What are the Steps in Selling a Business?

Very few people sell multiple numbers of businesses.  Accordingly, MOST businesses are sold by “first time” sellers.  The purpose of this article is to provide you some insight on the steps you should take in the course of selling your business.

  • Self-Assessment
    • Are you in fact selling a business?
      • If you are the key employee and if you have all the contacts it is possible you are selling a JOB and not a business.
      • The hallmark attributes of a business (as distinguished from a job) are:
        • They maintain and follow established systems and procedures
        • They produce regular, reproducible results
        • Reoccurring clients/products
        • There are no indispensable employees (including YOU)
    • Why are you selling this business?
      • Unprofitable businesses rarely sell. Commonly they simply close.
      • Burn-out and retirement can be seen as an opportunity for a change on both leadership and ownership.
      • Looming industry changes can dissuade a buyer.
    • Who are the most likely buyers for the business?
      • An internal buyer (family member or key employee)
      • An external buyer (most often a competitor or someone in the industry seeking to enter the market)
    • Consider a pre-sale audit
      • Do a SWOT (strengths, weaknesses, opportunities and threats) assessment
      • Do an appraisal of the BUSINESS
      • Do an internal review of your legal infra-structure
        • Employment agreements with key employees including non-compete agreements
        • Agreements with key vendors
        • Lease agreements
        • Assignability of key contracts (including the foregoing)
      • Do an internal review of your “systems’ and procedures.
    • Identify “QUALIFIED” buyers
      • Qualifications of a buyer in a successful transaction include:
        • Experience with either the particular business or the industry in which the business is operating
        • MONEY
      • Business brokers exist and can perform a VALUABLE service (for which they intend to be paid)
        • NORMALLY the Seller (or the Seller’s business) pays the broker.
        • NORMALLY the broker represents the Seller
        • Brokers can sometimes provide industry insights due to specialization (example a broker who deals primarily with restaurants may have insight into the local restaurant market).
        • Brokers primarily provide potential Buyers with information given to them by Sellers. Brokers sometimes, but rarely, verify Seller information.
        • As with all professionals, some brokers/brokerage firms are better than others.
      • Selling a business which is subject to a franchise can be tricky.
        • Franchisors normally are permitted to withhold franchise rights if the buyer does not “qualify” as a franchisee.
        • “Qualification” can be based on experience or finance or both.
        • If a potential buyer would otherwise qualify as a franchisee they are a better candidate to buy the business.
    • Determine an “Asking Price” for the business
      • IT IS AS RARE AS A WINNING THE LOTTERY FOR A SELLER TO GET THEIR ASKING PRICE
      • An appraisal provides some indication of and independent assessment of the value of the business. These are as much art as they are science.
      • Sellers most often establish pricing based on:
        • How much they think they “need” to sell the business in order to:
          • Fund their retirement
          • Meet their subjective valuation of their efforts
        • ULTIMATELY, the BUYER determines the price of the business since they are the ones paying
      • Although no one wants to “leave money on the table,” it is important that the buyer is able to make a reasonable income.
      • The tax implications of the deal structure can influence the asking price
        • A Seller may take/get less for a stock sale v. an asset sale
        • Allocations of total consideration among non-compete agreement, consulting agreement, lease or other assets can influence the asking price
      • Assemble a team to assist you which should include:
        • Qualified business lawyer
        • Banker
        • CPA
    • Executing a Confidentiality Agreement
      • This is like dating- the parties begin to find things out about each other.
      • These are commonly signed before any information is given out about the Seller
      • While not a “standard” form, these agreements are generally all similar
      • After confidentiality agreement is signed the Buyer normally receives a significant amount of information about the Seller
    • Executing a Letter of intent
      • This is like going steady or dating exclusively- there is a significant interest in entering into the relationship.
      • It is normally non-binding (either party can still walk away from the transaction)
      • MANY transactions do NOT employ a letter of intent
      • This establishes the broad parameters of the transaction
        • Price- Normally 4 to 6 times 3year average adjusted taxable income
        • Terms of payment
        • Outlines, in broad terms, additional agreements (Seller consulting agreement; Seller non-compete; leases)
        • Outlines, in broad terms, contingencies to closing such as obtaining bank financing or franchisor approval
      • Be careful of broker provided documents. Sometimes these create a binding agreement before Buyer is ready to commit to the transaction
    • Due diligence (not really an isolated step)
      • This may commence upon the signing of the confidentiality agreement or may be deferred to the signing of the contract.
      • Due diligence refer to the Buyer’s investigation of the Seller and the confirmation of the information provided by the Seller. The investigation should be quite thorough and should include discussions with:
        • Key employees- and FORMER employees
        • Key customer/clients
        • Key vendors
        • Key industry individuals
      • Seller may restrict due diligence until there is a contract in place to avoid upsetting Seller’s employees, Seller’s customer/clients, and or Seller’s vendors/creditors
      • The due diligence investigation is- by far- the most important part of the transaction
      • Often the CPA firm of the Buyer takes the lead in conducting the due diligence
      • Regardless of when the due diligence period commences, Buyer should not close the transaction until they have fully satisfied itself with the results of the investigation and/or the future action Buyer may take as the result of the findings
      • Remember: past results may not reflect future performance
    • Executing a Contract
      • This is like the engagement of the parties to the transaction
      • This is the legally enforceable document which outlines ALL of the fine points of the deal
      • The contract will specify the terms of payment
        • Normally there is some nominal payment at the time of signing the contract for sale
        • About 75% of the total sales price gets paid at “closing”
        • About 25% of the total sales price gets paid in the form of a promissory note from the buyer
          • Terms and interest rate vary from deal to deal but 3-5 years is not uncommon
          • This loan is normally subordinated to other financing and therefore gets paid last. Hence it has the highest risk of non-payment
          • Because this often represents a significant portion of the “profit” on the transaction, it is important that it gets paid. Hence, the importance of having a qualified buyer will be able to conduct the business in a manner which will provide payment
      • The BULK of the document comes from the representations and warranties
        • These are the written memorialization of the assurances the parties give each other as part of the transaction.
        • These normally include statements as to:
          • Proper formation
          • No undisclosed liabilities
          • No pending legal actions (either governmental or private action)
          • Compliance with laws rules and regulations
          • Title to assets
          • Payment of taxes
          • Required approvals of the transaction
          • MANY other issues
        • Although Buyer checks into many of these matters as part of due diligence, Seller can be liable for representations and warranties which turn out to be untrue
    • There are often disclosure schedules attached to the contract which provide additional information. Example: a disclosure statement may supplement whether there are any outstanding contracts
    • There are often MANY revisions before a contract is finalized
    • The contract may establish post-closing obligations. These might include:
      • A covenant that the Seller not compete
      • An agreement that the Seller will help train the Buyer
      • A requirement that the Seller favorably introduce Buyer to customer/clients and vendors/creditors
      • A requirement that the Buyer provide the Seller with information about the business’ operations until the full purchase price is paid
      • Depending on the type of transaction
  • Closing of the Transaction
    • This is BOTH the wedding (for the Buyer) and the divorce (for the Seller)
    • Takes place after all pre-conditions have been met and approvals have been obtained
    • This is when the “real” money changes hands, the transfer documents are signed and exchanged and the buyer takes control of the business
    • Most transaction “problems” come to light in 6-24 months following closing

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