Photo by Romain Dancre on Unsplash
No one gets into business to fuss about legal documents and annual meeting notes. But these are important not just for compliance with the law. If they aren’t in order, they can become major impediments to a sale.
All companies are legally founded by articles of incorporation. With those, you’ll generally find bylaws, and over time, minutes, which can include annual meetings of directors and annual meetings of shareholders (they can be combined) or written consents in lieu of those annual meetings.
Most importantly, for our work as advisors, we are looking for documentation verifying that the people we are working with to sell the company have the authority to do so. In most cases, this is true. But sometimes the majority shareholder of a company doesn’t have the right to sell the business, precisely because the governing documents don’t permit it.
Beyond who has the right to sell, documents should also have at least broad authority for what should be done in certain challenging circumstances. If you want to do a deep dive into those circumstances, often called the 4 Ds (Death, Disability, Dispute, and Divorce), you can read more here.
If a transaction is already going smoothly, any challenges with these documents can generally be ironed out. But if a transaction has already had its own challenges, including issues of trust, the first question on the seller’s mind will be: what else is out of order beyond these governing documents? Friction and distrust can grow, and we’ve seen deals tank not only because key documents were confusing, but because they were missing altogether.
Action Plan
If you don’t have everything in order at this moment, that’s okay. Now is the time to get those documents in order. Here is your action plan:
- Find your corporate governance documents. If they haven’t been digitized, digitize them. Get copies to all the owners and your attorney.
- Find the holes in the documents, whether they be meeting minutes or contingencies for the 4 Ds.
- Clarify who has the authority to sell and under what conditions, and spell that out, making sure all relevant parties sign the document.
- Cross check these documents with one of our advisors to make sure you have all you need (as far as this paperwork goes) to sell your company when it’s time.
As we said, nobody gets into a business to do this kind of paperwork, but nobody successfully gets out of a business without having this kind of paperwork in order. If you need help with this, reach out today.