Once you’ve agreed in principle with a potential buyer, you must begin the process of closing the sale of your business. At this point, you’ve settled upon a price and the major terms of the purchase agreement, but there are still several hurdles to clear before you can reach a successful closing. This means there are also several points at which a deal can still fail, if you’re not careful. Understanding the steps to finalizing a deal can help you prevent mistakes and complete your business sale successfully.
Letter of Intent
The first step is to have the buyer sign a letter of intent. This summarizes the agreed upon purchase price and the basic terms of the agreement. Although it is a non-binding agreement, the letter of intent is meant to protect both the buyer and the seller. It protects the buyer by requiring that the seller does not advertise their business for sale while they pursue further negotiations. It also protects the seller by confirming that the buyer is serious about their intentions to purchase the business. The buyer will be required to pay a deposit as well, which will further prevent buyers who aren’t serious from moving forward.
A prospective buyer should have signed a Non-Disclosure Agreement before this point to protect the confidentiality of the business. If they have not, a confidentiality agreement should accompany the letter of intent, before revealing detailed sensitive information about the business. Once the letter is signed, the buyer can take it to their lender if they need to obtain financing, or show it to their attorney, accountant or business broker for advisement of the terms of the purchase agreement.
Buyer Due Diligence
Due Diligence is the stage at which the buyer works to obtain information about all aspects of the seller’s business, in order to make an informed decision. The terms of due diligence should be mapped out in the Letter of Intent, but the buyer will essentially want to see any important documents relative to your business. This is where it becomes important to have your bookkeeping in good order. Poor bookkeeping can make a good business look bad, so keeping up with this regularly is critical. Buyers will want to see financial statements, profit & loss statements, customer lists, equipment or building leases and contracts, just to name a few.
While due diligence is in the buyer’s best interest, it also protects the seller. If the buyer tries to sue you after purchasing the business because they say you made false claims about it, the due diligence clause will protect you in court. However, even with this protection, it’s a good idea to make sure everything in the business is disclosed and you do not try to hide anything. Making sure the company is running optimally and setting up the future owner for success is the best way to avoid a lawsuit down the road.
Purchase Agreement
Once the first two steps are complete, assuming the buyer is still interesting in purchasing your business, it will be time to draft a purchase agreement. This is a binding agreement that will require that the buyer buys your business for the price and terms specified. For this reason, the buyer’s attorney will customarily create the initial draft. Your business broker and attorney should draft the sections that protect your interests, and the parts of the deal that are most important to you. To protect yourself even further, do not put any guarantee clauses in the contract. This could open you up to lawsuits well after the business has sold.
The purchase agreement may also include provisions asking you to resolve certain issues or defects that the buyer found during their due diligence. It could also include indemnity provisions, where you promise that you will reimburse the buyer for certain expenses if they occur in the future. This can be a highly debated section of the purchase agreement. If you do allow for any indemnity provisions, make sure there is an expiration date and a dollar limit on them. When both parties have agreed to the terms, they will sign it and include a date when the final ownership transfer of the business will take place.
Buyer Financing and Payment Terms
You may be lucky enough to find a cash buyer for your business, in which case the transaction will be fairly smooth. Most of the time the buyer will be financing the deal. They may even ask for seller financing. In this case the buyer would make monthly payments to you, while they own and operate the business. As you could probably guess, seller financing should be avoided, unless you are desperate to sell the business and are having trouble finding a qualified buyer. Otherwise you run the risk of the buyer defaulting on payments, and having to pursue a legal battle to reclaim the business.
Adhere to State Laws
Each state will have different requirements for both buyers and sellers in any business transaction. Some states require that the seller notify all creditors of a pending sale at least 10 days before the closing date if they are selling the bulk of their materials, supplies, merchandise, or other inventory. Failure to do this may result in a lien on the business and allow the creditors to repossess these items from the new owner. The purpose of this restriction is to allow your creditors to collect anything owed to them before you move on from the business, since they originally extended credit to you, and not the buyer. If the buyer ended up getting equipment or inventory repossessed after the sale, they could pursue legal action against you. The buyer will also want to search public records for any liens on the real estate or other assets of your business.
If you are selling a public company, state regulations may require that the Board of Directors or shareholders vote to approve the sale of the business. This is usually required for an asset sale, but not a stock sale. In many states, the minority shareholders also have rights. This includes the right to an independent appraisal of the business. They can then cash out their shares based on the appraised value of the business.
Strict attention must also be paid to tax laws. In some states, you must provide the buyer with a tax certificate, proving that you do not currently owe any sales or employment taxes. If you do, it will have to be settled before your closing date, or it will be withheld from your sales proceeds to cover the bill. Make sure you also take into consideration taxes from the sale or transfer of the business. Plan ahead for these items to eliminate surprises as you approach closing day.
The last step in finalizing the business sale is to close the deal and transfer ownership to the buyer. If you got past all of the other steps, this should just be a formality. If the process of seeing a business sale through to its conclusion looks complicated to you, don’t feel bad, because it is. An enormous amount of detail is required to put together and complete a successful transaction without making costly errors, which is why many business owners hire a business broker to help prepare their business for sale, and see them through the process.
Brokers can help you to effectively negotiate the price and terms of your business transaction, and guide you through the whole process, while you continue to attend to and run your business. If you would like more information about how to sell a business you own in Southwest Florida, contact CIBB. Based in Fort Myers, we are a business brokerage that handles transactions of all sizes and can help you negotiate the best terms and highest profit from your business sale.