Selling your business is similar to selling your house. It involves a buyer, seller, broker, and underwriter. There are many benefits to retaining a lawyer when selling your business. They can help vet potential buyers, manage negotiations and draft purchase agreements. They deal with all of the important details, so you can retire with peace of mind or focus on your next adventure.
Selling your business requires careful planning. It is important for you to identify your reasons for selling and the best time to sell. These decisions will impact the profitability of the sale. As a business law professional, I encourage business owners to give themselves at least a year (or more) to plan for the sale. Here are some things business owners should consider before, during, and after the business sale.
Your business’ governing document, such as the operating agreement, bylaws, or shareholder agreement will help you determine how to sell your business. Assets should be distributed according to the business’s governing documents. Please note, if there are multiple owners of the company, all should be involved in the approval process and sale of the business. If there‘s nothing in the documents, the business should follow the state law.
Determine Your Business’ Value
Before you sell your business, you must get the business finances in order. This means bookkeeping updates and preparing financial statements and other reports that have key metrics for your industry. Work with a team of trusted advisors such as an attorney and CPA to review assets and discuss a plan for any debts / liabilities that could impact the sale. Taking this step will assist in understanding the true value of your business and how to structure the deal.
Structuring the Sale
As you’re determining the value of the business, you’ll need to develop a list of assets that will be sold with the business. If you’re selling your business to a another company, the sale might include company stock, equipment, trademarks, and more. The buyer may want to ensure key employees will stay on board after the sale. Liabilities must be accounted for too.
Also, it is important to clarify if this is a whole business sale or assets sale because the accounting and reporting are different. A whole business sale can be easier than an asset-only sale. In the sale of an entire business, the seller transfers ownership of its business entity to the buyer. The buyer steps into the shoes of the seller as owner of the business and can act on behalf of the business. The new owner controls any assets owned by the business without the need to transfer assets individually.
If the business has valuable customer contracts, for example, the new owner can seamlessly take these over.
That is not the case in an asset-only sale. Asset only sales present a certain level of risk. Since they buyer is not taking ownership of the seller’s business entity, assets must be transferred individually. The buyer and seller must be clear about which assets are included with the sale. Many template contracts for the sale of business assets say that the purchaser is buying “all of the business assets” without identifying any specific assets to be transferred. Especially in cases of closely held companies, this broad language leaves room for disagreement between the buyer and the seller about which assets are business assets included with the sale and which assets are excluded personal assets.
For example, small business owners often purchase vehicles using business funds and title them in the name of the business, even if the business owner also uses the vehicles for personal purposes. I have seen sellers refuse to transfer title to such vehicles at closing, claiming that they are personal vehicles that the seller did not intend to include in the sale of “all business assets.” The buyer then has to decide whether it is worth pursuing legal action (at the buyer’s expense) to force a transfer of ownership.
Having an attorney on your team can help avoid these disputes.
A trademark is a great investment. It shows that your brand is established and well known, and that the business brand is protected. A trademark is an appreciative asset which means it increases in value as your business grows. It also makes potential buyers more confident in their purchase.
Keep Calm and Trust Your Attorney (and Advisory Team)
Selling a business takes time. Much like closing on a house, closing on a business can take several
months. According to SCORE, a nonprofit association for entrepreneurs and partners of the U.S. Small Business Administration, a business sale can take up to two years. During that time, remain focused on running your business and following the plan that your attorney and advisory team outlined. You hired them to be the experts, so let them handle any issues that arise before, during, and after you sell your business. Your team will be a great resource in determining smart ways to handle the profit from your recent business sale.
Making any changes to your business can be a daunting task. While selling the business yourself might save some money, it will not save you time that could be spent enhancing the business for sale. Having a good business lawyer on your team can help you stay on track, protect your personal assets, and offer peace of mind before, during and after the sales process.
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