Definitive Guide to Sell Your Business
Definitive Guide to Sell Your Business
While not every aspect of selling a business is fun or simple, we can assure you that it is rewarding! From deciding whether or not to sell that business to closing on its sale, selling your business involves complicated relationships, agreements, disclosures, and processes. There are so many important steps in the process to sell your business that we do not want you to miss a thing. If you follow all of these steps in selling your business then it will be an easy process but if you miss steps or just ignore them completely the path to selling your pride and joy can be a rocky one. That being said, we have a proven process that you can be assured will enable you to be successful when selling a business to a third party. Let’s get started!
As a first step to consider in the complex process of selling your business you’ll need to answer a few questions.
Do you Want to Sell your Business?
First, ask yourself if you should sell the business that cost you so much blood, sweat, and tears. There are many factors to consider when answering such a loaded question. Let’s examine a few of them:
Selling your business creates a very different financial reality when compared to retaining the business as a going concern. Selling the business represents a sudden influx of cash, while maintaining it consists of regular, albeit lower, income subject to the fluctuation of your industry and the overall economy.
Whether you prefer to cash out the equity that you built in the business or you prefer to hold on to it for the future cash flows is a highly personal decision based entirely on your situation. Both decisions (sell or hold) come with inherent risks and benefits to weigh.
You’ve likely heard the cliché, “living to work or working to live.” Which category do you fall into? Do you get up in the morning excited about running your business? Or is your business something you operate in order to allow you to enjoy life’s other pleasures?
If the activities involved with running the business are the WORST part of your day, you may wish to consider selling and getting your life back. If your business is still the best part of your day, then selling may not be the best choice.
Often, businesses are positioned to grow through an acquisition that allows the business owner to “take money off the table” while retaining an equity position in the company. If your business is structured to do this you may be in an ideal situation. You’re able to cash out some equity and reduce or fine tune your duties going forward. Further, the company is positioned to grow significantly and you may enjoy a second payday when you sell the final equity piece. The goal is that the second sale is worth far more than the first one.
What vision do you have for your future? Are you about to retire? Do you want to start a new company? Would you like to go to work for someone else?
Your future plans should weigh heavily when you’re deciding whether you want to sell your business. A sale should fit into whatever you’ve got planned for you and your family moving forward. If you envision retiring in the mountains or the islands it may be best to exit the business.
Is Your Business Salable?
Only some businesses are salable. Some, for a variety of reasons, are simply not highly marketable. In order to determine if yours can easily or possibly be sold, consider the following factors.
Identify your gross revenue per year and consider how much each of your customers contributes to that total. Typically, a business with no major customer concentration issues has no more than a single customer at or above 15% of revenue. While this can change from industry to industry, it’s important to look at your yearly revenue to determine if you have a problem or not. How concentrated is your revenue?
Customer concentration is an issue for business buyers because they want to make sure that your revenue is reliable. If you have one customer who has a large portion of the revenue it adds risk for the buyer, since they would lose a large portion of revenue if that customer left.
How are the trends in your industry behaving? Do you see a continual upward trend in the profitability of companies in your field? Or is the industry stagnating or declining? If, for example, you run the equivalent of a Blockbuster at the start of the Netflix era, it’s going to be very difficult or impossible to find anyone to take the business off your hands. The same can be said for a business that is in an industry that fluctuates up and down like oil and gas. It is hard to sell an oil and gas company when oil prices are below $40 a barrel or have been in recent times. Fluctuations do not mean that you will definitely be unable to sell the business, but it may mean that the business is not salable at the moment and you need to wait for the right time.
How’s the economy generally? Are we in the midst of a recession, pandemic or an expansion? General economic trends can affect the likelihood that you’ll find a suitable buyer, as well as the price that a buyer will be willing to pay.
The “Vacation Test”
The Vacation Test is a simple test of how easy it is to separate you from your business. When you go on vacation, does your business effectively stop operating? In other words, is “the business” just an extension of yourself?
The last statement is true of a lot of professional firms (doctor’s offices. law firms, accountancies, etc.) that rely primarily on the work of their principals to generate revenue.
Your Financial Requirements from A Business Sale
If you do decide that you want to sell your business and that your business is salable, you’ll need to determine what you need and hope to get out of the sale. Perhaps you have definite financial requirements that need to be met before you’ll consider selling.
Whatever those requirements happen to be, you’ll need to know that what you want from the sale won’t necessarily be what you can get from the sale. In other words, what your business is worth and what you want or need it to be worth are two separate things. It’s like selling your house. Just because you have a strong affinity for the house doesn’t mean that the house is worth more than the neighbor’s house on the same street. Yes, the house means more to you than the neighbor’s house does but that doesn’t mean that it is worth more to a buyer.
Selling a business is a team effort. You’ll need to put together a group of professionals that can competently execute on the transaction in a way that meets your needs.
Characteristics of Suitable Professionals
As the owner of a company, you’ve almost certainly worked with professionals in the past. As such, you know what to look for when choosing a professional to work with your business. Even so, it may be worth it to go over the characteristics you’ll want to seek out in a business sale professional.
More important than any other single characteristic, your level of trust in a professional determines whether you’ll be able to effectively work with him or her. It doesn’t matter how experienced your lawyer is or how well-positioned your business broker claims to be if you don’t trust them and have a good feeling about them handling your important affairs.
Experience is a tricky subject. There are professionals with decades of experience who are stuck in the past with less than ideal systems, thoughts, and processes. Sometimes, the best professionals are those with only a small amount of experience but who are up to date on the latest techniques and processes for how businesses are sold today.
99.9% of all businesses sales are confidential. Often, this prevents the parties from discussing the transaction after the fact. You should, however, figure out if the professional has positive reviews from previous clients. These may be in the form of Google reviews, referrals, or other websites.
All of the trust, experience, and good reviews in the world won’t matter if you can’t get a hold of your professional when you need them. When selling a business time is always of essence. As we always say, selling a business is not like creating wine or cheese. The result doesn’t get better with age! Be sure to choose someone who promptly answers calls and emails.
You undoubtedly already have an accountant who handles your books and records. While this person will make a valuable, indeed necessary, component of your business sale team, they may or may not have experience with mergers and acquisitions.
You should sit down with your accountant and have a conversation about whether they are equipped to handle the transaction that is about to come their way. Most CPAs are not properly trained to value a business for sale. The main area your CPA will need to be involved in is answering accounting questions.
Like an accountant, you almost certainly already have a lawyer with whom you regularly deal. For a business sale transaction, however, it is a mistake to simply go with whichever lawyer you happen to be most familiar with.
It is imperative for your attorney to have business sales or mergers and acquisitions experience. Doing otherwise is like going to an oncologist with a heart problem. You need a lawyer who has experience and skill in this specific area. Don’t have a family practice attorney represent your business in a sale. Find a professional that is experienced in exactly what you are looking to accomplish.
Assuming the business sale is successful, you may find yourself with a substantial amount of cash at the end of the transaction. This is a good thing, but it puts you in a situation where you may need some advice with respect to what to do with all of your newfound liquidity.
A financial planner will allow you to effectively put that money to work and might even be able to assist with some of the tax issues that arise as well.
Your business broker’s job is to position your business to maximize its value, locate the best business buyer, and to help overcome the problems that arise in the mist of the sale.
They typically charge a commission based on the final, negotiated sale price of the business. This typically ranges from 6% to 10%. While most competent business brokers charge a commission, it is not typical among reputable firms to charge upfront fees. A request by a business broker for an upfront fee when selling a business should make you suspicious.
Because of fees, some people choose to go through the process of selling their business without the benefit of a broker. Doing so, however, leaves them without the expertise and the contacts available to a talented broker.
You may wish to consider a few of the following characteristics of the firm when you’re choosing a business broker:
- The length of time the firm has been in business
- Whether they charge any upfront fees.
- Do they have an existing database of active business buyers?
- How they protect the confidentiality of your business’ information
- Technology that they employ to sale the business.
- Their success rate.
- Ability to answer questions.
- Are they hands on or hands off during the Due Diligence process?
You’ll need to get a few (well, actually, more than a few) things in order before showing your business to potential buyers.
Do Some Housekeeping
Take care of all the little things that need fixing, sprucing up, and tidying. Wash and clean your facilities, make major and minor repairs (even superficial ones), and ensure your landscaping is up to par.
Do Some (Online) Housekeeping
Google your business name and take note of all the information about your company that the internet provides, especially the information that’s available on the first page of your search results.
If you have any negative reviews that pop up online, deal with them by either posting a polite response that apologizes for the problem and explains how you’ve addressed the issue or by contacting the poster of the review and request that it be taken down. Business buyers look at these reviews.
If you have a web presence, make sure that it, like your physical location, is well-maintained, attractive, and easy to navigate.
Get Your Books In Order
The business sale process is going to involve a lot of due diligence. This means your financials need to be in order. If they aren’t already neat and tidy, get ready to clean up your books. You may wish to sit down with your accountant and bookkeeper to ensure that all your financials are organized and accessible. It’s also helpful if you have an experienced business broker to help you organize your books in a way that will minimize any tax liability. Business buyers want to know the true amount they will make when buying the business. This doesn’t necessarily mean profit. Check in with a knowledgeable business broker or CPA to help with this.
In addition to your financials, interested buyers will want to see your major business processes in writing. Your processes, after all, are what generate revenue and create profits. The more your day-to-day operating procedures (SOP’S) are written down, the easier it is to explain why and how the new owner will be able to replicate your success.
In effect, you’re aiming to create a “playbook” for the new owners of the business. They should be able to sit down with the information you’ve provided and hit the ground running.
You can’t sell something you don’t know the value of and businesses are no exception. Several difficulties arise when attempting to value a business but a properly executed business valuation is well worth the trouble.
Why you need a professional business valuation
There are numerous benefits to obtaining an outside business valuation when you’re trying to sell a business. These are just a few of them.
An outside perspective adds significant value
It can be tremendously illuminating to get an unbiased, unvarnished outside look at the value of your business. While the business may hold a huge amount of sentimental value to you, especially if you’ve built it from scratch, the market doesn’t place a high premium on sentiment.
An outside business valuation will provide you with an objective view of your company’s worth in dollars and cents
Business valuation is a complex discipline
While you may think you can easily determine the value of your firm on your own, the truth is that business valuation is a highly complicated skill worthy of attention from a specialist.
There are multiple approaches and methods used to value businesses and a whole world of differences between firms and companies that can affect their valuation. There are also significant differences between fields and industries that can dramatically impact the assessed value of your business.
An independent valuation adds legitimacy to your asking price
It’s one thing if a company’s owner has decided that their business is worth a million dollars and asks for that amount during a business sale. The buyer may or may not consider the valuation to be a valid and accurate one.
But being able to walk into a negotiation with an objective based value adds legitimacy and weight to your bargaining position.
Trusting the Valuation
There’s no sense in going to the trouble of getting your business’ value assessed if you’re going to disregard the valuation.
For one thing, the buyer certainly isn’t going to disregard it. Just because you think the assessed value is significantly lower than what the business is actually worth doesn’t mean your potential buyers will accept your position. They will likely regard an independent, professional valuation as an opinion that carries more weight than your personal view.
If you do have enduring difficulty accepting a valuation proposed by an independent assessor, consider getting a second opinion. Keep in mind, though, that you should be able to articulate exactly where you believe the assessor made errors or underestimated value. A vague notion that “the business is worth more” will rarely be enough to justify the added expense of a second valuation.
The previous section notwithstanding, you should understand that business valuation is as much art as science. An honest business evaluator will admit that there are several judgment calls that must be made when assessing the value of a company and that reasonable evaluators can have differing opinions.
It may help to consider your company’s valuation as expressing one possibility within a range of values. For example, if your business is valued at $1,525,000 by one evaluator, it’s not unreasonable to expect that, to the right buyer, it’s actually worth $1,625,000. However, it’s probably unreasonable to expect that it would sell for $3,000,000 to anyone given that valuation.
In other words, trust the valuation but understand that it should provide a value range rather than a specific value.
Stock vs. Asset Sale
During the valuation portion of the sale of your company, you’ll need to decide how you wish to structure the sale. There are two primary methods. Both methods have positive and negatives.
The first method we discuss here is a stock sale. In a stock sale, the business owner sells the shares of the business corporation to the buyer.
The second method is an asset sale. In an asset sale, the seller transfers all the real and personal property owned by the business to another party. This includes real and personal property as well as good will and intangible assets. For example, a manufacturing company might sell all its vehicles and equipment, as well as the name of the business and intellectual property to a buyer. The buyer would then setup a new corporation to continue the operations.
Different advantages and disadvantages attach to each form of business sale, depending on the circumstances of the buyer and the seller. A stock sale can open up the buyer to potential liabilities that would make the transaction worth less to the buyer. A stock sale can mean less tax from the closing proceeds although there are strategies now that make this a virtually nonexistent benefit.
Not all business sales are completed for cash up-front. Many are financed in one way or another. You as the seller or a third-party lender may agree to put up financing for the sale.
Financing options are numerous and are only limited by one’s circumstances and imagination. Bank’s that utilize the Small Business Administration program, as well as conventional lending sources, are the ideal financing options. It is important to explore this avenue prior to going to market since the lender may have requests from the seller that need to be considered.
The other option is for the business owner to accept a down payment as well as a note for the business transfer. Careful thought should be given to the structure and wisdom of the arrangement before a seller agrees to finance a large percentage of the sale themselves.
Finding A Buyer
Identifying a suitable buyer for your business can be even more difficult than making the decision to sell in the first place. The following are conditions that a buyer must satisfy before we could consider them to be suitable candidates for a business purchase:
List of Must-Have Criteria
Your business is more than just a set of financials and a good buyer needs more than just adequate cash. To command the right price for your business, you must find a buyer who’s suitably experienced, motivated and has the right temperament to put your business in the best position to succeed after the sale.
This is the obvious one. But let’s go deeper than a buyer who has the ability to get the money to buy the business. Let’s look at post-closing money. Does the buyer have the working capital they need after buying the business? Candidly, a quality business broker will help you determine the proper working capital needed to be successful.
In most cases, the buyer is purchasing the business with the intent of running it themselves. If this is the case, the buyer will need transferable expertise for your industry. This is NOT saying that they must be in the same industry (often they are the worst kind of buyer). They should have experience that will translate to your business, like sales or technical expertise.
Similar to expertise, it is important that your buyer has relatable experience. While they do not need direct experience, they must have relatable experience. The buyer’s lender will also be concerned about this. It is important to determine this early in the process so you are not wasting your time with someone who can’t buy the business or can’t operate the business post-closing.
Types of Business Buyers
It is important to understand the type of buyer you target to sell your company.
Often, competitors are the very worst buyers. They typically take a very pessimistic view with respect to the valuation. They have a tendency to devalue your intangible assets. Post-closing layoffs are very common because of cross-efficiencies. They are typically the best owner for your vendors.
- High net worth individuals
This buyer is often the purchaser that will offer the highest price for your business. They are typically the one who has the most energy and are frequently the best owner for your employees.
Often, strategic business buyers are the best of both worlds. A strategic buyer is defined as a person or company that is in the similar industry or same industry. The key is that they will gain something important or extremely valuable by owning your company. They are typically the best owner for your customers.
Consider who may be in the best position to buy your business and how that might affect you, your customers, your employees and your vendors.
Two Approaches to Marketing
With respect to marketing to business buyers whom you don’t yet know, there are two general approaches that will still protect confidentiality. The shotgun approach puts your opportunity in front of as many people as possible (while still protecting confidentiality) as quickly as possible. The rifle approach presents your business to far fewer but more carefully selected targets than the shotgun approach.
The approach you choose will depend on a variety of factors, including:
- The breadth of the appeal of your business opportunity. More broadly appealing opportunities will lend themselves to the shotgun approach.
- The size of your industry. Smaller industries will lend themselves to the rifle approach.
- The size of the opportunity. Larger deals will generally require a more selective approach as far fewer people are able to afford the purchase.
Serious Inquiries Only
People who offer businesses for sale quickly realize that for every serious inquiry about the opportunity, there are fifty that indicate only a passing interest. It’s important not to waste time on those who are just dabbling or dipping their toe into the water and focus on those who legitimately desire to pursue the business. For example, our business brokerage firm averages 82 NDAs for every one business we have listed for sale.
For that reason, we find it’s best to require information in exchange for information. In other words, if a party wants to know more about the opportunity than what is initially marketed, it’s not unfair to ask them to provide basic information that would qualify them to buy the business and allow you to distinguish between the serious buyer and the “tire kickers” (casual shoppers). If a person wants a lot of information but lacks the basic criteria of an attractive buyer, you can cut bait early.
Confidentiality vs. Marketability
You may be concerned about the confidentiality of some of your information. After all, the due diligence process includes requests for information that go to the core of your business and could be used by competitors to damage your position in the market.
At the start, it may be the name and address of the business and the proprietary way you are competing in the market. Over time, as you feel more comfortable with the buyer and build trust, it is important to begin divulging more and more.
To deal with confidentiality, potential buyers are required to sign non-disclosure agreements. Non-disclosure agreements aren’t all alike, so make sure that the NDA is a proven document that protects you when signed by any potential buyer. This prevents unnecessary disclosures of your personal information to competitors, customers and employee’s. It is imperative to get non-disclosure agreements (NDAs) in place. At our firm, our NDA is online and it allows us to use the latest technology to run “checks” on the person completing the NDA.
As for when to provide confidential information, it’s usually better to wait until further into the sales process after you have gauged the buyer’s trustworthiness. There’s an exception for information likely to imperil the deal, however. Information about likely problems is better disclosed out front. That way, if the buyer is unwilling to purchase in light of the problem, you haven’t wasted a lot of time, resources, or emotional energy in a deal that can’t go ahead.
To successfully sell your business it is important to identify the difference between public information, confidential information, and trade secrets. It’s important to have an objective third party who can help you determine what should be disclosed and the timing of that disclosure. Trade secrets are often the most valuable intangible asset that you have. True trade secrets set your business apart. As a rule, trade secrets and privileged information are divulged much later in the process.
So, at the beginning of the process when you’re trying to drum up interest in the deal, limit your disclosures to what is either generally known about the company or could easily be found out by any interested party. Leave the trade secrets for the end of the deal.
Negotiating a Letter of Intent
A good Letter of Intent captures the crucial commercial terms and critical assumptions made by the buyer and the seller.
Price and Terms
The price and terms can vary significantly based on the nature of the deal that the buyer and seller contemplate. A comprehensive letter of intent will include:
- Whether the deal is structured as an asset or stock purchase
- How the purchase price is to be paid
- Shares or equity interest
- Financed amount provided by seller.
- Bank financing requirements for the buyer
- Highlights of the critical representations, warranties, and indemnifications to be requested for the seller to make
- Conditions for completing a successful sale
- Successful financing
- Approval of the books and records
- Approval of the operational reviews
- Seller’s maintenance of specific financial or operational guidelines.
The Letter of Intent may include a provision that the buyer must pre-qualify, or has already pre-qualified, for financing.
Timing and Deadlines
The Letter of Intent will normally contain several deadlines that the buyer and seller must meet with respect to the furnishing of due diligence materials, financing qualification, payment, and similar milestones. Failure to meet these deadlines will commonly permit the opposite party to release themselves from the transaction.
The Letter of Intent will commonly contain provisions relating to the training and support a seller will provide over the period of transition when the buyer is taking over the business. The exact nature of the support and the length of time it will be provided will usually be described.
Due diligence involves a comprehensive review of a business by a potential buyer to ensure that they’re getting what they bargained for. As a seller, you’ll need to provide a wide range of documentation to satisfy the buyer that the business performs satisfactorily and has sufficient commercial potential going forward.
In an ideal scenario, due diligence is a cooperative process, with the seller anticipating what the buyer will need to see and proactively compiling and disclosing the information as needed.
What you’ll need to provide
You’ll need to provide documents relating to both the finances and operations of your business.
A sample of financial documents might include:
- Complete business tax returns from the previous three or four years
- Profit and Loss Statements (P&Ls) and balance sheets from the previous three years plus current year as well as the trailing 12 months performance
- Customer Sales reports from the previous three years
- Accounts Receivable and Accounts Payable aging reports from the previous three years
- W2s of owners from the previous three years
Operational disclosures can include:
- Your corporation’s Articles of Incorporation and Bylaw documents
- Building and equipment Lease documents
- Customer, vendor and Employee contracts and agreements
- Corporate organizational chart
- List of employees with salaries or pay rate of each.
Please see this link for a complete list of due diligence documents that are typically requested by a buyer.*note: make this a picture not an excel file You should also note that, depending on your industry, additional documents may be required. In all cases, the purpose of due diligence is to give the buyer a complete picture of the health of the business.
Working with Potential Buyers
Once you’ve entered into a Letter of Intent with an interested buyer, you’ll need to develop the relationship with them in order to iron out the details of the transaction and work toward a successful sale.
A term we’ve taken from the military, we involve our buyers and sellers in “cadence calls,” or conference calls, with buyers, sellers, and any other involved parties (like lenders). Preliminary details are ironed out, questions and concerns are aired, and plans discussed. These calls are held every week. The calls may take only ten minutes, but they are an important way of staying in touch with the buyer.
Site Visits or Offsite Meetings
Depending on the seller’s level of comfort with inviting buyers onto or into their property, the next step is usually to schedule an onsite or offsite in-person meeting between the buyers and sellers. We recommend three face-to-face meetings with the buyer during the due diligence process. This allows for casual conversation that is often the difference between closing the sale and watching the deal die.
As we say in our office, a business conducting due diligence is NOT like wine or cheese. It doesn’t get better with age! Time is of essence and due diligence should take a total of 75 to 90 days. As a business owner, make sure that you have the due diligence list completed ASAP. We have seen deals die while waiting on the business owner to provide documentation.
In addition to the overall timeline it is important for due diligence to be divided into sections with time frames to complete each section. See below (this can be a pic of the list with example dates)
The acquisition process requires the preparation of several documents as the process moves along.
The Letter of Intent defines the intentions of both the buyer and the seller. It includes key assumptions, conditions, terms, and deadlines that the buyer and seller expect to adhere.
It is typically initially prepared by the buyer at which point its terms are negotiated between the buyer and seller until a mutually satisfactory document is achieved. Once agreeable terms are negotiated and the document is signed by both parties, the hard work of detailed due diligence begins. The Letter of Intent is nonbinding and a definitive agreement (purchase agreement) will need to be negotiated and agreed to prior to closing.
Purchase Agreement (Asset sale or Stock sale)
The Purchase Agreement is typically prepared by experienced transaction legal counsel for the buyer after a significant amount of negotiation has taken place, due diligence is mostly complete, and financing has been arranged (banks typically provide a commitment letter that shows they are lined up to finance the deal.)
The details of the Purchase Agreement differ depending on whether assets or shares are being purchased and how the purchase price is being paid (cash, debt, or equity).
The Purchase Agreement is reviewed by the seller’s experienced counsel and its terms negotiated by both parties until a satisfactory document is agreed upon.
Preparing for your Exit
As you near the date of the transition, you’ll need to begin preparing for your eventual exit.
When you tell your employees that a transfer is looming is entirely up to you. Odds are that at least some of your employees may have been involved in the collection of some due diligence information so they may know very early in the process that the business is being sold.
As a general rule, we recommend telling employees later in the process, often on the day of closing with the new buyer. You want to ensure that the deal is going to happen. It is equally important to the buyer that uncertainty not be created for employees. It is very common that a key employee will fear losing their job. This can devalue your business if the key employee finds another job and exits. Whatever the situation, depending on the size of your organization, the nature of your industry, and the number of employees you have, it may be advisable to hold back information about the sale until later.
Your clients and customers will need to be informed about the sale at some point. It is especially important to tell important clients with whom you have personal relationships as much as possible in order to cushion what might be considered, by them, to be bad news. It is also helpful to talk to them as a “hypothetical” situation early in the process, so they do not see that this is an imminent problem.
Transferring Vendor Accounts
Each of your vendor accounts will need to be transferred during the transition. Pay close attention to your payroll accounts, as missed payrolls (this often happens around closing) can have catastrophic impacts on your employees, your business, and even the deal itself.
You’ll need to contact your landlords and learn what documents and information they require about the upcoming sale in order to effect a transfer of the lease agreement to the new business owner. Landlords all have a process for this and it is important to learn what that process is and what information they need. It is not in your interest to guarantee the lease going forward. However, it is common for the landlord to require this so we try to limit the length of the guarantee.
Transferring licenses, permits, etc.
Depending on the industry and area you’re in, you may need permits to operate your business. The buyer will require these same permits and your existing permits will either need to be transferred to the new owner or the new owner will need to apply for new ones.
The buyer will need to remember to apply for the state Sales and Use Tax permit prior to the transfer of the business.
In some company sales it is required to provide working capital as an asset of the business going forward. Working capital is the capital of a business which is used in its day-to-day operations, calculated as the current assets minus the current liabilities. It is becoming more and more common to provide working capital as an asset included in the sale of the business this is due to more and more business buyers realizing that Working Capital is really not profit but rather an asset needing to operate the business day to day.
Work in Progress
The work that the business is doing at the time of closing is called Work-In-Progress (WIP). This is a simple step to take when selling your business. At closing, you will create a list of all work that is incomplete (if it is complete, then it typically belongs to the seller). Then, the work is divided by the percentage that is completed. So, if it is 50% complete, the total amount charged to the customer is divided equally between the buyer and seller. The math is easy once you determine what percentage of the work you have completed. Take that percentage and multiply it by the total amount that is charged to the customer. Both the percentage of the cost and the percentage of profit that is incurred at the time the seller or buyer owns the business is included in this final WIP calculation. There are some exceptions to this rule, but this is the typical method for dealing with WIP.
No matter if the inventory is included in the sale price or added to the sale price it is important to have an accurate inventory count at the time of closing. Often, this is completed the day before or after closing with the buyer and seller with a third party being present to complete it.
A date will need to be identified after which the buyer is responsible for all fees and expenses attributable to the business.
What to Expect
If everything above is done properly, closing is uneventful. Typically, unlike in a real estate transaction, both parties are in the room to sign the needed documents. These documents will change based on your circumstances but will certainly include the binding documents that are needed for the buyer to own the business.
How is Debt Handled?
Debt is a negotiated piece of the purchase price but in most cases the closing attorney or escrow attorney will pay off the debt directly. This is important so the lender and the buyer both are assured that they have the business with no previous debt. It is important to conduct a UCC lien search on your business early in the process of selling your business. If you have been in business for any time at all it is likely that you have some liens that need to be taken care of. This may mean there is an outstanding debt or it may simply mean that the vendor didn’t properly release the lien against the business.
Who Sets Closing?
The lender typically sets closing at the lender’s attorney’s office. Many times, closing isn’t actually set until 24 to 48 hours prior to the actual closing. It is anticipated but, until the lender sets the date, no one can be assured what day it will close. If there is no lender for the acquisition then this is negotiated between the buyer and the seller.
When Does the Buyer Take Over?
The buyer typically takes over on what is called the “effective date”. This is the date when everyone agrees that the business is no longer the seller’s and belongs to the buyer.
What to expect
The time frame of the transition period may be two weeks, two months or two years depending on the business and what is negotiated. Keep in mind that, if there is a training period (often 60 days), it is important that the business owner spends some time prior to closing preparing for this training. The business owner is the trainer (not the buyer’s employee) and the more organized this training is, the easier it will be to make the transition quickly and smoothly.
As part of the transition it is advisable to start with introducing the buyer to your customers and vendors as well as introducing the buyer to your employees.
It is impossible to divide all expenses prior to or at closing. From the electric bill to payroll there are items that the seller will pay that are really the buyer’s expense. The reverse is also true.
While we are not truly able to cover every aspect of selling a business we do hope that this guide gives you more detailed information that will help you in the process of selling your business. From deciding whether or not to sell your business all the way to the closing day, selling your business involves complicated relationships, agreements, disclosures, and processes. Let us know if we can help you in this process. We have a proven process and track record that you can be assured will enable you to be successful when selling your business! Let’s get started!
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