Ten Rules for the Sale of a Business (Part Three)

In previous articles in this series it was emphasized that a business owner who wants or expects to sell his business should (1) plan to sell sooner rather than later, and (2) take an inventory of the entire business. Once a business owner makes a comprehensive inventory of his business and knows what he has to sell it is time to start working with professionals, as there are simply too many legal “land mines” in a business sale to risk such a transaction without the help of someone who has been down that road before. The number and type of professionals needed typically depends on the size and type of business, but normally outside accounting help, legal help, and marketing help is needed.

Even a small business will typically have a relationship with a CPA or bookkeeping service that can be helpful in preparing financial pictures of the company’s performance. Some CPAs have the ability to help ownership calculate a reasonable price range for the business. If the owner has located a buyer and has already agreed on a price there may be little for a CPA to do until time to calculate the seller’s taxes. On the other hand, in some transactions the tax outcome can vary substantially depending on how the purchase price is allocated among the assets being purchased.

Business brokers and attorneys can also be useful in different ways and in different stages of the sale process. For example, if a sale to an unrelated third party is most logical, a business broker will frequently be needed to locate the optimum buyer. If a sale to existing employees is expected a broker’s services are probably not needed. Although it may make sense to talk to a broker once the inventory has been completed to see if there is any reason to believe that a broker could find the owner “a better deal”.

Lawyers can be useful at the beginning and throughout the sale process in a variety of ways. For example owners who do not want a prospective buyer to back out of negotiations in possession of the business’s financial information may want a non-disclosure agreement. The owner might need help developing a letter of intent or other preliminary agreement. And legal help may be required to determine whether the business has any contractual impediments to a sale or will be exposed to loss or legal claims depending on how the sale is structured.

Often a business will have an interest in real estate, either leased or owned, that is an integral part of the business operation. When this is the case real estate or leasing agents can become critical to the success of the sale, and can provide valuable information to the owner as to the ease and cost of dealing with the real estate piece of the sale.

As part of the process of preparing for a sale, the business owner will need to consider the costs of the services of any of these professionals and weigh the benefit against the risk of making a deal which comes undone or leads to unexpected claims that develop out of misunderstandings, an unawareness of liabilities, or simply in order to avoid leaving money on the table by undervaluing the business. Nickloy & Higdon’s experience with disputes concerning the sale of businesses is powerful evidence of the huge financial costs that can result from deals which are not fully or properly supervised by the correct professionals.

Our firm has been involved in business sales as counsel for buyers and sellers as well as representing parties who find themselves in disputes arising out of such sales. This experience has led to relationships with other professionals to whom we can refer clients as needed. We are happy to help with such referrals as well as to provide legal services our clients may need.