So You Want To Sell a Business
The first step, if you have decided to sell your business or if you are only thinking of selling you’re business is the same. That is, to do some research to see if selling the business is feasible. This means getting a business valuation, verifying that there is a market for your unique business, finding out what the taxes will be and therefore what the net proceeds will be for a sale. The business valuation should reveal operational deficiencies that may reduce the value of the business or make the business difficult to attract offers. But assuming that these issues do not exist, a typical business sale proceeds as follows:
- Business Owner Retains Business Broker. Usually this is after the owner has interviewed a few, and considered the broker’s proposal and terms.
- Business valuation & Assessment. Be ready to provide the valuator with information.
- Three to five years of accrual-based financial statements and/or tax returns.
- Facility Lease Terms
- Equipment Lists
- List of Intellectual Property
- Descriptions of Real Property
- Broker creates Selling documentation.
- Blind Profile- brief description of the business that does not identify the business.
- NDA (Non Disclosure Agreement) that prospective buyers are required to sign before the identity of the business is revealed.
- CBR (Confidential Business Review) is a document that contains a written description of the business and a recent financial history. A well-written CBR contains sufficient information for a prospective buyer to make an offer.
- If the Owner is satisfied so far, the broker is given the go-ahead to begin marketing the company. The broker will make send the 'blind profile' to potential buyers, and depending on the type and size of business, private investment groups who are active investors in that type of business. The owner may have a list of people or companies that should be considered as possible buyers. (There also may be list of those that the owner would decline to sell to). The broker may put the blind profile on internet sites that specialize in private businesses for sale.
- Prospective buyers contact the broker in response to the information contained in the blind profile.
- The broker will ask for verification that the buyer has sufficient cash and credit to buy the business.
- The broker will require that the buyer sign the NDA upon receipt of which the broker will send the CBR.
- The broker will follow up with prospects that have received the CBR.
- Prospect may pass.
- Prospect may have questions. Based on questions received at this point we often revise the CBR.
- Prospect wants to proceed, and so will discuss executing a LOI (Letter of Intent)
- Broker receives an LOI. The Letter of Intent is similar to an offer (although depending on the language may not be legally the same as an offer) and contains the price and terms, a proposed time schedule to perform due diligence, specifies the amount of working capital to be left in the business at closing, a proposed closing date, and other terms unique to the business.
- Broker and owner reviews the LOI. There may be several competing LOI from competing buyers at this point.
- This is a good time for the owner to have his accountant read the LOI terms and make an estimate of the taxes that will be due if the terms of the LOI are concluded.
- After negotiating, the owner accepts and signs a revised LOI. The LOI is based on the information in the CBR, so it is important that the CBR contains information that is accurate and will be supported by what the prospective buyer finds during due diligence.
- The buyer conducts due diligence. The seller provides access to the company’s records, and arranges for the buyer to inspect the company’s operations. A buyer is still bound by the NDA, and whether a buyer is given permission to communicate with employees, customers, and suppliers is a matter of negotiation. After all other contingencies have been waived may be a good time for the buyer to be introduced to a few key employees who themselves con be relied upon to be discrete.
- The buyer is satisfied with due diligence, and waives contingencies. The buyer’s financing is approved by his bank, and the LOI is sent to a closing agent for drafting a definitive PSA (Purchase and Sale Agreement). The buyer or seller may ask their own attorney to review the PSA prior to closing.
- Buyers and sellers have both verbally approved the PSA, and a Closing date is set. Depending on how complicated the closing is the buyer and seller may sign independently, or a meeting with buyers and sellers may be required. If the sale is a sale of corporate stock, and there is a single buyer and a single seller, then a closing can be quick. But is there are multiple shareholders, and the sale is structured as an asset sale, then a meeting may be required so that all parties are present as multiple documents receive multiple signatures. The buyer has made arrangements to wire the money to the closing agents escrow, or brings a certified check to the closing.
There can always be additional issues or considerations to be taken into account during this process. We recommend you read our blog post on potential issues to learn more.