than selling your home. But in this respect it is not: the buyer’s potential use of the asset is more important than your own when it comes to determining what the buyer will pay. While I might highly value a place to sit in a comfortable chair surrounded by banjos, a buyer is just as likely (or more likely) to value a reading nook or watching television in that same space. Similarly, while you may value an experimental program in which you are doing interesting and exciting things with unusual yeast strains as you work to perfect a signature sweet potato-based gin, a potential buyer may prefer that you devote that time, energy and resource to the development of something a bit more mainstream. The key here is not to view a buyer’s views as indictment of your own, or as a dismissal of your aspirations, but rather to understand that achieving the maximum value for your business is most likely going to be obtained from pursuing a business strategy that is consistent with what the greatest number of potential buyers will want. Make no mistake, in taking this approach you may lessen the likelihood of finding that one potential buyer who is willing to pay a significant premium for your company because of your quirky gin. But you significantly increase the chances that you will find multiple potential buyers who may be interested in acquiring your business. And just as I hoped to find multiple buyers for my home, your chances of maximizing the value of your enterprise are greatly increased if you’ve got multiple offers. With that in mind, ask yourself these questions:
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What is your business? What are the key products that you are bringing to market today and that you expect to bring to market in the future? How do these products fill a market void? How are they compelling to the consumer?
You must be able to answer these questions for yourself succinctly and without hesitation in order to be able to convince a buyer to write a big check. And to answer them in such a fashion may require you to take a hard and fresh look at the business and its initiatives, and pare back those initiatives accordingly. In short, you may need to hide the banjos.
DOING THE MAINTENANCE
Truth be told, there is quite a bit of drudgery involved in running a small distillery. From polishing copper stills to filling bottles and affixing labels, there is often not much time left at the end of the day to actually enjoy the product of your labors. But unfortunately the care and maintenance of a spirits business doesn’t stop there. To achieve the best potential outcome of the sale of your business you need to be doing more than the day-to-day physical tasks associated with the operation — you also need to spend some time focusing on legal maintenance. A list of all the specific to-do items of legal maintenance for a business preparing for sale is beyond the scope of this piece, and in any event will be different for the specific business being sold.
But as a starting point, consider the following:
CORPORATE RECORDS. Is the business up to date in terms of meetings of its board of directors and shareholders (or similar governing bodies)? Do the records of the business contain minutes of their meetings (or written consents in lieu of meetings)? Is the company’s ledger of shareholders (or members if the business is a limited liability company) up to date? By paying close attention to these items and being able to demonstrate attention to detail to a potential acquirer, you reduce the likelihood that your buyer will reduce the potential value placed on the business because of concern that corporate formalities haven’t been followed. INTELLECTUAL PROPERTY.
Regardless of the specific nature of your spirits business, you almost certainly have some form of intellectual property. That property could be as simple as the recipe for your spirits (possibly a trade secret), as complicated as your patent application for a new form of dephlegmator, or anywhere in between (e.g., trademarks for your logos and copyrights for your written materials). In each of these cases, you need to consider the appropriate level of protection to seek for the underlying intellectual property, the jurisdictions in which you want to obtain that protection, and how far you are willing to go (i.e., how much you are willing to spend) to maintain it. Make no mistake, with some types of intellectual property (particularly trademarks), you must police the actions of others (i.e., prevent them from infringing on your rights) if you want to keep your rights. That can be an expensive proposition, but if you want to achieve the best value for your business in a sale (and you believe your brand and goodwill are a significant portion of the enterprise’s worth) then it is likely money well-spent.
CONTRACTUAL MATTERS. As part of your preparation for potential sale, you need to review and evaluate the contractual position of the business. A potential buyer will do this in its consideration of the transaction, so you are well advised to undertake your review well before starting a potential transaction process in order to have time and opportunity to address any potential concerns. For a spirits business, contractual concerns most commonly center around distribution agreements. A particularly onerous distribution agreement can, in some cases, make a buyer reconsider making an offer. And even if the buyer doesn’t walk away, the buyer may be expected to offer less for a business if the acquisition will mean that it finds itself saddled with a distribution agreement it doesn’t want, such as one containing a draconian buyout clause. In addition to reviewing distribution agreements, however, spirits companies should also look at several other forms of agreements that are not unique to the spirits industry. Those include leases for any real property; employment contracts for key employees; intellectual property licenses to which the business is a party (either in-bound or out-bound); employee incentive arrangements (e.g., stock option plans); and any other contractual arrangement that is likely to have a change in control provision which may be triggered by the potential transaction. In reviewing these items,
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