Category Archives: Business Sale

Selling a Business in 2013? Start With These 10 Steps Now

Originally published by Apex Counsel, LLC on 11/19/2012

[author: Tron M. Ross]

Introduction

With the holiday season upon us, we turn to thoughts of the upcoming year.  Small business owners with a goal of selling their business in 2013 should begin preparing for that transaction now.  The following are ten steps potential sellers should put in motion before the end of this year to help ensure a smooth transaction next year.

1. Obtain Legal Counsel

Competent legal counsel is of utmost importance in the sale of a business.  Most small and mid-sized businesses do not have in-house legal counsel and only work with lawyers when absolutely necessary.  For a business considering a sale, it is important that they begin looking at qualified attorneys sooner rather than later.  By doing so, you can ensure there is a good match between the attorney and your company.  You will also be able to utilize the attorney for guidance in several of the steps that follow.  Look for lawyer that both has the knowledge to steer you through the maze of a business sale and also one who fits well with you and your company personally, as a good relationship here is crucial.  Do not be afraid to ask for an estimate of what the legal fees will be and ask about flat-fee or other alternative-billing structures.

2. Look into Business Brokers (or an Investment Banker)

Depending on the size of the business, either a business broker or investment banker will play an important role in the sale of the business.  Generally, small businesses will utilize a business broker, while larger businesses will need an investment banker.  While their function of facilitating a sale is similar, these two types of professionals offer substantially different services.  A business broker will essentially act in a manner similar to a real estate broker by listing the business for sale, helping find a buyer, and receiving a commission based on the sales price.  Investment bankers generally offer a more sophisticated and interactive process, with a more structured approach.  Investment bankers also receive a commission based on the sale, but will often also receive a negotiated up-front payment.  Retaining a broker or banker is similar to retaining an attorney – meet with several and do not be afraid to ask about fees and for references.

3. Ensure Corporate Records are Complete

Prior to closing the deal, you will need to represent that the company is properly organized, in good standing and appropriately capitalized.  To make these representations, it is important to actually have all corporate records properly organized and in good order.  Many small businesses do not have a system for good record-keeping which can cost time and money to assemble if put off until negotiations are underway.  Furthermore, where the company is a corporation, poor record-keeping can be a basis for “piercing the corporate veil,” which can open the business owner up to personal liability for the company’s debts.  Therefore, ensuring a complete and accurate record of the company’s history is in place should begin as soon as possible.

4. Organize and Analyze Contracts

Contracts are a substantial asset for many businesses.  As such, the purchaser of a business will want to review the company’s “material” contracts. While materiality can be somewhat subjective, it is generally best to gather all contracts with key employees and significant customers and vendors.  Any and all financing agreements, regardless of amount should also be accounted for.  Finally, businesses who work with the government should uncover all of their government contracts.  If not already using a contract management system, now would be a good time to begin doing so.  Having such a system in place is not only is a good business practice, it also demonstrates to potential buyers that the company is well organized.  Once the contracts are gathered, a review should be done to determine the assignability provisions.  Many agreements restrict whether and how the contract may be transferred to another party.  Requesting assignability and providing notice can be a time consuming process – something you don’t want to be concerned with while negotiating the sale of the business, so getting contracts in order now will save trouble later.

5. Intellectual Property

Like contracts, intellectual property can be a substantial asset for many companies.  Now is the time to gather the records of all intellectual property assets to ensure that there are no surprises when the buyer does their due diligence.  A problem with an intellectual property asset found by the potential buyer can be substantial, cost time and money to remedy, and potentially cause the deal to fall through.

6. Analyze Financial Records

Businesses are bought and sold based on their financial outlook.  Providing a prospective buyer with accurate and complete financial statements is therefore a prerequisite for any sale. While some buyers will accept unaudited financial statements, depending on the size of the transaction, most will demand audited statements for the past fiscal year, and possibly more. Auditing statements can be a significant undertaking – therefore, the business need to get their house in order now as regards their financial policies and procedures, controls and any issues that could cause a delay in the auditing process.

7. Prepare a Form Confidentiality Agreement

Before engaging in any detailed discussions with potential buyers, it is recommended they sign nondisclosure agreements, which will require them to keep all of the information they receive about your company confidential for a period of time and to return all this information if the deal is not consummated.  The agreement should also prohibit the potential buyer from soliciting any of your employees should the deal fall through, as they would potentially have access to employee salary information.

8. Consider the Structure of the Deal

When it comes time to sell the business, the parties will negotiate a purchase and sale agreement.  This agreement can be structured in two primary ways: a sale of the company’s assets or a sale of the company’s stock.  Generally speaking, sellers prefer a stock sale and buyers prefer an asset sale.  For non-incorporated companies, the only choice is an asset sale. Those with the choice, however, should discuss with their attorney what the best means of sale would be, as this will have an impact on financing, taxes for both parties, and the seller’s ongoing liabilities.  While this is not the time to fully review this type of agreement, knowing what is in store and what will be expected of you will be beneficial when it comes time to negotiate the numerous provisions in the agreement.

9. Consider Means of Financing the Transaction

Some sellers will only consider a sale to full-cash buyers, while others may consider accepting stock if the purchaser is a larger corporation.  You will also need to think about whether you will offer some means of financing to potential buyers and what the risks are with each of these.  Now is also a time to think about whether you are amenable to an “earnout,” where a portion of the purchase price is withheld and paid in the future based on the performance of the company after the sale.

10. Consider Life After The Business: Continued Employment and Noncompetition

Will you want to stay with the company for a period of time after the sale as a consultant to make a smooth transition?  Will you want to stay indefinitely as an employee, or do you want a clean break after the deal closes?  Depending on what option you choose, employment and/or noncompetition agreements may be necessary.  If you would like to stay on after the sale, discuss with your attorney what type of employment agreement would be appropriate.  Whether you remain with the company or not, you will most likely have to sign a noncompete agreement which will prohibit you from engaging in a similar business for a certain period of time in the same area as the business you just sold.  Start thinking about these issues now so you have a better idea of what to expect when the time comes.

Tron M. Ross, JD, MBA, is the founder and president of Apex Counsel, LLC, a law firm providing innovative, cost-effective transactional solutions for entrepreneurs and small businesses.  He is experienced in corporate and business law matters, including business formation, contract negotiations, mergers, acquisitions, sales and purchases of businesses.  He previously worked as in-house counsel for a Fortune 500 Company and has represented start-ups and well-established companies in a number of industries.  He can be reached at tronross@apexcounsel.com or 888-960-APEX.

This publication contains general information only and the author is not herein rendering business or legal advice. This publication is not a substitute for such advice and should not be used as a basis for any decision or action that may affect your business.

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Selling a Business

Business owners considering selling their company should utilize as many resources as possible.  The New York Times Small Business Page (see link here) has a wealth of information on this topic.  The linked article provides a good overview of what to consider when first thinking about selling a business.  While not detailed, this article, along with additional resources at the site, are a good starting point.

Some good information in the referenced article addresses three questions owners should ask themselves:

 

Can Your Business Be Sold?

Many elements of a business make it attractive to buyers. For example, does it have a solid history of profitability, a large and loyal base of customers, a competitive advantage (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location and a skilled work force?

Are You Ready to Sell?

Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you do — not just for money but also with your time? Many business owners suffer real remorse after handing over their business to a new owner.

Here are a few indicators that it may be time to move on:

¶It’s not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.

¶You’re not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.

¶You feel your management skills are overmatched. It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.

What’s Your Business Worth?

Many owners have no idea. On one end of the spectrum, for example, was a client who owned a professional services firm. She felt the firm was worth more than $1 million. After a lengthy search, a buyer paid her less than half that amount. Then there was a client who was about to sell his I.T. company to an employee for $200,000. After advertising the business for sale nationwide, he sold it for one dollar shy of $1 million.

Selling a business is both art and science, and in no other area is this more evident than the valuation. While every seller wants to achieve maximum value, setting an asking price that is too high signals to buyers that you may not be serious about selling.

While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of seller’s discretionary earnings (S.D.E.). This type of market-based valuation involves recasting profit-and-loss statements — adding back owner’s salary, perks and nonrecurring expenses — to find the S.D.E. of the business and then using comparable data for similar businesses to arrive at an appropriate multiple. (the rest of the article can be found here)

Of course, Apex Counsel also provides substantial resources for business owners.

Buying or Selling a Business – Some Q & A

Why would you want to buy an existing business rather than start your own? For some, an ongoing cash flow is an attractive reason to buy. Another reason is a chance to grow an existing business more quickly.

Many people who buy businesses say that it is easier than a startup, although they may spend months scouting and researching a potential purchase. One thing is clear-researching the industry, the market and ultimately the company is key to future success.

Due Diligence

Once you get to the point of seriously considering the purchase of an ongoing business and have signed a letter of intent with the current owner, you need to thoroughly investigate all aspects of the business so there are no surprises once the transaction is complete.

What does “due diligence” actually mean?

Due diligence is the process of investigating a business to make sure that you have up-to-date, accurate and complete information that will later affect your operation of the business. This means verifying the seller’s statements and the business’s documents and records.

What is a letter of intent?

A letter of intent is signed by both the buyer and seller after most of the terms of the purchase are generally agreed upon. It shows that each is serious about completing the transaction and opens the way for the buyer to look more closely at the business records of the seller.

What if I am not familiar with all the regulations or if I do not feel very comfortable with all the bookkeeping and financial statements?

Even if you are on a tight budget, the time to bring in your lawyer and accountant is before you have written a check to the seller.

What should I look for when completing due diligence?

Here are some items you want to be sure to investigate when you are buying a business.

Paperwork: A good part of your due diligence time will be spent reviewing the company’s documents. This includes reviewing all financial records, such as income statements, balance sheets, cash flow statements, payroll, tax audits and a list of all physical assets owned by the company.

Other records, reports and contracts to study would include lease and loan agreements, any lawsuits past or present and insurance policies. Records of dealings with customers can give you valuable information, as will a thorough look at the company’s marketing materials-catalogs, brochures, Web site and sales letters, for example.

Compliance: If you were starting a company from scratch, you would need to research the registrations, licenses and permits required for the business. Ensuring compliance with local and national laws and regulations is just as important if you are buying a business.

Operations: You might want to roll up your sleeves and spend some time on the factory floor if you are considering a manufacturing facility. This is the time to talk with employees to get a better feel for the business.

You can check the company’s facilities with an eye toward safety and efficiency. Look at physical inventory and compare with corporate reports. Some potential buyers have been known to actually work at a company for several weeks before finalizing the deal.

Sales-current and potential: You have most likely studied and researched a potential purchase’s market and industry before you sign a letter of intent. Now that you have the opportunity to dig deeper, you can talk with suppliers and customers. You may be able to get a better sense of the competition.

I am selling my business. What due diligence should I complete?

As the buyer is studying the prospective acquisition, you should be studying the buyer. Of course you want to know if he or she can make the one or more payments called for in the contract. Even if the buyer is paying cash and you are retiring, you have an interest in maintaining a positive reputation for the business within the community.