If you’re thinking about selling your business, and even if you’re not, now is a good time to incorporate pre-sale diligence into your regular business operations so that if or when you decide to sell your business, you have a jump start on the due diligence process.  Any prospective buyer of your business is going to perform extensive legal and financial due diligence on your company to gain an understanding of what exactly they are acquiring, and what it is worth. Below are three of the top legal due diligence issues that owners can identify and address in the course of their ordinary business operations to maximize the value of their company and head off some of the potential issues that could arise in the transaction diligence process.

• Equity Issues. Who owns your company and how? If you are the sole member/shareholder, or if your ownership has never changed, this could be very straightforward. You should make sure you have an up-to-date cap table for your company that reflects its current equity holders and their proportional ownership.  Also ensure that you have documentation showing the issuance of shares or interests in your company to its existing owners. This could be in the form of stock certificates, an operating agreement, corporate resolutions and the like.  If you have a former partner that left, do you have adequate documentation reflecting the repurchase or sale of this former equity holder’s interests in your company? Buyers want to know from whom they are buying the company or assets, and also who must consent to the transaction.  If any of this documentation is missing, getting a head start on locating the documentation, or entering into agreements that properly document any changes in equity ownership, will help alleviate any buyer concerns about ownership that can affect whether your transaction even closes, and will also help head off any third-party claims that someone else is entitled to withhold consent to, or share in the proceeds from, the sale of your company.
• Commercial Contract Issues. While you may not review every customer or other commercial agreement you have in place the way your lawyers (or the buyer’s lawyers) will, a couple of things that you can focus on are whether you have contracts in place for your biggest customers (or suppliers) and whether they contain specific terms that should be negotiated with these counterparties when you are entering into a new or renewal contract. You should consider entering into written agreements with your top customers or suppliers which outline the terms and conditions of the services you are giving (or receiving) and govern the relationship between you and the customer (or supplier).  Also look to see whether these agreements contain language prohibiting assignment of the contract to a third party without your customer’s (or supplier’s) prior written consent.  Depending on the transaction structure, assignment language can trigger these third-party consent obligations, which in turn can stall your transaction with the buyer. If the opportunity arises to enter into or amend any contracts, you should consider including a carveout to the assignment language for the sale of your business to minimize the number of third parties you may be reliant on for assignment consent.  You should also identify any contracts that contain non-compete provisions imposing restrictions on your company’s ability to perform certain services (and for whom), or most favored nation provisions granting customers preferable pricing rights. As a successor-in-interest, any buyer of your business will also be subject to these terms, and if you are in a position to negotiate eliminating or narrowing the scope of these provisions, this could make the contracts and your company appear more favorable to a prospective buyer.
• Intellectual Property Issues. When your business is acquired, the value of your assets has a direct correlation with the purchase price that a buyer will offer for your company.  Part of your company’s value includes your intellectual property, an asset that in many instances can be more valuable than any physical assets that your company may own. Something to think about during the pre-sale diligence process is whether your intellectual property is adequately protected through the registration of trademarks, patents for inventions, or copyrights, to enforce your ownership and use of these assets. Another thing to consider if you utilize any independent contractors to perform work for your company is whether there are work for hire agreements in place with these contractors to ensure that your company owns the work product any contractor produces for your company. Are employees required to sign confidentiality agreements protecting your trade secrets, business know-how, customer lists, and the like? If the answer is no, then you should take time before the acquisition to try and get these agreements and registrations in place to maximize the value of the intellectual property and help ensure that the buyer is comfortable that the intellectual property it is acquiring from you is adequately protected.