So you’ve built your small business to the point where it is highly desirable and outside parties want to purchase it from you. Congratulations! This can be a very exciting time for you and also very personal. After all, this business is like a family member and you want to treat the process as delicately as possible. While selling your business can be a very straight forward process, there are some important ideas to keep in mind at the outset.
First off, to whom do you want to sell the business? Do you want to sell it to a family member, a long-time or valuable employee, or an unrelated third-party? This decision is probably the hardest that most small businesses face. You built your baby into the juggernaut that now exists, but after all of the hard work and several good years, you want to retire and enjoy the fruits of your labor. The problem is that each of the choices poses its own set of issues that need addressing. One of the most commonly overlooked questions when dealing with the transferring of a family owned business is whether or not another family member really wants to take control or if they want to try something else. Once that issue is addressed, some of the more common issues to the general sales transaction are as follows:
Secondly, and this may seem rather rudimentary, but are you going to sell the entire business, or just a part? Remember, you do not have to sell the “whole business”. Utilizing a technique called an asset sale, the buyer purchases some or all of your business assets, which can or cannot include the business name, but you keep the corporate shell of the business and possibly future liabilities. The assets can be tangible, such as equipment and inventory, or intangible, such as trade names, or goodwill.
The other option is something folks refer to as either an ownership purchase, or stock purchase. In this situation, the buyer steps into your position and owns all of the company, assuming all responsibilities and liabilities.
After deciding which path you want to take, asset versus stock sale, you then need to consider the following areas:
Valuing the Business
Business valuation is a tricky and complex matter. Some folks think that this step merely requires an analysis of the business’s earnings. Unfortunately, that is not the case. In addition to earnings, you need to assess the value of experienced employees, customer and vendor lists, and any other factors that you believe contribute to the value of the business. No matter which method you use to value the business, it is important to get experienced help when dealing with this issue, which should include comparing your business to other similar businesses, use an industry formula, or a business appraisal.
Unfortunately, one of the commonly overlooked aspects of selling a business is addressing tax issues. The three most common tax issues that need addressing are: 1) income taxes that you face; 2) property taxes of business assets sold, and 3) sales taxes owed to various governmental entities. Your personal tax bill will be heavily influenced by two important factors: How the business is legally set up (corporation, LLC, partnership, or sole proprietorship) and whether you’re selling the assets or stock. With the help of a CPA, or another tax expert, you can structure the transaction to minimize the taxes that you face.
While not a necessity, sometimes it is easier to engage the services of a business broker/sales agent, as opposed to trying to sell it yourself. An experienced broker can help you develop the materials needed to make your business look good on paper from an appearance perspective – both from an operational perspective and a financial one. For those more serious buyers, it is important to consider the signing of non-disclosure agreements before sharing too much about your business. You don’t want to find yourself sharing the processes/procedures that you developed with someone that poses as a buyer only to find out that they merely wanted a peek behind the curtain to get a running start as your competition. As such, you need to make sure that you are careful about divulging confidential or proprietary information without non-disclosure agreements being in place at the front-end.
Negotiating Key Terms
Negotiating key terms of the sale can either be fun or a dreaded exchange of proposals and counter-proposals that seems to continue forever. As such, developing a game plan that takes into consideration your overarching goals cannot be understated. In today’s ever competitive market, it is important to consider whether you are willing to sign a non-compete, will certain items of intellectual property be assigned or licensed, will current long-time employees be protected through employment contracts, who will take responsibility/liability for any benefit plans or potentially unknown liabilities such as environmental issues, how will outstanding loans/lines of credit be handled as well as payroll taxes. The potential terms can seem endless, that is why it is important to spend time determining what is and is not important to you and what is and is not a deal breaker. Too often, sellers become blindsided by one thing and one thing only – how much am I going to get. Now is not the time to focus solely on the money; rather, spend some time thinking about the non-monetary things that can impact your life one, two or three years down the road. Once you do this, with input from all of your key advisors, then you are ready to engage in meaningful, substantive negotiations.
Once the key terms and more common ones are decided upon, you need to formalize the agreement. Unfortunately, the days when a handshake sealed the sale of a business are long-passed. It is important that the Agreement accurately reflects the terms reached in as much detail as possible. There is nothing worse than the parties saying that they will use their “best efforts” to market the company or convince long-time employees to stay. If you agreed to do certain things, then the Agreement needs to reflect that as opposed to using wishy-washy or vague language. This is especially true with the terms that you identified as deal breakers or really important. There is nothing worse than vague language being entered into a Sales Agreement, and coming to find out six months later that the two sides interpret that language differently. Because this document will dictate how things occur in the sales transaction, it is important that corners are not cut when drafting this important document.
The parties agree with the language in the Sale Agreement, what’s next – the Closing. Most folks associate this phrase with the selling/buying of a house and guess what, the closing process is quite similar when selling/buying a business. The parties can, or cannot, be in the room together, pass copies of the documents to sign, and ensure that funds were placed in escrow and then transferred in accordance with the Sales Agreement. Pretty simple, right? Well, not so fast. In addition to signing papers and transferring money, sometimes folks overlook the simple things like 1) keys; 2) security codes; 3) access codes for websites and social media accounts, and 4) passwords for servers and other IT related items. To help take the guesswork out of what to bring with you, and reduce any last minute stress, make a checklist of all papers you and the buyer will need to bring, and send it to them. This simple act can go a long way towards making the closing run smoothly and allow you to enjoy the fruits of your hard work without the nagging thought that you forgot something.
While selling a business may seem pretty straightforward to most folks that built and run their own business, as you can see there is a multitude of issues, potholes, and traps for the unaware that you could run into. If you are thinking about undertaking this process, from either the buyer’s or sellers’ perspective, and want to discuss some things, feel free to contact me today.