Businesses are bought and sold every day for so many reasons. From a retiring owner selling to a long-time employee or a passionate pro ready to take on a new adventure (but not really interested in starting from total scratch). For this post, we dive into a few important considerations worth ironing out before jumping into a business purchase or sale
Whether you’re buying or selling, here are a few things to ask yourself before you begin the process.
Equity Sale or an Asset Sale?
In an asset purchase, buyers are only buying the assets of the business, including any property like equipment, furniture, technology, the business name, maybe a client list, trademarks or copyrights, etc., and putting them into a new entity created by the buyer. In an equity purchase, buyers are purchasing the entire business itself by buying the ownership in the business (stock or membership units)essentially stepping into the shoes of the previous owner. This means that the buyer is taking on everything related to the current business, including any existing debts and liabilities. Typically, sellers favor an equity purchase because they are passing on the whole business and outstanding liabilities to the buyer, but buyers prefer an asset sale because they are just getting the assets and not taking on any previous potential actions of the seller. You may not know what this is going to be until you begin negotiations and see what makes sense based on the situation but it’s definitely worth understanding the differences between the two.
What Kind of Due Diligence will be Involved in the Business Purchase?
Due diligence gives buyers the ability to make sure everything is as the seller says it is and that there aren’t any major liabilities the buyer isn’t willing to take on or wasn’t aware of. You can create a contingency in the business purchase surrounding the findings of due diligence. For example, a buyer may request the ability to cancel their purchase of the business if due diligence turns over any financial issues or pending litigation that was not initially disclosed.
Due diligence may include the review of: the seller’s business structure and corporate documents, such as partnership agreements, operating agreements or bylaws, certificates of organization or articles of incorporation; employee information, such as wages, benefits, roles and responsibilities; any contractual obligations; license statuses (such as liquor licenses); the inspection of any real property being transferred; financial due diligence such as tax returns, balance sheets, and any liens; any transferring leases and the purchaser’s ability to take over an existing lease; liabilities or liens on business assets; buyer’s proof of funds, if they haven’t shown these already; and more.
What Should a Seller Have Ready Before They Sell Their Business?
If you’re currently a business owner and you’re thinking about putting your business on the market or even if you already have someone you know who wants to take it over, what are some things you should do before even listing your business? Just as it’s common to spruce up a few things around your house before you’d put it up for sale, it can’t hurt to go into your business and make sure everything is in order.
A few immediate things a seller could do to prepare for a business sale:
Gather all of your current contracts, including any leases, client contracts, and service agreements, and review them for language that may surround the business sale. Many contracts require businesses to notify or get written permission from the other party to the contract in the event that a business is bought or sold, and some outright don’t allow it. This is sometimes called an assignment or transfer clause. Even in equity purchases, where you are buying all of the business’s liabilities, contracts may require businesses to notify the other party if a business changes owners. Understanding your contractual obligations and duties to other parties as a seller is crucial to ensuring everything can fully transition as it is meant to. If you aren’t sure where to even look, a lawyer can definitely help you with this.
Take an inventory of all of your business assets – from real property to equipment and even some intangibles you might not have thought of, like the goodwill you’ve created in the community. You’ll want to really wrap your head around exactly what you are selling (and see if there is anything you don’t really want to sell). You will also want to have a sense of the business’ market value or worth. You could even have a professional valuation done on your company to help you understand how much you should sell it for (and how much a buyer might want to pay).
Take the time to think about any non-negotiables that you want to make sure are included in a sale. Perhaps you want to keep the building where the business is located and separate this asset from the business’s ownership.
Assemble all of your organizational documents, such as your certificate of organization and operating agreement if you’re an LLC, and do an inventory and analysis of just how the business is structured. Make sure there isn’t anything missing or that you want to better understand.
We highly recommend speaking with an attorney if you’re thinking about selling your business because they’ll help you understand the nuances and considerations around all of the items above (and more) from the business’s formational documents to understanding contractual obligations to any registration or licensing requirements.
What Should a Buyer do to Prepare for a Business Purchase?
If you're looking to buy an existing business, some immediate things you can do is set your goals, budget, and do your research. Other questions to ask:
Will you be needing financing for this purchase? You may or may not be able to secure a loan before you enter into a business purchase agreement (banks often want to see some sort of value to back the loan), but you can certainly start these conversations with business loan providers so you know what your options will be when you begin the sales process and how much you could be approved for.
What are your non-negotiables and will you be willing to walk away from a purchase if they are not met? Will you only purchase the business in the event the seller allows for a longer due diligence period? Are you only willing to purchase assets of a business?
We recommend buyers, too, meet with an attorney early on to help outline a specific process and what is needed in each step, including potential industry rules and regulations, and to make a plan to make sure they are protected and legally compliant.
Last month’s blog featured Letters of Intent (aka LOIs), that is, good-faith agreements and terms to guide the contractual documents and relationships surrounding a large transaction. Once you figure out your sale/purchase structure, due diligence considerations, and other needs described above, an LOI is a great place to start in the buying or selling of a business and can outline the agreed upon terms before moving into actual purchase agreements.
The questions you ask and the organizing you do to get your house in order before buying or selling a business can help you in the long run. And if you’re interested in a step-by-step guide for how the sale of a business works, check out our free resource (download it directly by clicking here) in the trellis resource library that covers these and more.)