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Selling Your Business – A Basic Guide

On Behalf of | May 16, 2023 | Business Law

Man looking into a maze

Selling the business you spent the better part of your adult life creating is a very stressful on many different levels.  Clients often underestimate the time needed to sell their business and completely overlook the emotional aspect.  For many clients, the business plays a major role in how they see themselves and the identity they forged over many years.  Negotiating with a third party over the value of your life’s work is emotional and the subsequent relinquishment of control is difficult.  At Anderson Leavitt, we understand the interplay of both business and personal emotions and believe preparation is key to navigate both successfully.

I.    Asset versus Stock Business Sale

While there are many considerations that go into deciding to structure a deal as either an asset or stock sale, the principle difference between the two is:

A.    The Asset Sale.  In this deal structure, the buyer and seller have agreed upon what assets the seller is selling to the buyer and specifically what assets and liabilities will be excluded from the transaction.  Past liabilities of the seller are not transferred to the buyer.  Care needs to be given to third party contracts (think lease and key vendor contracts, licenses and permits) and what impact, if any, the asset sale will have on them.

B.    The Stock Sale.  In this deal structure, the seller is selling stock in the business to the buyer.  The entity it self continues and the ownership change occurs at the shareholder level.  While at first glance this may seem like an easier path forward; this deal structure substantially increases exposure to the buyer.  All labilities of the seller that existed on the closing date still exist.  The buyer in these transactions has to conduct its due diligence very thoroughly and make sure its indemnification rights against the seller and/or seller’s shareholder’s have real teeth behind it.

II.    Prepare to Sell your Business

How you present the business is critical to obtaining the best price.  A well run business with accurate records will provide a prospective buyer with more comfort when considering an offer and that yields a higher price.  As a buyer care and attention needs to be given to:

A.    Financial Books and Records.  Prospective buyers will want to review at least three years of financials before making an offer.  Knowing this, it makes sense to have your books and records in order and readily available to share, assuming of course, that a suitable nondisclosure agreement has been signed. While in some cases this may mean three years of filed tax returns, the more typical scenario is access to financial statements including, the balance sheet, income statement and cash flow statement.  Be prepared to discuss profitability and what if any other expenses may have been run through the business.  Think cell phone, or car lease here.  Preparing for the sale of your business may include stopping such payments well in advance to boost profitability.

B.    Third Party Liens.  Do you own the assets you are trying to sell free and clear of all liens, claims and encumbrances?  Simply stated, does a bank, for example, have a security interest in the assets being sold.  Is there a mortgage against any real estate?  Tax liens?  All of this will be brought to light in due diligence so it is best to disclose this up front.  By taking this approach, you are providing the purchaser with knowledge and comfort which will enable the purchaser to feel more comfortable and make a better offer.

C.    Commercial Leases and Key Vendor Contracts.  Location matters.  Will the buyer be able your run its business at the same location?  Will a key vendor agree to work with a new buyer?  Do these types of agreements transfer?  The answer to these questions will have a huge impact on the price a potential buyer will offer.  Therefore, its a good practice to know what your lease and other key agreements provide regarding assignability.  For more information on assignment clauses and their importance please click here.

D.    Noncompete Issues and Employees.  When most buyers purchase a business, they want to make sure that the seller does not open another business across the street.  Therefore, when selling a business, we advise our clients to think about whether or not they see themselves working in the same line of business or geographic area.  This will certainly be raised by a sophisticated buyer and you will be better prepared to rationally discuss this with the buyer if you have given thought to this beforehand.  Interestingly, the law is changing state by state against the use of noncompete agreements generally, most states still have exceptions when it comes to business sales.  For more information on the current state of noncompete clauses please click here.  Thought also needs to be given to when you tell your employees about the proposed sale. Tell them too soon and perhaps they leave.  What if the sale doesn’t go through?  If you have owned the business for a long time, employees become like a second family so it is not unusual to be concerned regarding how the buyer will treat your employees going forward.  All of these emotions and issues are normal and to recognize this up front will help you navigate the process.

E.   Existing Disputes.  Prospective buyers don’t like uncertainty.  If you have a dispute with a third party, settle it.  You may have to pay more than you would like but nothing chills negotiations when a buyer learns that the seller has problems with its landlord or supplier.  You are going to have to disclose this anyway in due diligence so its best to be proactive and resolve it.

F.    Business Licenses.  Similar to the commercial lease and key vendor contracts, does your intellectual property and business licenses transfer easily?  In certain industries like bars and gun stores, the license itself is in the name of an individual who can pass a thorough background check notwithstanding the business operates as a separate business entity.

Business Issues Drive our Legal Advice

Obviously there are many other considerations that need to be considered when you position your business for sale to a third party.  At Anderson Leavitt, we help you consider issues from a buyer’s perspective to address potential concerns before they are even raised.  Not only will this help maximize your offer but by being aware of potential buyer concerns and having a handle on them before they are even asked, this will help you navigate the often overlooked emotional component of the sale process as well.

If you have any questions concerning how to sell your business and the role the attorneys at Anderson Leavitt can help, or have any questions any other aspect of your business, please feel free to contact any of our business attorneys.

This entry is presented for informational purposes only and is not intended to constitute legal advice.