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

Continue reading

Getting What You Pay For When Buying a Restaurant-Part Two

Last week, we answered a couple questions about what happens to food and liquor inventory during the sale of a restaurant. Our clients have also inquired as to whether the licenses from the health inspectors or alcoholic beverages division can be transferred to the new owner of the restaurant.

FOOD/HEALTH INSPECTION LICENSE: A food license is not transferable from one owner to the next.  (IA ADC 481-30.3).  Any time a new owner takes over operations or is added in as a partner, a new license must be obtained. The same is also true if an establishment simply changes location. In order to obtain a new license, an owner must apply for the license with the Department of Inspections and Appeals, an inspection will be done, and upon approval, the license will be distributed. On the other hand, if a corporation owns a restaurant, a change in officers or stockholders of the corporation does not require a new license.  (Judy Harrison, Bureau Chief, IA Dept. of Inspections and Appeals, 515-281-6538).

LIQUOR LICENSE:  A liquor license may not be transferred from one person to another.  (IA ADC 185-4.13).  Consecutive owners must reapply for the license through the Alcoholic Beverages Division.  However, a liquor license may be transferred from one location to another, as long as the ownership remains the same. In order to do this, the licensee must file an application for transfer of liquor license, wine permit, or beer permit with the Iowa Alcoholic Beverages Division. The transfer is limited by jurisdiction, depending on the boundaries of the issuing authority. If the authority was on the county-level, it may be transferred within the county, but if the authority was a city authority, it may only be transferred within the incorporated city limits.

CONCLUSION: Licenses, whether for food/health inspections or allowing the sale of liquor, cannot be transferred to a new owner. Each owner must apply for a license through the respective Iowa administrative agency.

At Kreamer Law Firm P.C., we can help make each step in transferring ownership of a restaurant easier for both the buyer and the seller. If you, or someone you know, have any questions about buying or selling a restaurant, contact us at info@kreamerlaw.com or call us at 515-727-0900.

Giving Away Information

Crop Sam Speaking WEB (2)

Businesses really have only two choices: they can grow (through formation or purchases) or go away (mostly by sale).  Those are the two things I spoke about during a recent Lunch and Learn presented for the West Des Moines Chamber of Commerce. If you would like to access the PowerPoint I used, click this link:Chamber Luncheon Final

Here are the high points of what we discussed:

  • Identifying an Opportunity;
  • How to Avoid Pitfalls;
  • What the Buying/Selling Process Looks Like;
  • Pricing the Transaction;
  • Structuring the Transaction.

Following the formal presentation I took questions from the attendees. The one item that stands out was a question about the size of transactions I normally worked on. I responded that in my 30+ years I have worked on transactions ranging from start-ups all the way through the sale of a $45,000,000 company, but the most important transaction is whatever my client(s) need to accomplish.

However, the best question came as I was packing up to leave.  An attendee came to me and asked, “Why is it that you simply gave us all of this information free of charge?” My answer was really pretty simple: “My job is to help businesses and individuals achieve their goals. For me, that includes providing people with an opportunity to expand their business knowledge.  Simply giving some valuable information away for free? No, I’m doing what I love.”

The Kreamer Law Firm specializes in business law as well as estate law.  We Get Things Done!

Buying and Selling a Business- A Lunch & Learn Event

Buying and/or selling a business requires many considerations.  For example, you may find yourself wondering:

  • How to identify the right opportunity as a buyer or a seller;
  • What pitfalls might lurk in the existing economy;
  • How will the pricing and the structuring of the transaction work;
  • What’s the process behind the transaction numbers?

Please consider joining me on August 13th. I’ll be hosting the Lunch and Learn event through the West Des Moines Chamber of Commerce and talking about this topic which is really, very useful in  a city like West Des Moines where businesses and companies thrive.

Buying or selling a business can be a very tricky process; even in a simple transaction there can be many questions. Come to the Lunch and Learn on August 13 which will be held at 4200 Mill Civic Parkway West Des Moines, IA and find out more about what it takes to get through the buying/selling process. The end result can be very rewarding for both parties.

This will be a great event and I can’t wait to answer your questions. Click this link to sign up. You don’t need to be a member to attend, so feel free to bring any and all questions you have.
http://web.wdmchamber.org/events/eventdetail.aspx?EventID=292

This is a very important topic to discuss and if, in the meantime, you have any questions, feel free to email info@kreamerlaw.com, call (515)727-0900, or visit our website www.kreamerlaw.com

 

Buying a Business, Essential Qualities: Commitment

This blog is part of a series of blogs on buying a business. We are first exploring the qualities you need when deciding to whether or not you are should buy a business. I encourage you to go back and read the previous blogs.

This week we are discussing access to commitment.

Commitment. The one indispensable characteristic of a successful Buyer is commitment. By this I mean that although a Buyer will not succeed simply because they ARE committed to the business; it is certain that the business will fail if they are not.  Business commitment takes many forms. Business ownership can take a toll on the Buyer’s social and family life in addition to their financial situation. Accordingly, a Buyer, and to some extent their family and friends, must be willing to make some short term sacrifices to reap long term benefits. Among the commitments successful Buyers make is to be “life long learners.” There are many good business books and courses. Four books that we strongly recommend are: “Getting to Yes” by Roger Fisher and William Ury; “Guerilla Marketing” by Jay Conrad Levinson; “From Good to Great” by James Collins and “E-Myth Revisited” by Michael Gerber.

If you would like assistance in regards to the purchase/sale of a business, please contact me at http://www.kreamerlaw.com.

Buying a Business: Essential Qualities, Expansion of Products and Services

In the 30 +/- years of since I began practicing law, I have worked on hundreds of sales and purchases of businesses. This is the second chapter in a series of blogs wherein I will share my observations and experiences.  I encourage you to go back and read this blog series from the beginning “insert date”.

The second reason a strategic buyer will purchase a business is to provide expansion of products/services.

Expansion of products/services. Most business purchases by Buyers seeking to expand their product line/services are successful. These types of transactions are typified by Buyers with related industry experience. Examples of this type of acquisition could include:

An insurance agency who focuses on sales of life insurance buying an agency with expertise in property and casualty insurance.

A car dealership which buys another car dealership which represents a different manufacturer.

Sellers in these types of transactions are often motivated by personal reasons such as retirement, health issues, or unrelated indebtedness. It is not uncommon in these types of transactions for the Seller (or a key employee of Seller) to remain involved in the operation of the business after its acquisition. In the examples above the Seller might run a “division” of the Buyer’s business which engages in the Seller’s business. In these types of transactions, it is very important that as part of the transactions the Seller agrees that he/it will not compete with the Buyer for a period of time (normally 2-5 years) after the Seller is no longer involved with the business.

Next  I will be covering Entry into the Market.