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
      • 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 One

Many times we have clients who come in for assistance in purchasing an existing restaurant. Typically the scenario is that Bill Buyer (B) is planning to buy a restaurant from Owen Owner (O).  B wonders if he can buy any of the liquor or food inventory that O has in stock.  He also wonders if any of the licenses from the health inspectors or alcoholic beverages division can be transferred from O to B.

What restrictions are placed on the sale of liquor or food inventory during the sale of a restaurant?

SALE OF LIQUOR OR WINE INVENTORY:  In order to legally sell wine, beer, and/or liquor the business owner must have a license. These are normally issued by the City in which the restaurant/bar is located. The seller of the restaurant/bar (the “licensee”) may sell their stock of alcoholic liquor and wine to the new owner, as long as the new owner will be operating the business in the same location.  (IA ADC 185-4.36).  When making this transfer, it is strongly advised that the new owner make certain to detail within their records which inventory was received as a part of the sale of the business, since liquor sale records are required to be open for inspection.  (IA Code § 123.33).  They must also make certain that the inventory is affixed with the proper seals (IA refund 5¢), as all liquor must be obtained from a licensed wholesaler.  (Lynn Walding, Administrator, IA ABD, 515-281-7402).

SALE OF FOOD INVENTORY:  Food inventory is frequently sold as part of the sale of a restaurant. There are really no code provisions regulating this.  The sale of food inventory should be itemized in the contract for the sale of the restaurant, with specific provisions identifying the items and quantities requested.  Frequently, the contract will include a minimum dollar amount of inventory (including food, to-go containers, etc.) that must be on hand for the sale of the business, with discrepancies affecting the sale price.

Be sure to check back next week where I’ll be discussing whether of the licenses from the health inspectors or alcoholic beverages division can be transferred as part of a sale of a restaurant and/or bar. In the meantime, if you need any help or have any questions about buying, or selling, a restaurant feel free to email us at info@kreamerlaw.com or call us at 515-727-0900.

Business Decisions-Who has the power?

Again, I go on air to discuss with Michael Libbie the final part of our Three-Part Interview on “What Happens to Your Business If Anything Happens to You?” This time we’re discussing who will have the power to make the decisions for your business if you can’t.

Click the link below to watch the podcast, and if you need legal help with any business questions or concerns, please feel free to email us at info@kreamerlaw.com or call us at (515)727-0900.


Kreamer Law Firm-How can we help you?

Recently I was able to record a short video explaining what it is we do at Kreamer Law firm and how we can help you with legal assistance in your Business, Corporate, Estate Planning, and Probate needs.

Click the link below to watch our video, then head over to our Practice Areas tab for more information!
If we can help you in any of our various practice areas, feel free to call us at (515)727-0900, or email us at info@kreamerlaw.com.


Employee Wages: Let’s Get to the Basics

Minimum Wage Dollars (2) Recently minimum wage has been all over the news.  Some states and even some cities have passed laws that have raised the minimum wage, recognizing what a person must earn to make a living. Because of this, people are asking, “How much must I pay my W-2 employees here in Iowa?”

The law in Iowa sets a minimum wage of $7.25/hour and applies to all employers whose gross annual sales are $300,000 or more. The Federal minimum wage is the same $7.25/hour and applies to all employers whose gross annual sales are $500,000 or more.  When both the Federal requirements and state law apply, it’s actually the law which sets the higher standards that must be followed by the employer. So, in the states that have passed higher minimum wage rates, the local law actually trumps Federal law.

The laws on wages in Iowa have some slight exceptions.  For example, if the business employs tipped employees (defined as an employee who makes $30/month or more on tips), then the business can pay as little as $4.35/hour (Iowa) or $2.13/hour (Federal).  However, in any given week where the employee’s wages do not average at least $7.25/hour, the business is required to pay the difference.

Another income regulation to consider is that Iowa law also allows for an employer to pay an employee an “initial employment wage” of $6.35/hour for that employee’s first 90 days of employment.  Federal law allows for employees under the age of 20 to be paid as little as $4.25/hour for the same 90 day period. This period allows the employee time to train until they are able to fully handle the workload.

If you, or someone you know, are in need of legal services regarding employment wage questions or employees, feel free to contact us at Kreamer Law Firm, P.C. through our website at www.KreamerLaw.com or by calling us at 515-727-0900.

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

In the 30 +/- years of since I began practicing law, I have worked on hundreds of sales and purchases of businesses. This is the first in a series of blogs wherein I will share my observations and experiences.

There are several “qualities” which are common to Buyers in successful sales/purchases of businesses.  These qualities are:  industry knowledge, personal operational knowledge, capital, access to expertise, and commitment In the next few weeks I will be exploring these qualities with you.  Before you consider buying any business, you should ask yourself if you have these qualities:

This week we are examining industrial knowledge and Personal knowledge.

Industry knowledge. Industry knowledge includes knowing the “market” (both customers and competition), as well as “industry standard” revenue/costs/expense ratios for the business. This information can sometimes be obtained from associations which are comprised of similar businesses.

Personal operational  knowledge. Unlike “old dogs” it IS possible for Buyers to learn “new tricks”. HOWEVER, in most successful transactions the Buyer himself/herself has had PERSONAL experience in the operational side of a business similar to that which they are considering buying. Often one of the terms of a transaction is that the Seller agrees to “train” the Buyer. This approach can be successful if the business operation is not very complicated, or if the business has revenues of less than $250,000. Our experience is that in most (but not all) cases the teacher/pupil model does not translate well to Sellers and Buyers.

A hybrid between buying a business and starting one “from scratch” is the purchase of a franchise. At its core, a franchise is a tested business “model”. Their terms and conditions vary among industries and among companies within an industry, but most offer some level of industry/market knowledge and training of franchisees. Obtaining a franchise can reduce the “learning curve” but it is not a guaranty of success.

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