To get the highest value for your business and to negotiate the selling process effectively and efficiently, you must enlist the aid of qualified professionals.
Even if you have been a determined do-it-yourselfer from day one, selling your business is not a job you should attempt to do alone. Even for a relatively small business, there are various regulations and tax issues to consider, not to mention one or more essential contracts to negotiate. Selling your business is something you will probably do only once: There is no opportunity to take a trial run or build up any experience before you do the real thing.
In addition, the process of selling of business can take a lot of time and effort. The more involved you get with it, the less time you will have to spend running the business at the very time when you need your business to run most successfully. You will be much better off leaving some of the work to experts who have crafted dozens of deals instead of spending much of your time trying to reinvent the wheel.
There are several team positions that you must fill, although the same individual or firm may fill more than one of these:
- tax expert;
- business broker;
- business evaluator/valuation expert; and
- banker or other financiers if third-party funding is needed.
Not all of these positions need to be filled for every small-business sale—much depends on the size and nature of your company.
However, at a minimum, you will need to involve your lawyer and accountant, who may also serve as your tax adviser. A tiny sole proprietorship will need a lawyer to review the sales contract. If this document is not worded correctly, you may fail to get all your money and be exposed to potentially enormous liability claims by the purchaser, creditors, customers, employees, etc.
Your accountant is an indispensable team member
If you are considering selling your business, your accountant will likely be one of the first people you turn to for advice. If you have used an accountant regularly to prepare your tax returns and draw up financial statements, they will be very well acquainted with the financial shape of your business. Most probably, your accountant also has other clients in similar businesses and can tell you how you compare to them. So, your accountant will be in an excellent position to know whether your business would be attractive to a potential buyer and can give you some good ideas to make it more attractive.
Your accountant will also be essential in drawing up the historical and projected financial statements and other data required to place a proper value on your business and in gathering and organizing financial data requested by the buyer during the due diligence phase of negotiations.
We strongly suggest you do so now if you have not been in the habit of getting audited financial statements. If the accountant you have been working with is not a CPA, they may be able to recommend someone who can perform this service for you. Another possibility is to use a business evaluator or valuation expert who is also a CPA and can provide the audited statements to place a value on the business.
As two of the key people in the team you are assembling to complete the sale of your business, your accountant and lawyer must work well together. If they do not communicate frequently, they may end up duplicating some of each other’s work, which means you may have to pay twice. You may want to use a lawyer your accountant recommends, or vice versa, precisely because you will know that they respect each other and can cooperate.
Make sure your lawyer is well qualified
Your lawyer needs to play a vital role in your plans to sell your business and in drawing up the legal documents used to carry out those plans.
Many small business owners have established a relationship with a business lawyer over the years and, as a matter of course, decide to have this lawyer handle the sale. If your business is small or your lawyer is very experienced in all aspects of transition plans, this may be a wise course of action. However, before automatically going with your tried-and-true business lawyer, ensure they are familiar with all the legal aspects of selling a business. Business sales–whether an outright sale or a merger or acquisition–require a high level of expertise and time to devote to the process.
For this reason, you may decide to use a lawyer who specializes in business transfers or mergers and acquisitions. Most larger law firms have M & specialists on staff, although these experts do not come cheap. However, when you are talking about a once-in-a-lifetime deal, it is well worth getting the best legal advice you can afford. If your deal is too small to interest a high-profile lawyer, they might be able to recommend an associate who would be interested.
If you are working with a business broker or M & A agent, they may be able to recommend a lawyer who is successfully guided other businesses through a sale. However, in most cases, it is best to hire a lawyer first so they can examine the broker’s listing agreement before you sign it.
As with any professional, the best way to find a good lawyer is through word of mouth: ask your current lawyer, accountant, other business owners, or retired owners if they liked the lawyer they used. Once you have collected a few names, interview them to see whether they can take on your sale.
Make sure they have the time, the staff and the expertise to do an exceptional job on your behalf. Ask them to point blank how much experience they have had in business succession planning and implementation. Ask how many other clients they have had that are in the same line of business as you are. Finally, ask them what the fee schedule is, what is covered, and what are “additional charges.” Once you have all these questions answered, ask yourself the most crucial question: Do you feel comfortable with their knowledge, experience, communication style, and level of integrity.
Retainer agreements. Ordinarily, your lawyer will expect you to sign a retainer agreement and pay a substantial portion of the fees upfront. It is to your advantage to sign such an agreement (after reviewing it carefully): it will lay out the scope of the services the lawyer will provide and put the fee arrangement in writing.
The two critical parts of the retainer agreement are:
- the statement of exactly what services the lawyer will provide and
- the fee arrangement.
The contract should state the lawyer’s hourly rates (many charges a higher rate for court time or other specified services) or the flat fee if you are paying on that basis. If a flat fee is involved, the agreement must specify what services are included in that fee.
The contract should also specify whether you will have to reimburse the lawyer’s costs in addition to the flat or hourly fee. It may state the billing schedule (for example, that you pay an up-front retainer of several thousand dollars against hourly fees; when the retainer is used up, you start paying monthly bills) and whether and how much interest will be charged on unpaid balances.
Make sure the lawyer is your representative. The agreement should also define exactly whose interests the lawyer is looking out for. Theoretically, all parties to the transaction (i.e., each partner or shareholder of the business being sold and each purchaser, plus the business entity itself if incorporated) should have a separate lawyer. This can get very expensive and impractical if there are several shareholders, so many lawyers will agree to represent more than one party if proper waivers are signed.
For example, the lawyer may agree to represent you individually as a majority shareholder and your corporation, provided you sign a disclosure document. The document will state that you recognize the potential differences between your interests and your company, but you agree to the dual representation anyway.
However, we do not advise that you go so far as to have only one lawyer representing the buyer and the seller — that situation presents a fundamental conflict of interest rather than just a potential difference. Few lawyers would agree to such representation anyway. Any time there is an actual conflict of interest, the parties in conflict should retain separate counsel (for example, if some shareholders want to sell but others do not).
Using a business broker can improve sale prospects
You do not need to list your business with a business broker or agent to sell it. You may already have a good idea of who your company’s likely purchaser would be — perhaps a key employee or a relative — in which case the marketing power of a broker would not be necessary. You may have gotten unsolicited offers to purchase your business. Or, you might decide to place ads in the business opportunities sections of several newspapers or trade publications to see if you can find a buyer without paying a broker’s commission.
However, if you do not already have a buyer lined up, you can benefit greatly from increased exposure to a large pool of potential buyers. A business broker can provide this for you. A broker can contact likely purchasers (including competitors, suppliers, major customers, and investors known to the broker) directly and tell them the key facts about your business without “naming names” until the contact has shown definite interest.
The broker can also screen interested parties for financial ability and other criteria specified, so you would not waste time talking to unqualified buyers. Perhaps even more important, a broker can guide you through the process of selling based on experience gained from many similar transactions.
Match the type of broker to the size of business
The type of broker you select will largely depend upon the size of your business. Because brokers are compensated based on a percentage of the sales price, you may find it hard to locate one willing to take on the listing if your business is a very small business. Instead, you will have to try to locate a prospective buyer on your own or sell off your assets as best you can. You may also find a real estate agent who does business brokerage as a sideline and maybe is willing to take on a smaller listing.
Generally, business brokers are interested in listing companies valued at more than several hundred thousand dollars, although the cutoff point varies throughout the country. Suppose your business is worth more than one million dollars. In that case, you may want to hire a mergers and acquisitions intermediary — a more sophisticated agent who functions as a consultant for buyers and sellers and whose organization may even have in-house valuation specialists and financing available.
Interview the prospective broker about recent sales they have handled, and ask for the names of satisfied clients you can contact. Make sure you follow up on these references.
Carefully review fees and listing agreements
The main drawback to using a broker or other agent is the fee, which may be as high as 10-12 percent of the sales price for smaller businesses. Businesses over $1 million may be charged using a formula such as “5 percent of the sales price up to $1 million; 4 percent of the sales price between $1 million and $2 million; and 3 percent of any sales price above $2 million.” A mergers and acquisitions professional may also charge you for costs and expenses, and you may have to agree to pay a minimum fee, whatever the sales price.
You will be expected to sign a listing agreement to lay out the fee schedule. Usually, brokers’ fees are contingent, meaning that they are paid only if and when the business is sold. In some cases, the fee will be split between your agent and an agent hired by the buyer, or you may be able to convince the buyer to pay some or all of your broker’s fees during price negotiations.
Try to have the listing agreement provide that the fee will be paid when you receive the purchase price, not when the deal is closed. If you wind up financing a good portion of the price over several years, you will pay the agent only as you get the money.
The listing agreement is for a specified period — if a buyer is located within that period, the agent will be entitled to the fee. Anything under three months would not give the agent enough time to market your business effectively. Conversely, if the period is too long, you will not be able to switch agents if you find that yours is not working effectively. Since you can always agree to extend the listing period, we suggest you initially list for no longer than six months to ensure your agent will get moving quickly.
You may also be able to negotiate a clause stating that if you find a buyer on your own (for example, one of your key employees decides to purchase), you do not have to pay the broker’s fee. Without this clause, the broker usually must be paid if a buyer materializes during the listing period, regardless of who finds the buyer.
As with any legally binding document, we advise you to run the listing agreement past your lawyer before you sign it.
Retain an evaluator to value your business
Your need for an evaluation, and the kind of valuation that will be done, depends on your business’s size and complexity. Suppose you are a small service company with few assets, or have only common assets like cars, real estate, and office equipment. In that case, you may not need to hire an evaluation specialist — your regular accountant’s assessment of your book value may be adequate. You may also choose to rely on your business broker’s assessment.
However, in many cases, it is worth the time and money to hire an experienced business evaluator. The value of your business depends on a vast number of interrelated factors. If you are to receive the full value of the business but avoid setting the price so high that it drives away all potential buyers, you need an expert’s analysis. Moreover, when buyers question your price during the negotiation process, it helps to point to the precise reasons why your business is so valuable.
Consider the lender your teammate
In most cases where third-party financing will be needed to complete the sale of a business, it will be the buyer who selects the lender and negotiates for financing. We mention the banker as a member of “your” team only to emphasize that it is to your advantage to cooperate with lenders as much as possible. Thinking of the lender as a team member may help you share the necessary information and work with the lender to close the deal.
Require confidentiality agreements from all parties
These professionals will learn confidential information about you and your business —information that could be damaging if it gets into the wrong hands. For this reason, you should ensure that the information will be treated with utmost confidence. Particularly in the case of the broker, you should require a confidentiality agreement stating that all information about your business is deemed valuable and confidential and that the broker can only disclose it to qualified buyers to evaluate the acquisition decision. This agreement should be included in your listing agreement and examined by your lawyer before you sign.
One of the key reasons for using a business broker is that they can contact potential buyers and whet their appetite by telling them the general facts about your business without revealing your name. Before you sign the listing agreement, you will want to ask the broker what information would usually be revealed at each stage of contact with potential purchasers. The contract should state that you have the right to final approval before any information is released. You should also require your broker to agree that any party interested, after receiving the general overview of the business, must sign a confidentiality agreement with you before learning any more details.