate your own legal risk in the sale contract, and to make the sale process as smooth as possible, there are several common labor and employment related areas where sellers can help themselves by investing a bit of time at the beginning, before due diligence begins, to make for a simpler and more cost-effective sale process later. Many of these topics are important to any business, but become especially timely when you are starting to consider a sale.
Overtime Exemption and Employee vs. Independent Contractor Classifications
Properly classifying your staff as being eligible for overtime (or not) is essential when running your business. Improperly classifying an employee as overtime-exempt can open you to significant financial consequences. Under federal law, misclassified employees may be able to recover backpay for unpaid overtime going back up to three years and may be able to recover punitive damages and other penalties that further increase the award.
Similarly, properly classifying people as being an employee or an independent contractor raises even greater financial risks, as improperly classified “contractors” may be able to recover unpaid benefits, payroll taxes, and other types of damages beyond unpaid overtime. We’ve previously summarized the concerns raised by using independent contractors in a previous client alert which you can view here.
When you sell your business, these are very common red flags for buyers. While each purchase is different, it is common for buyers to require the seller to indemnify the buyer for wageand hour violations which are caused by improper wage and hour classifications from before the purchase of the business. As a result, even if the buyer agrees to purchase your business, you may be stuck holding the bag for any later claims that the business did not properly classify its employees and contractors.
To prepare for a sale, you should consider doing the following:
- Review your job descriptions for each position, especially for positions that you classify as overtime exempt or as a contractor position, as these descriptions will likely need to be provided to the buyer as part of their due diligence into whether you have classified staff properly.
- Consider hiring an attorney or other consultant to help you ensure that you are complying with wage and hour laws now, so that your business is in a good position for a later sale.
- Make sure your contractor recordkeeping is complete, including collecting W-9’s from contractors and having written agreements.
Employee Recordkeeping
Maintaining strong employee records is always prudent when running a business. When buyers begin looking into your business operations, strong recordkeeping can greatly simplify the due diligence process:
- Be sure that all employees have signed your standard onboarding documentation, such as acknowledging your employee handbook or other policies, to facilitate a smoother transition for the new owner.
- Make sure that all of your employee policies are in writing and review your existing handbook and other policy manuals to make sure they are up to date. We’ve written about several important policies that every employer should have in their employee policy manual in an earlier client alert.
- Ensure that you are tracking employee hours accurately. Buyers may be cautious if you are relying on employee self-reported hours rather than using an electronic timecard system because of the risk of timecard theft or underpaying employees, which could impact the valuation of your business.
- Consider whether you should conduct an internal review of your I-9 records. Internal I-9 reviews should be carefully implemented, and it is best practice to consult with an attorney before conducting one to ensure you comply with state and federal law during the course of your internal review.
Additionally, buyers typically require you to provide them with an “employee census” of all current and recently departed staff, and will use that census to ask follow-up questions about how you are running your business. Make sure that your HR process tracks this type of information so that you can easily generate a census when the time comes.
Intellectual Property
Intellectual property often plays an important part in the buyer’s decision to purchase your business. Your name, logos, branding, and other materials support the reputation of your business, and any buyer will want to make sure that branding is protected and well documented. If you develop software or create other forms of intellectual property as part of your business, thisbecomes an essential part of the acquisition and buyers will be keenly interested in making sure those assets are well documented and protected.
- As part of your handbook review, make sure that your employees are subject to appropriate IP ownership policies that make ownership of company intellectual property clear.
- If your business develops patented or trademarked assets, make sure the ownership of those patents and registered trademarks is properly recorded with the USPTO and state-level registries.
- Make sure that the business has control over its intellectual property, including its website domain, social media accounts, and email servers, to ensure a smooth transition for the new owner.
- Review employee access to make sure your assets are protected from bad actors, and that sudden employee departures will not lock you out of important systems.
- If you use independent contractors in connection with IP-related topics, ensure those relationships are documented with appropriate contracts that make IP-ownership clear.
Employee Equity Plans, Bonuses, Retirement, Unions, and Other Special Topics
Finally, there are a number of specialized topics that you should think about as you prepare for a sale. Every business is different, but when these topics come up, they frequently require a lot of work to set up correctly before you sell:
- Employee Equity Plans: If you offer employee stock ownership, profit sharing plans, RSUs, or other equity incentives, you should consult with an attorney in advance of preparing to sell to help you set up the proposed transaction properly and to smooth the sale process.
- Bonuses: Make sure all bonus policies are in writing. If you have key employees with special bonus policies, consider reviewing those policies with an attorney to determine how they may be affected by the sale.
- Retirement Plans: Make sure your retirement plans are up to date and that the company has been making all employer contributions properly. Unpaid contributions or poorly documented retirement plans can create significant legal liabilities and may deter prospective buyers during the sale of a business.
- Unions: If your employees are part of a union, it will complicate the sales process and you should speak to a labor attorney early in the process.
Conclusion: An Ounce of Prevention
Many of the topics that potential buyers are most interested in are important because, if they are not managed properly, they can cause problems for business owners far down the line. Whether you are considering a potential sale of a business in the future, or are just looking to do some spring cleaning for your business, having a solid exit strategy is crucial. Clyde Snow’s Labor and Employment attorneys would be happy to assist you in reviewing your company practices and helping implement legally defensible processes.