The Major Steps Involved in Selling a Business

Business owner decides to sell business The first step sounds like common sense, but unless a business owner

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Business owner decides to sell business

The first step sounds like common sense, but unless a business owner truly decides to sell, the process cannot and should not begin. Perhaps when a supplier has sent a shipment late, an employee has quit, or a customer has not paid on time, you may have pondered the idea of selling. These scenarios occur daily for many business owners. Often, a more cataclysmic event needs to occur to push an owner over the edge into a selling mode, such as fatigue, retirement, or divorce.  Regardless of the event, a business owner must come to a definitive decision with himself before he begins this process. If not, he could waste time and money.

Determine the market value of a business

The ultimate value of a business will be the final price that will be negotiated between you and the buyer. 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.  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. This is one of the most important steps, and should be handled with great attention.

Gather pertinent information into a marketing package

Unless someone knows your business intimately, such as an employee, customer, or supplier, a potential buyer will need thorough documentation to understand the business. A business analysis must be performed to explain the strategic plan, financial statements, strengths, and opportunities. 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.

Marketing the business

Once you have gathered the necessary documentation into a concise and complete package, what’s next? 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.

Identify potential buyers

For almost every solid and profitable business, there are prospective buyers in the marketplace. 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, a good fit, and sincere in his interest of your business. All potential buyers should sign a confidentiality agreement and provide verification of their financial ability to complete the transaction.

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. A potential buyer will rely on financial statements to determine if a business is a good value, but will base the decision to buy on the relationship with the seller and the company’s appearance.  You should always be forthright in your answers and give quick responses to inquiries on updated information.

Offer to Purchase/Letter of Intent

After a buyer has met with the owner and completed the analysis of the financial statements, he will have three main options: pass on the business, ask for more information, or prepare a formal contract. The two most utilized legal vehicles used for formal contracts are a Letter of Intent and an Offer to Purchase. Both documents are very similar in that they represent a formal attempt to acquire a business. Most often, they are accompanied by an Escrow check, which is used as a “good faith” gesture. This check is essentially a preliminary down payment when the transaction is ultimately completed. If the transaction is not completed, the buyer with be returned his escrow monies unless he has completed his due diligence and has agreed to go forward in writing. At this point, the escrow check is deposited and non-refundable.

The main difference between the two documents is the level of commitment. A Letter of Intent is nothing more than 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.

Negotiating and deal structure

Once a legal contract has been presented, 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, 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 in a business transfer is what a seller ultimately receives after the transaction has been completed.

Due diligence

Due diligence on a business is similar to the first two or three dates you have with someone. The beginning is mainly taking 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.

Closing

This is the best part of the whole process: the time you 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 seller.

 

Source:

Vantarakis, Alexander and Whitehurst, William.  EXIT.

http://vantgroup.wpengine.com/book-exit-sell-a-biz/

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