Selling your Business

Ultimately, this is what every business owner strives for, unless the idea was to start a business that would become a family business, and continue from generation to generation, and in some cases unforeseen or tragic acts force you into selling your business, which is of course deeply regrettable.

So, unless it was your goal to keep it in the family or you have to out of necessity, congratulations, you have reached the end of this chapter in your life or career, and now is hopefully the time to reap the rewards for the years of blood, sweat and tears you have poured into your business.

Of course there are many aspects of selling a business that need to be taken into consideration, but above all you need to be able to keep your emotions out of it.  You need to remember that you certainly attach far more value to your company than the potential buyer will, and you might feel offended when the buyer asks for certain items, documents or proof.  You do have an emotional attachment to your business; it has consumed so much of your life and taken all your spare time as well.  Remember, the buyer will question almost everything you tell him, not because he thinks you are a liar, but because he or she wants to be sure of what they are buying.

Business Broker

You could consider making use of a business broker, but remember in smaller businesses it is more often not a viable option as the fees are high, at least 10% to 15 of the sale price.  Of course, a business broker will be able to take a huge burden off your back, and may well be able to show a better proposition in the sale of your business thus allowing you to demand a higher price.  Weigh this up carefully, very often 10% of the sale price will be worth it considering what they broker may be able to achieve for you.

Legal Help

Also, as with buying a business, you are not a lawyer.  Despite the fact that most will describe lawyers as “deal killers”, and in many if not most cases this is true, do not try do the contract work yourself.  If you need to save money in that department, get some “fill in the blanks” agreements, makes the changes required, and just have an attorney or lawyer go over it.  You could very easily through your own ignorance create loop holes in the contract that could adversely affect you.  And if at any stage the contact can be proven to be unfair to any party, the contract may be set aside, and both parties will need to be restored to the same state they were in before they entered into the agreement, and this could be very painful and costly.

One very important aspect of selling your business is that you need to have, and enforce one clause very strictly.  You need to include a clause that states that if the buyer has not paid within 5 or 10 at most working days, you have the right to step back in and reclaim your business and the buyer has to settle your damages.  After selling your business, a reckless buyer can cause vast and irreparable damage to your business in a very short space of time.  If the buyer offers excuses which you may believe, then still step in and be at the business every day until the buyer comes good on his payment so you can watch every move and be sure the business is not ripped to shreds if you do need to take it back.  Take no prisoners in this regard!

So, let’s continue…

The main goal of selling your business is for you to get as much money as quick as possible for your business.  Unfortunately few buyers will give you the whole asking price at once, some may give you a 40% or higher down-payment, and pay the rest off over x amount of months, or provide a larger down-payment.  Of course you will strive to get it all at once, but sometimes you may need to sacrifice on the asking price to get a lump sum.

Selling your business should not be an overnight decision unless you cannot help it.  If you could set selling your business as a goal in 6 months at least or possibly even 12 months, you will certainly be able to get the best price for your business as you will be able to get your internal processes documented, get rid of dead wood that no one else besides you benefits from, you will be able to get all your accounting right and up to date, gather bad debt and do a drive on sales.  Not that these are not tasks and functions you have not been doing all along, but there is certainly a difference in the way you will handle this when getting your company ready for sale.  For example, there are many tasks in your business that you do in a specific way, and that are not documented, but when someone wants to buy your business they might see this as being done very “hap hazard” which will reduce the perceived value of your business.

Basically what you are trying to do is show as high a profit margin as possible, so you will try to avoid new equipment purchases and maintenance.  Again, there is something to be said for honesty here, as with buying a business, when selling your business ask yourself “What will people say about me for doing this transaction after I am dead?”  Do you think you are being fair?  You cannot base your happiness of someone else’s unhappiness!

To tell, or not to tell

You will need to decide whether you wish to sell your business quietly, or whether you would want to inform your staff.  In most cases doing it quietly is better, as some staff may not want to continue to work for someone else, and also some clients may not want to continue doing business with your company if you are no longer there.  You need to decide on this, as you are the only one that knows and understands the dynamics of your staff and clients.

Before allowing any prospective buyer access to  your accounts, financials, customer lists, staff or anything else for that matter, have the buyer sign an NDA (Non Disclosure Agreement), and make sure it is water tight, and witnessed by at least 2 people, one from your side, and one from the buyers side.

Determining Price

There are various formulas to get to your final selling price, but essentially it is based on either your revenue multiplies by a factor, or the profit multiplied by a larger factor plus fair market price on the assets.  Normally 5 times (for 5 years) the annual free cash (or profit) plus fair market value for assets is used, and of course projected growth, or projected negative growth could come into effect.  There certainly are more formulas, and different formulas for different types of businesses, however, this may not mean much especially when the economy in general, or the market in your specific sector cannot sustain it, in these cases you may receive an offer based on what buyers are prepared to pay, which you need to consider and decide on whether it is good enough.  Also don’t forget to attach a fair value on you no longer needing to carry the stress of running your business and just enjoy the money.

The various formulas that are used could be simple, or far more complex, and to keep up with them all may be difficult, especially again as the economy changes, so rounding your accountant up for assistance and guidance certainly is a good plan, listen to his or her advice, but also use your own head to a degree, do not take everything your accountant says as gospel.

When putting your numbers together to establish a purchase price, it is best to discuss it with your accountant, he understands your business, and also understands what you are trying to achieve.  Your accountant will also have a good understanding of the different formulas that can be used to determine the price for your business, but at the end of the day, honesty should prevail, and you should not be trying to cook the system or the books to make your business look more profitable than it is.  There are steps that can be taken to track back in a transaction if it is shown that there has been misinterpretation, and not only you, but your accountant can also get into trouble.

One tactic that does exist, and is legal, is to show as much of the purchase value in non-tangible assets such as customer revenue, rather than value in assets.  Your accountant will know what to do in this regard, and how to achieve it.  But remember the seller will try doing the opposite for his obvious reasons.

Getting Ready

There are numerous items you will need to have ready for your prospective buyer and you accountant should be able to assist you with these, and possible even expand on this list – but this is should be the bulk of it:

• Your NDA.
• Ask the prospective buyer whether he or she has any problems with you doing a background check on them.  Of course, if the buyer is going to pay you outright, and you have no real need to stick around, this does not matter, but if they purchaser is planning to pay you over a period of time, why should you treat him or her any differently to someone wanting to buy a living room suite or a vehicle?
• Your full company financials for 3 years
• All your tax returns for 3 years
• Clearance certificates that you have paid all your taxes and dues such us unemployment, etc
• Many buyers will request 3 years bank statements to compare income statements and tax returns – the buyer will know that your tax return is to show as little profit as possible, and your income statement will try show as much profit as possible – but the back statement showing all income and all expenses should show a very good median.
• An asset register, with makes, models, purchase value and current fair market price
• Stock or inventory register with current purchase value – a buyer is not going to pay you more for inventory than what it can be purchased for at that time.
• List of customers (excluding names and contact details).  Only show customer type and what they pay – once you have gone further down this road you can offer more information in this regard.
• Be prepared to answer questions on whether there are any skeletons in the closet, if there are, you do have a duty to declare them, or make sure they are removed.
• Have your draft sales agreement ready, some buyers will request this right up front before they spend any time on any investigations.

·         Sales agreement Checklist

·         This is a list of items you should have on the agreement:

·         Names of Seller, Buyer, and Business

·         Background information

·         Assets being sold

·         Purchase price and Allocation of Assets

·         Covenant Not to Compete

·         Any adjustments to be made

·         The Terms of the Agreement and payment terms

·         List of inventory included in the sale

·         Compliance with the Bulk Sales laws of the state

·         Any representation and warranties of the seller

·         Any representation and warranties of the buyer

·         Determination as to the access to any business information

·         Determination as to the running of the business prior to closing

·         Contingencies

·         Possibilities of having the seller continue as a consultant

·         Fees, including brokers fees

·         Date of closing

From the SBA website (U.S. Small Business Administration)

Closing Checklist

Finally it will come to closing on the transaction, and there is a checklist.  This checklist should be the same for the buyer and the seller:

It is important during the closing to make sure that you have legal counsel available to review all documentation necessary for the transfer of the business.

The following items should be addressed in a closing:

• Adjust Purchase Price — this would take care of prorated items such as rent, utilities, and inventory up to the time of closing.
• Review Documents Required to be Provided by the Seller — These would be a corporate resolution approving the sale, evidence that a corporation is in good standing, or any tax releases that may be been promised by the seller. Check with your local department of corporations or secretary of state.
• Signing Promissory Note — in some cases, the seller will carry back financing, so have an attorney review any Note documentation.
• Security Agreements — these documents may be necessary if you are going to finance your purchase. A Security Agreement lists the assets that will be used for security as a promise for payment of the loan.
• UCC Financing Statements — these documents are recorded with the Secretary of State in the state you have purchased your business. Again, these documents are necessary if you are going to finance your business.
• Lease — if you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlord's concurrence to assumption of the lease. You may have negotiated a new lease with the landlord instead of assuming the existing lease.
• Vehicles — if the purchase includes vehicles, you may have to execute the transfer documents for the vehicles. You can check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
• Bill of Sale — the bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own.
• Patents, Trademarks, and Copyrights — May need to execute the necessary forms if part of the transaction.
• Franchise — May have to execute franchise documents if the purchase of the business was a franchise.
• Closing or Settlement Sheet — the closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing, so there should be no surprises.
• Covenant Not to Compete — it is a good idea to have the seller execute this agreement. This will help add to the success of your operation of the business without any interference from the previous owner.
• Consultation/Employment Agreement — if the seller has agreed to remain on for an amount of time, this documentation would be necessary.
• Complete IRS Form 8594 (PDF file), Asset Acquisition Statement — this document will indicate how the purchase was allocated amount the various assets. Important for your tax return.
• Bulk Sale Laws — Make sure that all bulk sale laws have been complied with in the transfer of the business assets.

From the SBA website (U.S. Small Business Administration)