There are key steps involved in a business transfer. Each step will vary in its complexity and size; having knowledge of the complete process will help to keep you on a path to closing successfully.
Step 1: Business owner deciding to sell his or her business
Sounds simple, doesn’t it? However, unless a business owner is truly deciding to sell, the process should not begin. Scenarios can occur daily for many business owners to cause them to ponder the idea of selling. Often, a more cataclysmic event needs to occur to push an owner over the edge into a selling mode. A business owner must come to a definitive decision before he begins this process. If not, it could be a waste of time and money.
Step 2: Determining the market value of a business
Before placing a business on the market, a value or range of value must be established so that you have a basis for what and how to negotiate. This is one of the most critical steps and should be handled with special attention. There are many different people that you can turn to in determining a business’s market value, which includes but is not limited to CPA, attorney, valuation company, self, and a business broker. Depending on who sets a value on a company, the pricing range can be wide.
Step 3: Gather pertinent information into a marketing package
The resulting marketing package created is the first interaction a prospective buyer will have with a business; therefore, the old adage, “You can only make a first impression once” could not be more appropriate. The marketing package should include at a minimum, information about financials, employees, assets, and the operation of the business. A business analysis must be performed to explain the strategic plan, financial statements, strengths, and opportunities.
Step 4: Marketing the business
Potential buyers need to be approached in order to be made aware of your business. There are two basic avenues of marketing a business: hiring a business broker or selling it yourself. In general, there are many methods that either party can use to reach the market: The Internet, newspaper, trade associations, and others. The most important factor is that a game plan is absolutely necessary to ensure that the greatest numbers of qualified buyers are contacted regarding the sale.
Step 5: Identify potential buyers
The key is determining who they are if they have the necessary funding and if they are a good fit. A brief list of potential buyers includes corporate executives, customers, suppliers, competitors, investment groups, and employees. It is imperative not only to identify the potential buyers but also to ensure they are financially capable of purchasing your business.
There are a number of pre-qualification methods that can be used to ensure a prospective buyer is financially secure. All potential buyers should sign a confidentiality agreement and provide verification of their financial ability to complete the transaction.
Step 6: Arrange meetings with buyer and seller
The first meeting between a buyer and seller is similar to a first date. Each side is wondering if the other likes them. The meetings with a seller are of paramount importance in a buyer’s final decision. You should always be forthright in your answers and give quick responses to inquiries on updated information.
Step 7: Offer to purchase/letter of Intent
The two most utilized legal vehicles used for formal contracts are a Letter of Intent and an Offer to Purchase. The main difference between the two documents is the level of commitment.
A Letter of Intent is a document stating intent by a buyer to buy a business. An Offer to Purchase is more detailed and binding. A Letter of Intent is usually followed by an Offer to Purchase. In some instances, a further step is taken with the preparation of a Definitive Agreement, which is a more formal version of an Offer to Purchase. Be advised that the documents are merely tools to ultimately get to the closing though they should include as many detailed “deal points” as possible.
Step 8: Negotiating and deal structure
There are three primary decisions: accept, decline, or negotiate. The sale price is only one of several negotiation points on a contract. Variables such as payment terms, the length of training, consulting agreement, and allocation of sale price are just a few items that can be leveraged to make a deal more favorable. The most important aspect of a business transfer is what a seller ultimately receives after the transaction has been completed.
Step 9: Due diligence
The beginning is mainly taking the time to learn more about the other person, the business, and to determine if both sides are compatible. Due diligence is performed by the buyer to ensure that the books, records, and operation of a business are as they have been portrayed. If it is a solid company, then the due diligence should be effortless, but if there are problems with the business, then due diligence could take longer and be more complicated. Due diligence can last between 7 and 45 days with the average length being around 21 days. The size, type, and complexity of a business, as well as the style of the buyer all, affect the amount of time due diligence will take.
Step 10: Closing
Closing a deal is the finest part of the whole process! It’s time to get paid. Prior to closing, the Offer to Purchase or Definitive Agreement is submitted to an escrow company or closing attorney, so that due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include: lien and title search, real estate and personal tax pro-rations on the business, preparation of closing documents, and disbursement of funds to the seller.