Buying and Selling a Small Business
Buying and selling businesses is not something most people will ever contemplate let alone undertake. This is true if you have never bought or sold a business before and even if you have. There is always room for a refresher course. Here is what you need to know about the process and the issues.
Initial NegotiationsThe parties may circle around each other throwing out vague numbers, but at some point, a proverbial flag needs to be put down in the ground. In the sales of businesses, this flag is usually a letter of intent coming from the buyer to the seller setting forth some tentative terms such as price and the amount of time the buyer has to do its due diligence of the business. Often times, the letter also includes an agreement by the seller not to market the business during the period under the letter of intent nor can either party publicly or privately discuss the potential sale. The letter of intent serves many purposes in this respect, but at a bare minimum it calls a time out.
Types of PurchaseThere are typically two types of vehicles by which to purchase a small business that is incorporated: a stock purchase and an asset purchase. Stock purchases involve the buyer acquiring all or most of the stock of the seller in the company and filling the shoes of the seller. As part of this type of agreement, the buyer is usually going to take on the seller's debts and liabilities in addition to its assets. An asset purchase is exactly what it sounds like: the buyer takes on only the assets of the business rather than the debts and liabilities in addition to the assets.
Negotiating a DealBusinesses are not valued like houses or cars. It is often difficult to use price points for comparison as you would do with real estate since the business itself may be specialized or unique. More often than not, the homework of figuring out the value of the business lands with the potential buyer. This is actually a great opportunity for the buyer to be able to look over the entire business and get a feel for its strengths, weaknesses, and how much they are willing to pay to take it on.
This process is also known as due diligence, as in the buyer must be as diligent as possible in looking under the hood of the business before making a final decision as to whether to go forward with the acquisition or not. The amount of due diligence depends upon the nature of the sale. If the buyer is doing a stock purchase, more may be required since the buyer will likely be taking on the seller's debt and liabilities. The buyer also needs to consider the questions such as whether they will retain some or all of seller's employees and if they will relocate the business.
hile the buyer is doing their due diligence, the seller has some of its own. Questions the seller needs to research are:
- Does it need to get permission from a board or stockholders for the sale?
- Are any third party or government approvals or documents to be filed to complete the sale?
- Do the seller's third party contracts require that the third party approve the sale prior to the closing?
Drafting an AgreementOnce the parties reach an agreement as to price and the buyer
elects to move forward with the acquisition, the parties work on drafting the agreement and negotiating the finer points of the deal. The drafting of the contract of sale is vitally important as it governs not only the sale of the property, but the conduct of the parties during and after the sale, and what exactly is and is not included in the sale. Other considerations the parties must determine and negotiate are:
- Will there be indemnification provisions for both parties?
- How will proration of expenses such as taxes and fees be handled?
- Survival of representations and warranties
Once the agreement has been drafted and agreed to, the parties enter the pre-closing phase in which government approvals are obtained, if required, staff are notified of the sale, and the parties prepare to go to closing.
ClosingThe day will finally arrive when the parties will close the sale. This will involve signing numerous documents (the agreement for one), and the handing over of records, keys, and other important information from the seller to the buyer. Of course, the most important step is that the buyer will wire the purchase price to the seller in accordance with the agreement. If the sale is being partly financed by the seller, the buyer will also sign a promissory note in addition to the other closing documents.