Think of Compliance Before Selling or Buying a Small Business
by Michael Lamm, Owner and Managing Partner at Corporate Advisory Solutions, LLC
Only one-third of the approximately 32 million small US businesses counted by the US Census Bureau have employees and must meet a weekly payroll. While all small businesses are vital to the economic health of our country, I am only referencing the one-third of small businesses with payroll for the purposes of this discussion about compliance.
Whether your small business is for sale or you are in the market to purchase a small business, a heightened emphasis on compliance is currently slowing down the due diligence process. Buyers and sellers alike are asking for more assurances and information about how a business manages its policies, procedures, and processes to remain in compliance.
What has been slowing the process down from the seller’s side is being able to assemble all the information needed in an organized fashion to share with the potential buyer. This information can include everything from how the seller deals with and responds to consumer complaints, which many times are simply disputes.
Each industry has its own unique reporting requirements. A restaurant may have to account for food safety and sanitary issues, a food delivery service may have to account for pedestrian injuries, and a telemarketing company may have to deal with Telephone Consumer Protection Act (TCPA) issues.
The structure of a transaction, whether an asset or stock sale, will lead to differing implications for assumed liabilities for the buyer post-transaction. This will impact the level of diligence required. The most tax-advantageous structure to the seller of a business will likely be one that leads to greater legal exposure for the buyer. However, this structure will require more extensive diligence efforts.
Legal counsel – internal or outsourced – that can answer questions around any recent lawsuits or legal actions against the company can accelerate the due diligence process.
HAVE YOUR COMPLIANCE MATERIALS READY WHEN THE SALE PROCESS STARTS TO EXPEDITE THE PROCESS
Any small business thinking of putting itself on the market or is already on the market should take time to prepare compliance materials and have as much as possible available right from the beginning to avoid issues that can come up later. Preparation on the compliance side will help to shave off valuable time during the due diligence process.
Sellers of small businesses should disclose everything during a negotiation. There is no point in hoping a prospective buyer will not find out about a troublesome issue – a “skeleton in the closet” – or that the issue is not relevant/applicable to the due diligence process.
In the long run, if you are selling a small business you will be much better off putting everything out on the table, while explaining what, if anything, happened in the past regarding any inquiries. By doing so, the seller can prevent the possibility of the buyer coming back later to claim he or she didn’t share information. Even worse, the purchaser could file a lawsuit post-transaction leading to years of legal action.
Please note: This article contains the sole views and opinions of Michael Lamm and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security. Any use of this article without the express written consent of Guidepoint and Michael Lamm is prohibited.
