Legal Insight. Business Instinct.

Selling your business? Read this first!

Sooner or later, every business owner will ultimately confront the question, “Should I sell my business?” Deciding to sell your business is often a difficult decision because of the profound emotional, personal, and financial impact. You invested a great deal of your time, energy, and resources to make it what it is today. However, succession is inevitable. Deciding to sell is a decision that must be thought through and carefully planned. There are many reasons business owners find themselves wanting or needing to sell…

– Retirement
– Relocation
– Dispute between partners
– Diminished interest in the business
– Illness or death
– Exposure to business risks
– Divorce
– Desire to pursue other business interests
– Lack of sufficient working capital
– A need within the company for new skills or new philosophy
– Stagnant sales and earnings

You must assess your reasons carefully and decide if selling will enable you and the company to reach future goals and objectives. Once you have made the decision to sell your business, consider the following questions:

Who will I sell my business to? There are several options to consider. Do you want to sell to your employees? To a competitor? To a larger business? Do you want to turn the business over to your children? Should you move on or retain a role in the business’s future? The answers to these questions may impact the long-term success of your business.

What is my business worth? Typically, a buyer is purchasing a future stream of income. If a business does not generate income the purchase price may be minimal. In determining the value of a business you will need to gather financial information. This may include income statements, balance sheets, records of accounts receivable and payable, etc. You will want to strongly consider getting a business appraisal to determine the potential value of your business. Keep in mind, the value of your business is what a buyer is willing to pay for it.

What payment terms am I willing to accept? How the purchase price is paid may be driven by your financial needs and lifestyle. In most cases you should insist the buyer pay the full purchase price when you transfer ownership of your business. However, if a buyer is unable to get financing from a bank or other lender for the full purchase price, you may have to finance some amount of the purchase price yourself. This means the buyer would sign a promissory note with you as the lender. You will want to be sure you have adequate security and guarantees from the buyer to protect yourself.

Are there tax savings depending on how the sale is structured? Yes. In most cases parties structure a sale as an asset sale (assets are exchanged for money) or stock sale (stock is exchanged for money). Both have advantages and disadvantages that need to be considered.

What is due diligence? It is the buyer’s opportunity to evaluate the business. Every business has skeletons. The issue is how big those skeletons are. As a seller you will want to be upfront about these skeletons. If not properly disclosed, a buyer may ask for a reduction in the purchase price later on.

What documents are involved in the sale of a business? In most cases, the parties will sign the following documents: Nondisclosure Agreement, Letter of Intent (not needed in all cases), Purchase Agreement with exhibits and schedules, and Non-compete Agreement. There may be additional documents depending on the transaction.

Should I involve legal counsel? Involving legal counsel can be very beneficial to the entire process. An experienced business attorney can help you negotiate the purchase price, structure the sale and draft agreements, and aid in the closing. One of the biggest mistakes we see is a seller entering into an agreement that negatively impacts the seller. This includes too low a purchase price, broad warranties, and inadequate protection on default.

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