Selling a Business- Part Two

The Process

Executing a Confidentiality Agreement

• This is like dating- the parties begin to find things out about each other.
• These are commonly signed before any information is given out about the Seller.
• While not a “standard” form, these agreements are generally all similar.
• After confidentiality agreement is signed the Buyer normally receives a significant amount of information about the Seller.
  

Executing a Letter of intent

• This is like going steady or dating exclusively- there is a significant interest in entering into the relationship.
• It is normally non-binding (either party can still walk away from the transaction)
• Some transactions do not include a letter of intent.
• This establishes the broad parameters of the transaction.
• Price- Normally 4 to 6 times 3year average adjusted taxable income.
• Terms of payment.
• Outlines, in broad terms, additional agreements (Seller consulting agreement; Seller non-compete; leases)
• Outlines, in broad terms, contingencies to closing such as obtaining bank financing or franchisor approval.
• Be careful of broker provided documents. Sometimes these create a binding agreement before Buyer is ready to commit to the transaction.
  

Due diligence (not really an isolated step)

• Due diligence refer to the Buyer’s investigation of the Seller and the confirmation of the information provided by the Seller. The investigation should be quite thorough and should include discussions with:
• Key employees- and former employees
• Key customer/clients
• Key vendors
• Key industry individuals
• Seller may restrict due diligence until there is a contract in place to avoid upsetting Seller’s employees, Seller’s customer/clients, and or Seller’s vendors/creditors.
• The due diligence investigation is- by far- the most important part of the transaction.
• Often the CPA firm of the Buyer takes the lead in conducting the due diligence.
• Regardless of when the due diligence period commences, Buyer should not close the transaction until they have fully satisfied itself with the results of the investigation and/or the future action Buyer may take as the result of the findings.
• Remember: past results may not reflect future performance.
  

Executing a Contract

• This is like the engagement of the parties to the transaction.
• This is the legally enforceable document which outlines ALL of the fine points of the deal...
• The contract will specify the terms of payment.
• Normally there is some nominal payment at the time of signing the contract for sale.
• Often about 75% of the total sales price gets paid at “closing”.
• Often about 25% of the total sales price gets paid in the form of a promissory note from the buyer.
• Terms and interest rate vary from deal to deal but 3-5 years is not uncommon.
• If this loan is subordinate to other financing, it gets paid last and has the highest risk of non-payment.
• Because this often represents a significant portion of the “profit” on the transaction, it is important that it gets paid. Hence, the importance of having a qualified buyer will be able to conduct the business in a manner which will provide payment.
• A significant part of the document are the representations and warranties
• These are the written assurances the parties give each other as part of the transaction.
• These normally include statements as to:
• Proper formation
• No undisclosed liabilities
• No pending legal actions (either governmental or private action)
• Compliance with laws rules and regulations
• Title to assets
• Payment of taxes
• Required approvals of the transaction
• Responsibility for pre sale and post sale liabilities
• Many other issues
• Although Buyer checks into many of these matters as part of due diligence, Seller can be liable for representations and warranties which turn out to be untrue.
• There are often disclosure schedules attached to the contract which provide additional information. Example: a disclosure statement may supplement whether there are any outstanding contracts.
• There are often revisions before a contract is finalized.
• The contract may establish post closing obligations. These might include:
• A covenant that the Seller not compete.
• An agreement that the Seller will help train the Buyer.
• A requirement that the Seller favorably introduce Buyer to customer/clients and vendors/creditors.
• A requirement that the Buyer provide the Seller with information about the business’ operations until the full purchase price is paid.
  

Closing of the Transaction

• Takes place after all conditions have been met and approvals have been obtained.
• This is when the “real” money changes hands, the transfer documents are signed and exchanged and the buyer takes control of the business.
• Most transaction “problems” come to light in 6-24 months following closing.
  

Conclusion:

Selling a business is more of a multi-step process than an event. Although there is no assurance that the sale of your business will provide you the benefits you anticipate, attention to the successful completion of each step will reduce your risk of failure.