Preparing Your Business For Sale (Part Two)
This is the second part of the Preparing Your Business for Sale checklist. Please be sure to check out part one first.
Real Estate
Most businesses need a place to operate from. Provide a narrative of the real estate necessary to operate your business, why it's suitable, needed upgrades, and other important considerations. Real estate is not generally considered an asset of the business, though real estate leases are. Real estate often transfers to the buyer in a separate transaction via purchase or lease.
- Address of each location
- Size of current space
- Unused portion of space that can be used for growth
- Copy of the lease(s), summary of the rent and terms
- If the real estate is available for continued occupation
- If the real estate is available for purchase separately and the price and terms
- If the real estate is available for long term lease, the amount and terms
Legal Matters
It is vital to disclose all current, former, and pending lawsuits or other legal actions that the business has been, or might be involved in. Don't hide any skeletons in the closet. Past litigation is discoverable during due diligence and undisclosed pending litigation will inevitably lead to problems down the road.
- List of any and all legal actions, past, present, and future
- Account for any past, present, and future worker's comp claims, tax liens, etc.
- List of all potential legal claims that you should reasonably know about
- Describe the outcome of all settled actions and the status of all present actions
Taxes and Jurisdictions
Businesses are subject to a myriad of taxes, license fees, and other government collections. Provide an accounting of all of these to the buyer. You will need to provide proof at closing that all taxes have been accounted for and paid.
- List of all taxes and other fees owed (sales, payroll, property, etc.)
- List of the associated jurisdictions (federal, state, county, city, special districts, etc.)
- Provide proof that these have been paid
Licenses, Permits, and Regulatory Requirements
Many businesses require special licenses and permits to operate or operate under specific regulatory regimes. Provide a list of all of these, associated fees, and the current status of each.
Environmental Issues
In many business transactions, there is the risk of exposure to environmental liability. If you know that you have this type of exposure, it's best to prepare for an environmental audit ahead of time as you can expect the buyer and/or the bank will order one. Be sure to disclose any known or suspected environmental problems to the buyer. Being up front here will keep the due diligence process moving and get the deal closed faster.
Insurance Requirements and Policies
Typically the buyer will obtain new insurance policies unless the business is being transferred in a stock sale. Regardless, the buyer will need to know the details of the policies that must be maintained for the operation of the business. Provide copies of all of your insurance policies to the buyer. You will also have to prove that you have maintained these policies up through closing.
Post-Sale Training and Consulting
Before offering your business for sale, consider how much training you will need to offer to the new buyer to make sure the business continues to prosper. Since there will be a seller carry note, and possibly an earnout involved, this will also insure that the business continues to succeed and you will get paid.
A typical training clause will provide for 6 months of uncompensated full-time training with an additional optional consulting period. The details are negotiable and depend on what you think is required to successfully train the new owner and how much the new owner feels they need.
Stakeholders and Your Rationale for Selling
The buyer will want to know who every stakeholder in your business is, both voting and non-voting, as well as any influencers, such as the company accountant, attorney, management team, spouse, or children.
Being able to clearly articulate your reason for selling your business is very important. Buyers are very wary of sellers that can't explain their decision to sell. Why don't your children want to continue the business? Why doesn't a key employee want to buy it? What is your spouse's opinion? Your accountant? Are you retiring? Health issues?
Deals can fall apart at the last minute if all of the stakeholders aren't on board. Buyers are acutely aware of this and will ask about this early on in the process. Take the time to work all of this out ahead of time.
Non-Compete and Non-Solicitation Agreement
Expect to be asked to sign non-compete and non-solicitation agreements by the buyer. They want to know you aren't going to set-up shop across the street! These agreements are normal and are usually geographically and time limited in some way.
Company Advantage
What advantage do you have over your competitors that allows you to maintain and increase your market share? Is it an exclusive licensing deal? Is it a long term relationship with a client or clients? Is their a high barrier of entry into your business? Do you have key intellectual property rights?
Think carefully about why your business is successful and what is keeping a competitor from luring away your customers or someone starting their own business from scratch and competing with you. The buyer wants to buy your business because it's already operating successfully, but it's a question they consider because once they own your business, they want to know what's to stop others from taking business away from them.
Valuation and Asking Price
Before you sell your business, you'll need to understand what your business is worth and come up with an asking price which can be a fixed number, a multiple of your earnings, or some other way of determining how much you will sell your business for. This is a complicated subject, and is outside the scope here. We have a separate white paper that discusses how to value your business.
Asset or Stock Sale
Business purchases are generally one of two types: a stock sale or an asset sale, with the asset sale being the much more common method.
A stock sale involves the sale of the stock of the company and is the simplest method. Despite this, it's rarely used at the lower mid-market level because in a stock sale, the buyer is assuming all the liabilities of the company, including hidden liabilities. This requires a much higher standard of due diligence and is very expensive. It's still sometimes used in some specialized circumstances, for example if key vendor or customer contracts can't be transferred to the new owner.
An asset sale involves the sale of all of the assets of the business to the new owner who forms a new company to buy them. Assets include the physical assets of the business but also things like the business name, logos, customers, working capital accounts, etc. The amount that the buyer pays the seller over the fair market value of these assets is referred to as "goodwill" and becomes an asset for the new owner. Asset sales avoid most of the liability issues that come with a stock sale and are by far the most common way to transfer a small business. To the outside world it appears that nothing has changed.
There are many implications of both types of sale, including tax implications, and you will need to consult with your advisors about the advantages and disadvantages of each.
Conclusion
Taking the time to compile this information ahead of the sale will make the process much easier and less frustrating for both you and the buyer. It will make all parties, including debt and equity sources, feel confident with the transaction. Best of all, it will save time and get the deal to closing much faster. Remember: time (and too many lawyers) kill deals!