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The 4-step process to selling your business

What to know about this important process

Doug Griess //December 6, 2021//

The 4-step process to selling your business

What to know about this important process

Doug Griess //December 6, 2021//

If you’ve decided it’s time to sell your business, it’s imperative that you take your time and do things right.

Skipping steps in the process or hurrying over paperwork assuming that everything will be fine could land you in legal hot water and owe you money.

Here are the four steps in the process of selling your business that you should follow for a successful transaction so that you can avoid the most common mistakes and disputes.  

Have Your Business Professionally Valued 

You want to get a fair market price for your business. You or the buyer may think you know its value, but frequently, both the buyer and the seller are a long way off.

Hiring a local business appraiser to perform a valuation of your business is essential to ensuring you are getting paid what it’s worth.

The appraiser’s job is to conduct a thorough investigation of the business’s financial assets and debts and draft a report detailing its value. This objective appraisal can help you and the buyer get on the same page about a fair price.  

It’s essential to take this step at the beginning of the process so that the parties know the baseline value of your business from the start. It also gives you time to fix any areas of concern identified by the appraiser, such as broken equipment. 

Sign a Letter of Intent 

A Letter of Intent (LOI) explains that you intend to sell your business and that the buyer intends to purchase it from you. It summarizes the terms that you and the buyer agree on before the parties spend real money and time on third party advisors, due diligence, digging into the details, and negotiating the final deal terms and agreement.

An LOI isn’t a binding contract; however, it both establishes each party’s seriousness concerning the transaction and makes sure the parties are actually on the same page about the outline of the deal. 

The LOI doesn’t guarantee a sale, but it is a significant step forward. Your LOI must be transparent and include any significant necessary terms.

Ensuring this will help focus both parties’, limit surprises and disputes that will derail the deal, and keep the parties accountable through the process, all from the beginning of the transaction. 

Enlisting the help of a seasoned business attorney can make the LOI clearer to each party. 

Focus on Due Diligence 

Next, you will be asked to, and may need to, share financial, operational, and every other kind document with the prospective buyer to prove that the business is not only in in good financial standing, but is everything it is represented to be, according to the buyer’s own independent analysis. 

In addition to interviews and tours of facilities, you will need to collect and provide many documents such as tax returns, bank statements, registrations, manuals, customer files, Operating Agreements or Bylaws, licensing and zoning information, and agreements with other parties such as vendors or employees. This complex process can sometimes take months. 

Negotiate a Purchase Agreement  

The purchase agreement should then be discussed and negotiated. This agreement is a formal legal contract that spells out the terms of the transaction. 

The agreement is the final, comprehensive, detailed form of the LOI, and even more than the LOI, the purchase agreement must be clear, explicit, and define critical terms. 

The buyer and seller can sign this agreement at closing or weeks in advance with multiple contingencies or conditions that must be done before the closing takes place.

Once the closing is complete, where the buyer transfers payment and the seller gives possession of the ownership interests or business assets, the business officially belongs to the new owner. 

Avoiding Frequent Transactional Disputes 

Unfortunately, when selling a business, some sellers encounter transactional disputes. Although this part is not an official step in the process, it’s something that sellers and buyers should be considering throughout the entire process. 

Examples of common transactional disputes when selling or buying a business are: 

  • Working capital disputes: Typically, sellers keep all cash on hand for the business’s working capital needs making it necessary to establish the target amount of money between the buyer and seller.  Practically every private company transaction should involve a specific method to develop a working capital requirement. This isn’t something that should kill a deal. Both parties should be able to reach a reasonable agreement considering all the various factors. 
  • Conflicts over earnout calculations: Earnout mechanisms are essentially agreements that are completed after closing to keep sellers engaged or to shift the risk of post-closing risks. They are often complex and can create additional disputes between business buyers and sellers. There may be conflicts over the earnout period, the control of the business post-acquisition, or how the calculations should be done.
  • Missing or vague language in purchase-and-sale agreements: As previously stated, ensuring clear language and even defining essential terms with the LOI and purchase agreement is imperative to a smooth transaction. When terms or definitions are ambiguous or missing, problems are more likely to arise.
  • The valuations of COVID-19 affected companies: These valuations can cause inherent disputes in a post-COVID-19 world. The professional business valuation should include the impacts that the pandemic has had or could have on the business, both positive and negative.  

All business sellers and buyers can significantly reduce the risk of disputes by being forthright with information and demanding that all agreements be clear and on paper.

 The best way to ensure this is to hire a well-versed business attorney who can help with every step of the sales process. 

They are familiar with all the information that must be disclosed, the issues that need to be addressed, and are experienced in drafting clear agreements that both the seller and buyer can easily understand.