What is Involved in Selling My Company?

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Most closely-held businesses reach a point when selling full or partial ownership becomes a desire or even an absolute necessity. But what are the steps and considerations from “we need to sell” to the closing process…and even beyond?

Step One: Getting Your House in Order. Do you have a company records book and is it up to date? How about your financials? One initial point of consideration is determining exactly what is being sold, whether it includes some or all of the business’s operations and/or assets, and whether the assets to be sold are ready for sale in their current condition. Ensuring that all books and records are ready also eliminates stress during the all-important due diligence process, when a seller needs to demonstrate clear title to assets, payment of taxes, appropriate licensing and operating authority, and proper business formation and qualification.

Step Two: Starting the Process. At the outset, a business owner who wants to sell will have multiple conversations with potential buyers. Having a non-disclosure agreement (NDA) makes perfect sense even at this early stage because you don’t want the details of your business shared, and that includes the very fact that you are exploring a potential sale or investment.

Example: Tony wants to sell his successful pizza restaurant. He starts chatting with customers and people in the community. A story is published in the local newspaper about Tony looking to exit and the potential loss of an iconic restaurant in town. Business starts to fall off in anticipation of Tony’s retirement and the value of the business falls. Eventually, no buyer is interested and the business closes.

Be careful and don't sign anything without giving your team time to look it over.

Step Three: Selecting a Buyer. The highest bid isn’t the only consideration in choosing a buyer. First, offers are generally not all “cash” so what form the consideration takes is an important issue. There are risks associated with an owner-carry offer that may not be as attractive as a cash offer. Another issue that might arise is a partial owner or shareholder using their share of the business to pay for part of the purchase price. The tax implications can be complex and must be taken into account. Other factors to consider are cultural fit and the role you expect to have and the roles you expect your key employees to have under new ownership.

Example: Tony sells his business under an owner-carry arrangement to a non-traditional, health food purveyor. His employees are not skilled in preparing gluten free and dairy free dishes, and as a result several are released from employment and eventually the business fails due to the significant alteration in customer pool. Tony took the highest bid with no consideration for continuity and culture while carrying the debt.

Step Four: Structuring the Sale. Asset purchases generally favor the Buyer while Equity purchases generally favor the Seller. Buyers want to maximize tax benefits and minimize liability. Sellers want the liability to transfer away from them. A few major elements of the transaction may enable Sellers to negotiate an equity sale such as the difficulty in transferring licenses and permits or name recognition and “blue sky” or good will as well as favorable vendor contracts, etc. Each element may be a negotiating point that will enable the Seller (or Buyer) to get the best deal possible.

Step Five: Going Through the Sale Process. Letter of Intent (LOI) or a Memorandum of Understanding (MOU) is often the first step in formalizing the sale. The LOI or MOU will include key terms, such as the anticipated sale price, how that will be paid, and the proposed transaction structure (asset or stock purchase). In addition, it will establish the Buyer’s exclusivity period, during which the Seller is prohibited from negotiating an alternative transaction with another potential buyer. The full third-party due diligence process generally kicks off at this point, and the Buyer’s legal, accounting, insurance and IT professionals will review the company to confirm the Buyer’s expectations. Negotiations then begin on a definitive purchase agreement between the Seller and the Buyer as outlined in the LOI or MOU.

Step Six: Closing Considerations. Transactions generally “close” (i.e., the deal is finalized, and the purchase price consideration is delivered to the Seller) with the signing of the purchase agreement. In some cases, though, the purchase agreement is signed, but the transaction “closing” is delayed until certain conditions have been satisfied. For instance, government approvals, third-party consents and confirmatory customer contract transfer approvals may be required. When the closing occurs a portion of the proceeds may be held in escrow pending a working capital adjustment or the resolution of a regulatory or legal matter.

Example: Tony hires a team to guide him through the sales process. The attorney drafts an NDA for the potential buyers delivered by the sales agent. The agent, CPA and attorney provide relevant information about which deal is best for Tony. The offer that best aligns with Tony’s goals is accepted and the legal documents are drawn up. The closing goes smoothly, and Tony shakes the pizza flour off his hands and sails into the sunset…

Sailing away!

Step Seven: Post-Closing Considerations. Not all deals mean that the Seller walks away from the business. It is common for Sellers to stick around after close under a short-term employment contract or consulting agreement. Most business sales will subject the Seller to a non-compete, non-solicitation, non-disclosure obligation, meaning that the Seller will be prohibited from starting a competing business or soliciting customers or hiring former employees or disclosing information about the sale or the business for a period of time.

Conclusion: It is prudent to avoid plunging into a business sale without a good team to advise you of the tricks, traps, and pitfalls. Sales teams often are comprised of a CPA tax professional, an attorney and a commercial sales agent.

Curry Andrews, Attorney