THE IMPORTANCE OF “FIRST IMPRESSIONS” Getting a Company Ready for a Financing or Sale

While the cliché, “You only get one chance to make a first impression,” rings true in the social context, the phrase is also true in the business world where the stakes can be much higher. If you are applying for a bank loan, seeking capital from equity investors or considering a possible sale of your company, it is critically important that your business documents are complete and that you respond promptly to requests for information.

Seeking financing or preparing a company for a potential sale will vary by industry and the type of business. In any case, the starting point for a business is to make a strong first impression because any well advised lender, investor or potential buyer will undertake a thorough “due diligence” review of the company before they make a final decision to lend, invest or buy the company. The key is to be pro-active in preparing for an external review because the outcome will have a profound impact on the terms, price and sometimes, whether the transaction closes at all.

There are two elements that shape the impression you make in responding to a due diligence request. First, is the quality and completeness of the information and documentation you provide; and second, is how long it takes you to respond. A complete and well organized response is expected, but even a thorough response can create a negative impression if it takes too long to pull together the requested information and documentation. Conversely, a thorough and timely response to a due diligence request can create a positive first impression that may help to temper at least some types of negative issues that might be raised by the substance of your response.

Among the most frequently overlooked items that a business owner should have at the ready prior to a due diligence review by others, and which have universal application to every industry or type of business include the following:


  • Signed Copies of All Important Agreements: Every company has agreements that are critical or at least material to its operation and financial success. These often include real estate and equipment leases, documentation of existing credit facilities, distribution agreements, licenses and employment-related agreements. Make sure all current agreements are complete and signed by all the parties, and attach any exhibits referred to in the agreements.


  • Complete Documentation of Ownership of the Company: Although there is rarely a doubt in the minds of the owners regarding ownership of the company, in a surprising number of cases, producing the legal documents to substantiate ownership can be a problem. The issuance of stock must be approved by a vote of the Board of Directors. Once stock is issued, the original owner and all stock transferred by the original owner should be documented in the company’s stock transfer records. If there are restrictions on transfer in the charter, bylaws or a stockholder’s agreement, a waiver of transfer restrictions should be on file. If stock has been issued without the proper approvals or there are gaps in the stock records, this could be an indicator of a potentially expensive dispute or litigation in the future.


  • Employment Matters: Are the company’s service providers properly classified as employees or independent contractors? Improperly classifying service providers can lead to expensive problems, including civil fines and liability for failure to pay withholding taxes, penalties and interest. Also, if your company has intellectual property that is material to its operation and success, all service providers should be required to sign confidentiality agreements and, in some cases, assignment of developments agreements.


  • Qualification to Do Business: Virtually all companies are required to file annual reports in the state in which they are organized. If they do business in other states or foreign countries, they also may be required to qualify to do business in those other jurisdictions. Failure to file annual reports in the state where you are organized can result in administrative dissolution of your company. Although there is a procedure for reinstatement, being administratively dissolved for failure to file your annual reports makes a profoundly negative statement about how the company is run. Failure to qualify in another state or foreign country can also give rise to civil penalties and disqualification from use of the courts in that jurisdiction. That could be important if a major customer fails to pay you and your company decides to sue to recover what is owed.


These four points are not an exclusive listing of areas that need to be addressed. Rather, they are common problems that come up in due diligence reviews. For a more exhaustive due diligence checklist of the type you might expect to receive in an equity financing or an acquisition, consult with your attorney.



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