The Sale Price
Determining an appropriate sale price is the first step. The valuation of a business is a difficult thing, but you must be sure to take into account all aspects of the business. Does it own equipment? Does it have ongoing relationships and contracts that can be transferred? Are there permits that can be transferred? What about the inventory of the business? All businesses have good will, equipment, and other items that give it value. An accountant can review the items that will be transferred, the cash flow and earning ability of the business and help determine a value. A business broker can also help set a reasonable and appropriate price.
How will the price be paid?
Determining how the price will be paid may be a function of whether there are any liens against the business that must be repaid. If there are outstanding loans that must be repaid, they must be taken into account first. Will the Lender allow those loans to be assumed. You must also make a determination as to whether you wish to hold a promissory note for any future payment of the purchase price. Depending upon the sale price, can the Buyer get his or her own financing for the purchase price or is it necessary for the Seller to assist in that financing. If the Seller will hold a Note against the purchase price, make sure that the Seller has security, either a personal guarantee, or against the assets of the business to insure payment.
Are you selling assets of the business or the stock?
Many businesses are held in the corporate form or in the form of a limited liability company. If the business is held in such a form, the stock of the corporation or the ownership shares of the LLC can be transferred. There are tax consequences which should be discussed with an accountant, however the Buyer may not want to buy the entire business, just the assets. Buying the stock or membership shares may result in the Buyer assuming the "liabilities" of the business while just purchasing assets does not transfer liabilities to the Buyer.
Before allowing any potential Buyer to look over the books and records of the business, you should have a Confidentiality Agreement in place The Buyer should agree that he or she will not disclose anything about your business to the outside world or use any information gained in reviewing your business for their own purposes including stealing any of your business methods or secrets.
Get it in Writing
If you agree on a price with the potential Buyer and the terms of the sale, it is most important to get it in writing. An agreement of sale is a must before going any further. The buyer can sign such an agreement and still examine all of the books and records of the business in order to decide whether or not to buy it, but get an agreement of what the terms are before going further. Never let the buyer take over and operate the business for any reason without a written agreement in place.
What should be in the Agreement?
All agreements should cover these essential terms: 1) What is the purchase prince 2) How is the price to be paid 3) What is being sold 4) Is the Seller retaining any of the business property or equipment (even keeping your the contents of your personal desk used in the business should be clearly set forth 5) Are there any contingencies that have to be satisfied before closing- such as the Buyer getting financing 6) When is the closing 7) What due diligence is the Buyer allowed to conduct and how long is the Buyer permitted to do that
What is Due Diligence?
Due diligence means that the Buyer gets to examine the business in order to properly make a decision as to whether to complete the sale. This actually protects you as a Seller from claims later on that you withheld information from the Buyer or made misrepresentations about the business. You should be careful not to make any specific promises about the business or its potential earnings because a new owner may make more money or less money depending upon that person's ability to run the business. You should make a full and complete disclosure and give the Buyer the time to verify anything that the Buyer wants to know about the business. Typically these times for due diligence run from 30 to 60 days.
Are there any employees of the business that will remain after the sale?
Employees of the business are a tricky subject to deal with. On the one hand you may not want them to know about the impending sale for fear that they will leave to find another job. On the other hand the Buyer may be relying on some key employees to help with the transfer and to run the business after the sale. A discussion of these issues is important to smooth transition and both the buyer and seller should agree on how to handle these issues.
After Due Diligence Now What?
You should understand that even after due diligence there are a few steps that have to be completed in order to go to closing. First the Buyer should run a lien search on the business to make sure there are no liens against it. Secondly, a tax clearance certificate is usually required to make sure that all taxes have been paid by the business. This is particularly true of businesses that have to remit sales tax to the State. Usually these items are not ordered until the Buyer finishes their review and indicates that there no more items that need to be reviewed and the due diligence period has come to an end.
Am I there yet? Can we get the closing done now?
Almost but not quite. If there are items such as inventory that the business uses in the business and will be transferred, this must be counted and valued before closing. Usually the business that is being sold must be operated in its normal course until closing and that means keeping normal stocks on hand. These must be counted and valued, usually at what the Seller paid for these items. Payment for inventory is usually in addition to the purchase price.
One final note . . .
How are you going to notify customers and transfer relationships? That should be a consideration as well as how you will introduce the new owner. Frequently the Buyer stays on to make the transition smooth and to teach the Buyer the specifics of running the business. If this is going to occur, it should be addressed in the written agreement of sale including whether the Seller will be compensated for this, for how long the Seller will do this and what hours the Seller is expected to assist the Buyer after closing.
The allocation of the purchase price can be agreed upon and should be addressed in the agreement of sale. A competent CPA should be consulted as to the tax implications of any sale.